Matt Hougan joins Jay Coulter to make the case for the new Bitwise ETF on this episode of ETF Stories from FinancialAdvisor.TV. Learn more about BITC: https://bitcetf.com
From the Bitwise BITC website: 'BITC is a new type of bitcoin-linked ETF designed specifically for long-term investors. The fund provides directional exposure to bitcoin via regulated futures contracts and seeks to maximize potential roll returns through a selective analysis of bitcoin futures beyond front- or near-month contracts. The fund does not invest directly in bitcoin.'
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Transcript:
00:00
Love it or hate it, Bitcoin dominates every news cycle and your options for allocating to the space get murkier by the day. This is ETF Stories.
00:13
where we bring you some of the most interesting stories from the world of ETFs. But we are eliminating all the fluff and getting right to what investors need to know. Our guests only have 60 seconds to answer each question so you can get right to the point. Joining me today is Matt Hogan from Bitwise. They are the advisor of the Bitwise Bitcoin Strategy Optimum Role ETF, which goes by the symbol BITC. Matt, I'm gonna get right to it. Why Bitcoin today?
00:44
Bitcoin is a asymmetric alternative asset that when added to portfolios in small amounts can have a huge impact on your long-term returns. Historically, it's boosted your risk-adjusting returns significantly, even at allocations of 1%, 2.5%, and 5%. And I'm personally optimistic about the future of Bitcoin. Of course, there are no guarantees, but there are very few assets that you can add to a portfolio that can have that kind of impact.
01:12
at that low level of an allocation. That's why Bitcoin today. So Matt, for the novice investor, could you explain why the asymmetric return profile is important? Sure. Absolutely. Look, if you add 1% Bitcoin to your portfolio, the worst you can do is lose 1%. Right? 1%, the market goes up and down 1% on any given day. But historically Bitcoin has been among the best performing assets in the world over long periods of time.
01:41
And that means that just a little bit can go a long way. Oh, and one more thing, Jay, which is that historically and today, it has very low correlations to stocks, bonds, oil, and other major asset classes. It's really hard to find a low correlated asset that's liquid and that has significant potential upside. Bitcoin's that, and that's why it's been sort of a magic ingredient for portfolios over the last 10 years. Let's turn to your new ETF.
02:10
Symbol BITC. Why BITC as an investment vehicle? Yeah, investors and particularly financial advisors who want to add crypto to a portfolio wanna do it in an ETF. Right now the SEC won't allow us to have a spot Bitcoin ETF, which would be the perfect vehicle. We're left with future strategies. And the first futures ETFs that came to the market for Bitcoin were great. They brought the fun month of the futures contract. That's a good first step.
02:40
But what we know from other commodity futures ETFs is that there is potentially a better way for long-term investors, which is rather than just buying the next month contract, you look across all available contracts and try to optimize for long-term returns. This has worked in oil, it's worked in natural gas, and we think it may work well in Bitcoin. And here's the thing, we think it's important because people investing in Bitcoin are typically making long-term bets.
03:09
They're betting on Bitcoin not tomorrow, but Bitcoin a year from now, three years from now, five years from now. If that's the case, you need a product designed for long-term investors. That's what we've tried to build with BITC. So Matt, could you speak to some of the regulatory protections that come with the BITC wrapper? Absolutely. BITC holds regulated futures that trade on the CME, a well-regulated, well-established exchange that we are all comfortable with.
03:38
It removes concerns about things like custody, about broker-dealer handling of crypto, and of course it's wrapped in all of the traditional regulatory advantages of a fully regulated product. There are prospectuses, disclosures, etc. I would add also that it fits cleanly into most portfolio software tools so that it flows through to things like billing or into portfolio calculations. So there's both regulatory protections.
04:06
and practical improvements that I think are really valuable. Matt, you touched on this a little bit earlier, but I'd like to go deeper. How is BITC structured for the long-term investor? Absolutely. The way futures markets work is that an exchange like the CME will offer futures expiring at different months, not just this month, but let's say July, August, September, October, November, and each of those will be priced differently by the market.
