Hougan: Well, the beauty of cryptoassets is that they combine high potential returns with extremely low correlations to other traditional financial assets. Whether you look at stocks, bonds, gold, liquid alts, commodities, volatility, whatever … the correlations to crypto are at- or near-zero. Given that the fundamental drivers of cryptoassets are different than those for traditional financial assets, we expect those attributes to persist.
We recently finished a study (www.bitwiseinvestments.com/research) looking at the impact of adding a 1%, 5% or 10% allocation to cryptoassets in a diversified, 60/40 portfolio. What we found was that, no matter what time period you looked at, these allocations significantly boosted both your Sharpe ratio and your total returns. In fact, a 1% allocation, rebalanced regularly, boosted returns significantly without increasing portfolio risk at all. It actually reduced the maximum drawdown in the portfolio, as the crypto position zigged while the market zagged.
So do you think most investors should have exposure to crypto?
Hougan: The data is the data, Tom, and the data suggests that a small allocation to crypto – properly rebalanced – may substantially increase risk-adjusted returns over time. So yes, I think a small allocation to crypto can be valuable for many portfolios.
What about people who say it’s a scam? That there’s no intrinsic value?
Hougan: I completely get that sentiment. It’s hard to wrap your head around something like cryptocurrencies. I think many people dismiss the idea reflexively.
But I think it’s too big to ignore at this point. Cryptoassets have a combined market cap of $430 billion. They trade $30+ billion per day. All the major banks and financial institutions are moving into the space. Goldman Sachs just hired someone to head its crypto department. Large institutional investors are talking to us every day about allocating to the space.
For financial advisors, I know that they’re clients are asking them about crypto every day. One way or another, they’re going to invest. So advisors need to get educated and find out how to talk to their clients responsibly and intelligently. Dismissing crypto out-of-hand is the wrong approach.
Do you have any financial advisors who are using Bitwise’s index fund in client portfolios?
Hougan: Absolutely. We have conversations with financial advisors every day.
You were involved in the ETF industry in its early days. Do you see any similarities to crypto?
Hougan: I definitely remember the big banks and large financial institutions dismissing ETFs as too risky or arguing that they’ll never amount to much. My guess is they regret that decision.
I hear a lot of the same noises coming out of those banks today about crypto.
Large, established financial players tend to dismiss new ideas reflexively, and sometimes they do that at their peril. I think people will look back on 2018 and realize that this was early days for cryptoassets.
What’s the one thing you would tell people thinking about investing in crypto?
Hougan: Don’t just buy Bitcoin. Buying any one crypto asset is like buying just one stock. You wouldn’t buy Apple and call it your portfolio. Bitcoin represents less than half to the crypto market and its share is steadily falling. Buy a diversified basket, rebalance it regularly, and keep your allocation in the single digits.
Will we still be hearing from you in ETF-land?
Hougan: Of course! For starters, Bitwise is aggressively investigating the options to bring a product to market in the ETF arena. But more importantly, I’m still involved on a regular basis with Inside ETFs and ETF.com. In fact, I’ll be giving the keynote address with my good friend Dave Nadig at the upcoming Inside ETFs Canada event, taking place in June in Montreal.
In the end, ETFs and cryptoassets are both financial innovations that can help investors succeed. I’m like a proud papa: I love both my children equally.
Thanks, Matt!