The market for cryptocurrencies is growing, and now with the adoption of Bitcoin and Ethereum ETFs, there are more choices for advisor clients to access the space. But for the crypto market, is it better to invest in an index or use an active manager? Asset managers recently debated the topic at the Future Proof Festival in Huntington Beach, California this week.
Matt Hougan, chief investment officer at Bitwise Asset Management, said there is room for both. Bitwise has been running a crypto index fund since 2017 and has about $1 billion in assets in it. However, it is not like the S&P 500 because they have had to control risky assets, such as LUNA and the FTX token.
But crypto is almost there. When emerging markets first became an investment option, it started with large-cap stocks, then large-cap and mid-cap, and finally, total exposure.
“The same is true with crypto,” he said. “In January it was just Bitcoin; now it's Bitcoin and Eth. This is 70% of the market. This is the same as large caps and mid caps. So we just have to go to the small cap market. That will happen over time.”
Jan van Eck, CEO of Van Eck, added that his company also has its own crypto indexes, but the space is evolving too quickly for an index approach.
“I really think the asset is better,” he said. “When you start controlling things like Luna, you're pushing a little bit more towards active management. And thank God you did.”
He said it is better to invest through a private fund.
“I really believe in active management in this space as well,” added Hougan. “I would just caution that there are extremely high quality stores, one of which is Van Eck, and a wide diaspora of lesser quality stores. It's a place where working with the best is extremely important.”
Zach Pandl, head of research at Grayscale, said cryptocurrencies are different from stocks.
“Blockchains have no obligations. There is no company. There are no buildings, no electricity bills, no employees,” he said.
But with active management, you can avoid “dead capital” and rely on the best ideas in the space. Grayscale, for example, offers actively managed private placements to accredited investors.
“I think there's a lot of dead capital in crypto projects that maybe have a big market cap, maybe have some resources, but they're not going anywhere,” Pandl said. “Active management allows you to continue to rely on pioneering ideas in the space.”
“It's worth noting the risk, which is, if you think crypto is a 10x or 50x market, buying beta—if not perfect—is still very good,” Hougan said. “Allocating to a weak active manager that lets it all go to Bitcoin Cash and Luna wasn't a great option either.”
Hougan pointed to the early days of the Internet as an example, when many companies failed.
“But if you're going to make an index-based bet and hold it for 20 years, that was great,” he said. “Indexing will never be the best strategy in the space and will hold a lot of dead capital and dead currencies. But it will give you beta. The best investment in crypto is to simply buy it.”
Pandl said we will see a sort of S&P 500 of cryptos in the next year or so. You can divide the crypto space into market sectors, but they are not yet investable, mainly due to the regulatory status of these tokens in the United States.
One of the best things about the crypto market, he said, is that you don't need permission to post your token on the blockchain.
“However, this means that there may be assets that have a good market cap that we feel are not suitable for investors, so we are not prepared to give investors purely passive exposure to the market,” he said. .
Panelists also discussed the idea of tokenization and how it could impact investing and personal finance.
“If you're a registered investment advisor, you can probably ignore tokenization for now, unless your clients are frustrated that they can't move money over the weekend and things like that. If so, there's a use case for stablecoins,” Van Eck said.
Hougan said stablecoins are perhaps the most under-hyped area of crypto compared to their true potential.
“I think stablecoins will be a multitrillion dollar market in a year or two,” he said. “They are just such an incredible killer app. They put dollar bank accounts on every cell phone around the world. They allow you to access liquidity on weekends. More and more they will be used for future repayment collateral and other things.”
The largest issuer of stablecoins makes as much money as Goldman Sachs, he added.
“Most of what I think about tokenization is the way most people talk about it is completely wrong. They tend to say two things: 'We're going to mark down the dry cleaning business and I'm going to trade shares.' It won't happen. Or, 'we'll wake up one day, and instead of trading stocks on the New York Stock Exchange, everything will be listed.' That won't happen either. These are fantasy dreams that develop pilot projects that end in tears.”