04:36
What BITC does is it looks at where Bitcoin is trading today. It looks at where each of those contracts are trading and it asks which one is optimized to deliver the best long-term return, which one will not decay the most if Bitcoin futures are in what's called contango, or which one will have the biggest tailwinds if Bitcoin futures are in what's called backwardation. And so by doing that, it tries to achieve those better long-term
05:06
Matt, could you explain to investors that are not familiar with Contango and backwardation exactly why they need to be aware of that and why it's important in a portfolio like this? Absolutely. I love to use oil because oil is something people are so familiar with. Let's imagine oil is trading at $100 a barrel and you'll have futures contracts. Maybe the next month contract is trading at $110 a barrel and then the month after that is trading at $111. And the month after that at $111.
05:36
If you buy the contract that's worth $110 and it's expiring in one month, you know that if the price of oil stays flat at $100, you're going to lose $10 over the course of that month because the futures contract will have to settle to the spot price. So when markets are in contango, you expect to lose money through the decay of that contract over time. Now, different contracts will be at different levels of contango.
06:05
You could imagine one losing a dollar a day and one losing a quarter a day or a dime or a penny. If you're an investor, you want to find the contract that's scheduled to lose only a penny a day. And that's what Contango is. And that's what these optimized strategies seek to do. It's not a new idea. We've been doing it in commodity investing for more than two decades. It's well established in the academic literature.
06:34
this concept into the Bitcoin future space. But it's a natural analog to what's been happening with oil and natural gas and other markets all along. Matt, where do you feel BITC fits in a portfolio? BITC fits cleanly into the alternative sleeve of the portfolio. You're looking for an asset with asymmetric returns, with high potential upside, but also with significant risk and low correlation.
07:03
So I think of it in an alternative alongside things like gold or commodities, or maybe venture capital or private equity, those sorts of non-traditional assets. The other thing I would say is that crypto is a little bit like cayenne pepper. I love spicy food, Jay, but I only need so much cayenne pepper in my food. And that's the same thing that's true with crypto. The average client at Bitwise has between
07:30
one and 5% of their portfolio in crypto. And those are people who love crypto. That's probably the right amount for many investors. Above that, it increases the volatility of your portfolio significantly. So think about it as an alt, and then think about it a little bit like cayenne pepper. A little will go a long way, but it can make the portfolio really interesting and maybe advantageous for the right investor.
07:59
So Matt, could you tell us a little bit about the people behind BITC? Sure, absolutely. Bitwise has been in the crypto market for five and a half years now. We're one of the largest crypto asset managers in the world. We've seen booms and busts and booms again. And throughout it, we've oriented ourselves to serve the financial and financial advisor and financial professional market. So we've done things like co-author the CFA Institute's Guide to Crypto. We try to make it easy.
08:27
for advisors and financial professionals who want to access crypto to do so in safe wrappers that they understand with products that are designed to fit their needs. So we've been doing it for five and a half years. I can't wait to do it for another 50. All right, a couple of questions here before we wrap up and I'm gonna ask them both at the same time. Could you share your short-term and long-term outlook for Bitcoin and for viewers? We're recording this in the summer of 2023. Yeah.
08:55
Short-term outlooks for Bitcoin are always challenging. There's so much news flow, both positive and negative. Our forecast is for this to be a relatively volatile summer for Bitcoin due to the regulatory concerns and legal machinations surrounding this space. So I wouldn't allocate if you're only looking at a two or three or four month allocation period. Long-term, I'm exceptionally bullish for Bitcoin specifically.
09:23
I think Bitcoin's primary use in the world is as a digital version of gold, a non-sovereign store of value. At least that's what it's aspiring to be. And if you think about it like that, it's penetrated almost none of the market, maybe low single digits. And I suspect like most thing digital in our world, over time it will win more and more market share. So it has significant upside. You know, Bitcoin's been the best performing asset class in the world for the last 10 years.
09:52
despite a lot of negative headlines, media stories pronouncing it dead, a lot of challenges, it's actually in a great place and we're just at the cusp of institutional adoption. So short term, basically I don't know, but long term I'm really optimistic about where we're going and I think it has a role in many investors' portfolios. Well, Matt, thanks for coming on. Viewers, to learn more about the BITC ETF, visit bitc.com.
10:21
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