Look for the fallout from the collapse of Sam Bankman-Fried's FTX crypto exchange to "cause some professional [crypto] investors to sit on the sidelines for a period of time," Matt Hougan, chief investment officer of Bitwise Asset Management, creator of the world's first and largest crypto index fund, tells ThinkAdvisor in an interview.
"It's a Bernie Madoff-level scam," is how Hougan describes the FTX fiasco, which, he says, will also cause some large firms without a crypto strategy to "slow down platform approval for a period."
However, long-term effects will be positive, he argues: For one, crypto investors are now likely to conduct due diligence before they turn over their assets to unregulated entities domiciled outside the U.S.
Where do financial advisors enter this picture?
"A financial advisor should have such a key role in managing crypto investments for clients," Hougan says.
Bitwise clients are mostly financial advisors and family offices. The firm also onboards high-net-worth individuals on a case-by-case basis.
According to Hougan, who joined Bitwise soon after its 2017 launch, FTX's implosion will "speed up the process of adding regulations … to the crypto market."
Bitwise, one of the world's largest crypto asset managers, was founded specifically to create the world's first crypto index fund, the Bitwise 10 Crypto Index Fund.
Today, that fund (OTCQX: BITW) boasts assets of $337 million.
The firm's assets under management totaled $1.3 billion as of year-end 2021, the most recent date for which such information is available.
In the interview, Hougan explains what the crypto industry is today ("massively more robust, significantly stronger") and what crypto is not ("a competitor to the dollar").
Hougan — who was CEO of Inside ETFs, managing director of global finance at Informa and CEO of ETF.com before joining Bitwise — also explores why tax loss harvesting "works better with crypto than anything else."
ThinkAdvisor interviewed Hougan on Dec. 14. He was speaking from Bitwise headquarters in San Francisco.
"Crypto is the future," he declares, because "it will reshape how finance works, how money works, how technology and the digital world work."
Here are highlights of our conversation:
THINKADVISOR: What's your reaction to the Sam Bankman-Fried FTX scandal?
MATT HOUGAN: It's pretty crazy. From everything we're hearing, it appears that it was almost a Day One fraud. A shocking development.
Often you see fraud take the form of someone making a mistake, covering it over and then digging the hole until it's too deep.
But with this one, there seems to be a fair amount of intent.
What does it all mean to the crypto market in the future?
In the short term, it's bad. It destroyed a lot of trust. I think it's going to cause some professional investors to sit on the sidelines for a period of time. It's a Bernie Madoff-level scam.
But I think the long-term impact would be positive because it will push people to more regulated, trustworthy institutions instead of parking assets with unregulated offshore exchanges [like FTX], which was domiciled in the Bahamas.
Investors should be looking to work with regulated U.S.-domiciled entities that have been around for a while.
What other positive impact will it have?
It's going to speed up the process of adding regulations and regulatory clarity to the crypto market. Crypto needs that if it's going to fulfill its full potential impact on the world.
Where exactly does the crypto industry stand today?
Crypto has had a lot of negative headlines recently, but the industry is massively more robust, massively more institutional, significantly more regulated and significantly stronger. And the technology has improved a lot.
Some consumers feel that the industry is anti-regulation. Any truth to that?
It's not true. Those of us who think that crypto will reshape significant portions of how the world works know that it can do so only within a regulatory framework.
You're going to see real progress in crypto regulation; and that, in turn, is going to help build the mainstream applications that people are hoping for.
Bankman-Fried reportedly kept no records. All he used was QuickBooks, small-business accounting software. How does one evaluate these companies up front?
You need to ask some basic questions: How are you regulated? Are you audited? How are clients' assets separated? Who's the custodian? Where are the assets domiciled?
If you had asked those common-sense questions about FTX, you would have found that it's located in the Bahamas. It's not audited. It doesn't have a board. It has a relatively short history in the market. That would have raised some red flags.
But clients don't necessarily know the right questions to ask. Financial advisors do. Where do financial advisors fit into the scenario?
A financial advisor should play such a key role in managing crypto investments for clients.
Do you think any of them asked those questions when dealing with FTX?
Many of them did. But I don't think many financial advisors have clients with assets, which they knew about, that were on FTX.
That's not how advisors are giving exposure to crypto. They're working with firms like Bitwise.
