SotN #36: DeFi Crypto Index For Financial Advisors | Bitwise CIO Matt Hougan

Transcript

all right bankless nation welcome to another episode of state of the nation this is our opportunity to talk about what is happening lately in crypto related to some of the big picture stuff we talk about on the podcast and in the newsletter and drop some insights and action items i am super excited about the guest we have today he is the cio chief investment officer of bitwise matt hogan we're going to get into how defy is going mainstream with traditional investors but first we're going to give you a bit of intro information david how you doing today absolutely fantastic while the markets are doing one thing the crypto world and specifically dfi is continuing to march forward unhindered

and i'm super excited just to get into the conversation about how uh bitwise is connecting defy and defy assets to the world of what i consider big money which i like yeah absolutely this is going to be an exciting uh conversation because matt really comes from that world and he he basically helped to mainstream etfs at the very beginning of etfs now crypto is sort of entering it's uh it's close to mainstream movement there's a big educational campaign with traditional investors we're going to get to all of that and introduce matt in in a moment but first let's talk about what is new in the nation david we're getting ready to celebrate our one-year anniversary in fact the podcast is now officially as of today one year oh and we're gonna be i

know dude i can't wait well this was all your idea so for the good and bad guys david was the person who convinced me to do a podcast and i was like i don't know what are we going to say will we have enough episodes well here we are is there going to be enough content yeah that's what i said uh here we are 150 plus episodes later uh just just uh back from mark cuban on the podcast in our first year pretty exciting anyway we're gonna be doing a one-year anniversary episode david do you want to tease that yeah yeah so it's gonna be kind of a bankless episode zero reprise where we go in and introduce like what is the what did what does it mean to go bankless right and we talked about in

our second episode which actually we labeled number one um it was like all about crypto monetary policy it's just going to be i think a synthesis of a lot of our introductory uh uh content but now that we are a year older a year wiser uh which i mean for the crypto space that's 10 of all of crypto history and it's 25 of all of ethereum's history so there's a lot that we've learned in the last year and so we want to kind of a little bit redo some of our initial content but do it i think more with more precision and more information and better perspectives and i think that's going to be a really valuable takeaway yeah so this is going to be on the podcast stream next monday and what we're really trying to do is is have a

canonical episode when somebody goes and asks you okay what is defy what is this crypto thing you could send them to this one episode that that spells it out um we're trying to fit like six or seven episodes into one so we'll see how this goes but you let us test our skills that we've developed we're gonna test our skills one year we're one year vets now so i think we can do this uh david we've also got some awesome content coming out on youtube i know you're doing some meet the nation videos with all of these different crypto projects uh some digital art stuff any any teasers there yeah we're doing we're doing something with connext and i specifically have questions about how connects is going to help bridge liquidity across l2 roll-ups i know that that is a huge conversation

so we're recording that this week i also have a meet the nation with b protocol for those that are interested in that gonna learn all about that but something i'm recording today with my good friend kitty who uh people on the our east finance reddit will be all too familiar with uh i i showed him he i know he he's a digital artist so a 3d digital render artist he's not a cat he's not a cat he's not a cat and i showed him a a picture of some something that people put out on twitter and i was like wow this is really cool uh and he was like no no dude this is like really simple like just slap some some stuff together digital artists would know and would know how to identify that but typical people like more people that are just trying to get

into the world of digital art might not be able to know some of these things so kitty and i are going to go through some of uh the digital art nfts that are out there and he's going to evaluate them them like on on the video and he's going to i think use his thought process and his mental like knowledge about digital art to kind of explain to us how he evaluates digital art and i think that's gonna be useful for people that are getting into the world of digital art and nfts yeah for sure um also some stuff coming up david the yang speaks episode oh it's coming out this thursday so um i yang speak so this is andrew yang's podcast they invited me on for a podcast episode that's for like an intro to crypto that releases this thursday i'm super excited

about this um and i think this kind of will help open the door to to some traditional channels we haven't previously like folks are interested in crypto so subscribe yang speaks if you don't listen that podcast stay tuned for that and i hope i did the crypto and bankless movement some justice on that episode um i was a little bit nervous i got to confess going in this is andrew yang but that comes out this thursday the last thing is david the consensus conference is coming i believe that is may 24th so that is a fantastic crypto conference this year of course of course it is virtual but ray dalio is speaking there and david i heard that you were speaking

there as well do you know what your subject is yeah even bigger than ray dalio right um i'm still chewing on my subject matter but i'm i've something i've really been fascinated about is the job opportunity the labor monetization opportunity surface area that ethereum creates and i think that really fits in well with um coindesk which is not an ethereum-centric uh uh company right they are just crypto they are whatever like all all the blockchains are going to be there remember it's like like even though we kind of say on on bank list it's just bitcoin and ethereum on coin desk everyone's going to be there and so i think it's a worthwhile conversation to talk about the job surface area that crypto is creating specifically ethereum and like there's conversations with nfts with d5

