The market for cryptocurrencies is growing, and now with the approval of Bitcoin and Ethereum ETFs, there are more choices for advisors’ clients to get access to 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, Calif. this week.
Matt Hougan, chief investment officer at Bitwise Asset Management, said there’s room for both. Bitwise has been running a crypto index fund since 2017, and it has about $1 billion in assets in it. It’s not quite like the S&P 500, however, because they have had to screen out risky assets, such as LUNA and FTX’s token.
But crypto is almost there. When emerging markets first became an investment option, it started with large-cap stocks, then large and mid-caps, and eventually, total exposure.
“Same thing is true with crypto,” he said. “In January it was only Bitcoin; now it’s Bitcoin and Eth. That’s 70% of the market. That’s the same as large and mid-caps. So we just have to get 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 indices, but the space is evolving too quickly for an index approach.
“I really think active is better,” he said. “When you start screening out things like Luna, you’re kind of edging a little bit more toward active management. And thank God you did that.”
He said it’s better to invest through a private fund.
“I really believe in active management in this space too,” Hougan added. “I would just caution that there are extremely high-quality shops, of which Van Eck is one, and a wide diaspora of less quality shops. It’s a place where working with the best is extraordinarily important.”
Zach Pandl, head of research at Grayscale, said cryptocurrencies are different than stocks.
“Blockchains don’t have liabilities. There’s no company. There’s no buildings, no electricity bills, there’s no employees,” he said.
But with active management, you can avoid the “dead capital,” and lean into 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 keep leaning into the vanguard ideas in the space.”
“It’s worth pointing out the risk, which is, if you think crypto is a 10x or 50x market, buying the beta—if it’s not perfect—is still pretty great,” Hougan said. “Allocating to a poor active manager that lets it all ride on Bitcoin Cash and Luna wasn’t such a great option either.”
Hougan pointed to the early days of the Internet as an example, when a lot of companies failed.
“But if you took an index-based bet and held it for 20 years, that was great,” he said. “Indexing is never going to be the best strategy in the space, and it will hold a lot of dead capital and dead coins. But it’s going to get you the beta. The best investment in crypto is just to buy it.”
Pandl said we’ll see a kind of S&P 500 of crypto in the next year or so. You can divide the crypto space up into market sectors, but they’re not yet investable, largely because of the regulatory status of these tokens in the United States.
One of the great things about the crypto market, he said, is that you don’t need permission to post your token on the blockchain.
“What that means though is there may be assets that have a decent market cap that we don’t feel are suitable for investors, so we’re not ready to give investors purely passive exposure to the market,” he said.
The panelists also discussed the idea of tokenization and how that might impact investing and personal finance.
“If you’re a registered investment advisor, you can probably ignore tokenization for now, unless your clients get frustrated that they can’t move money over the weekend and things like that. If so, there’s a use-case for stablecoins,” said Van Eck.
Hougan said stablecoins are probably the least hyped area of crypto relative to their true potential.
“I think stablecoins will be a multi-trillion-dollar market in a year or two,” he said. “They’re just such an incredible, killer app. They put dollar bank accounts in every cell phone around the world. They allow you to access liquidity on the weekends. Increasingly they’re going to be used for settlement collateral for futures and other things.”
The largest stablecoin issuer makes as much money as Goldman Sachs, he added.
“Most of what I think about tokenization is the way that most people talk about it is completely wrong. They tend to say two things: ‘We’re going to tokenize the dry cleaner’s business, and I’m going to trade shares.’ Not going to happen. Or, ‘we’re going to wake up one day, and instead of trading stocks on the New York Stock Exchange, everything’s going to be tokenized.’ That’s not going to happen either. Those are fantasy dreams that develop pilot projects that end in tears.”