treasuries there's so much potential for ethereum to pay people's you know paychecks right and help them live in this world and i think that's a really valuable conversation especially when the greater societal conversations are of like wealth inequality uh gargantuan silicon valley uh monopolies i think that is an interesting conversation i think that's a good topic to talk about at coindesk absolutely do not miss a crypto conference during the bull run there are a lot of fun so go check this out we have a link in the show notes you can get 20 off with the bankless code that's bankless as the code there will be a link in the show notes here shortly if there's not already david all right before we get in what is the state of the nation today my friend yeah the

state of the nation is recovering right we had our first i feel like we had our first major pullback in crypto prices uh we were to me it was like every individual crypto person has their own like pain threshold i was on the verge of mine but we didn't actually go there i i was making the joke about how like you ether price can't actually go below 1300 it doesn't actually there's nothing that actually exists down there and that was right that was right at the bottom if that actually holds then that would be pretty cool but um like i said at the beginning like defy innovation developers protocols are continuing to build while the prices are doing their thing so this week on the state of the nation we are recovering pull back 35 or so pull back pretty normal for the bull

run it still feels very much like we are in a bull run all right david before we get to our next guest uh matt hogan we want to take a minute to tell you about the fantastic sponsors that made this episode of state of the nation possible synthetics is ethereum's decentralized derivatives liquidity protocol what does that mean synthetics is a platform for creating and trading synthetic assets which are assets that are priced via an oracle rather than bids or asks traders can use the quenta exchange which hosts and trades all of the synthetic assets created by synthetics traders on cuenta can trade synthetic tokens like sbtc s oil or sd5 because quinta is powered by

synthetics traders experience zero slippage on their trades no i didn't mean low slippage i meant no slippage because that is the power of the synthetics platform no slippage on your trades you can also easily short assets with isynths which are synthetic assets that move inversely to their target asset synthetics isn't just for traders developers can build on synthetics to access the infinite liquidity offered by synthetic assets or investors can stake collateral to the protocol and earn fees that the protocol collects if you're a trader and you're looking for a trading platform and not found in the legacy world check out quenta.io if you're a developer or you just want to earn yield on your collateral go to

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bitwise he spent 15 years in etfs when they were first invented so he knows that space very well he saw it emerge and now he is seeing the emergence of crypto as an asset class for traditional investors and that is the subject of today's conversation we're going to talk about how crypto is going mainstream with traditional investors how defy is now going mainstream with traditional investors and how they understand it matt really excited about this conversation because i think there's so much the crypto world just doesn't understand about traditional investing you are here to help us out with that how are you doing today sir i'm doing well thanks for having me on happy happy

to be that bridge for you very good that's what we need we need bridges because uh you know for a lot of folks tuning in to bankless they don't really understand how the traditional finance world works i guess i want to start with this question matt is when we think about traditional finance in general where's the money so like who holds the capital where is it parked i think we have this general sense that uh if you look at dispersion across generations of course baby boomers have far and away the bulk millennials you know still trying to buy their first house in general so so we understand that generational dispersion but how would you split out where the wealth is and where the capital the investing capital is uh

today and maybe maybe focus on the u.s first yeah sure it's an amazing question actually it's one that most of crypto misses for reasons that aren't clear to me the way i think about wealth in america is that they're three buckets so they're self-directed retail investors which crypto knows very well right that is the group that built crypto from the ground up the early adopters there's institutions that people talk about as this sort of pantheon of the capital gods right endowments foundations the institutions are coming that's right we've been hearing that forever and they control a lot of capital and and crypto has been serving that market for a long time as well you mentioned institutions are coming we have you know major venture capital firms that have been marketing to that

group forever the piece of the american capital distribution pie that people miss is that the fat center is financial advisors who control the wealth of most americans like so if you think about how big these three things are self-directed retail investors really small you're talking like 10 to 20 of all wealth in the us institutions pretty big 40 of the wealth the other 40 is controlled by these wealth advisors like we laugh at names like morgan stanley or ria's but we all know that wealth in america is mostly concentrated amongst a relative few all of that relative few have their money with financial advisors so it's this huge segment of the market that in crypto no one has really

marketed to and it's just starting to come into the market right now so yeah that's the area that bitwise focuses on and it's an area that i think is going to be critical to the growth of crypto it was the reason etfs emerged uh those were the first adopters and i think you're gonna see that you're starting to see that in crypto as well so so matt my parents have a family friend that works at edward jones and he was my old baseball coach when i was in little league and he manages my parents money is that is that who we're talking about is that the cohort that we're talking about that's definitely a big piece of the cohort is is your baseball coach that's an example they're also independent raas so they're really two groups they're big groups like like raymond james or morgan stanley and then

they're independent people with their own shingle but that's exactly it and they tell your parents where to invest and they set the capital allocation uh and they control again something like you know 20 30 40 trillion dollars of wealth in america i mean just a huge wow yeah wow okay so uh we want to dig in more to make sure we understand it because because again we're talking to crypto people who are in sort of that retail bucket primarily and they they may not know all these terms you laid out the the term ria which stands for registered investment advisor can you talk about what an ria is is that the same thing as a cfa or a cfa sort of a subtype break down some of these financial acronyms for us yeah so cfa is chartered financial analyst this is an

independent designation you could think of as sort of a graduate school for quant finance right you go there and you take tests and you study for a billion hours and you suffer for three years and then you get this designation uh an interesting fact uh the average salary of a cfa higher than the average salary of an mba so it's actually a good approach to take much more cost-effective way if you're looking for graduate education um those people can cfas operate in all parts of the financial ecosystem you'll find them in banks you'll find them at regulators you'll find them at ras the wealth management market they're really two kinds they're people who are affiliated with large broker dealers like morgan stanley where morgan stanley directs some control over

what they choose and then their ras which are typically independent people for instance if i opened a shop to manage money for my friends and i didn't have morgan stanley sitting on top of me i would be an independent ria and typically the way adoption moves is those people are the first right they're the first to adopt new things they've typically left firms like morgan stanley because they're more experimental because they want exposure to things like crypto like art like real estate like alternative lending platforms um and that's really the early adopter market but that's that's the group cfas just a designation that means you've studied a lot of math uh raas mean you have to manage money for people in a fiduciary

manner and then broker dealers which have have lower fiduciary standards but still try to do the best for their clients that's that's more or less the breakdown okay and to be someone like uh david mentioned edward jones yeah for his parents uh what designation is required yeah you have to typically go through some sort of training there are certain uh sec level designations that you have to get but they're they're relatively low i think the important thing to realize that there are people in that market who are extremely sophisticated and know a lot about portfolio management and then there are people in that market who are primarily relationship people right they are my kids soccer coach or they are a retired school teacher who have relationships in

the community who basically use other people's portfolios to allocate so that the barrier to be a financial advisor is relatively low and the dispersion of quality and experience is relatively wide but it is a huge market there are 300 000 of these people in the us again they control something like 30 or 40 trillion dollars of wealth uh and that's just that's a lot that's as much as the largest endowments in the world yeah that's massive now in general across these categories obviously we understand what retail represents you know generally not people who are accredited investors right but in the in these other two categories we've got institutions and financial advisors is it the case that the institutional money skews more high net worth individuals

whereas the financial advisor category is more middle america upper middle america is that generally the case unaccredited investors that's close yeah the way i think of institutions is like the stanford endowment or the harvard endowment or the yale endowment or pension funds that run like you know the teachers union money or the firefighter union money those are really true institutions and what's distinct about them is there's typically a board that makes decisions about how they invest uh and those that board tends to be relatively sophisticated rias and financial advisors serve a wide spectrum of people so they're ras who have average clients who have 50 or 100 thousand dollars uh to invest

and they're ris who dress themselves up with fancy names like family offices or multi-family offices that sound fancy and allow them to charge more which manage clients who have 50 million 100 million 200 million dollars in wealth so anywhere between you know like a hundred thousand dollars to a couple hundred million dollars you typically have some of this financial advisor action taking place and controlling where the portfolio is allocated it's a big space so i want to get to bitwise in a second because i think that's that's helpful to understand it um but give us the real high level here so in this financial advisor class which represents 40 trillion in capital in the us what do they think about crypto right

now just a high level because we're going to spend some time camping on this a little bit later but just give us the broad strokes it's 2021 do they think crypto's a scam uh are they able to buy crypto what do they think of it yeah i think it's 2016 and crypto for them so there is a there is a small sliver of them it's not zero at all i mean these are bitwise's clients we're a billion dollar asset manager so they're they're a number maybe five percent maybe six percent maybe ten percent who are already allocating to crypto for some clients there's a very small fraction who's very excited and thinks it belongs in every portfolio and then there's a huge swath who is distrustful and uncertain i will say however that it has trained

dramatically in the last year and we can get into the reasons why it has changed but a year ago the vast majority of people i talked to were simply dismissive of crypto they thought it was uh rat poison squared or harvested baby brains or choose your favorite epithet uh people are have a different view now right they particularly because they saw it run up in 2017 pull back and then recover which is really a unique characteristic that recovery has brought a lot of people into the market the infrastructure has improved so you're starting to see rapidly spiraling adoption i'll throw one stat in just to give you a view we do a survey of financial advisors we have about a thousand people fill it out

each year now this is self-selected so don't take these numbers in isolation but last year six percent said they were allocating this year nine percent so it was up fifty percent last year seven percent said they planned to allocate this year seventeen percent said they plan to allocate in the year ahead so it's more than doubled in terms of adoption and i think particularly if we get an etf or other easier ways to access i think this could become the single fastest growing area of money moving into crypto in the us much bigger and faster than even the institutional side when we talk about numbers like nine percent and 17 well they doubled from last year we get we can see this is just a tiny part of the the pie there's so much

growth potential there we do want to get back to that um because i think that's a bulk of the story of of what these financial advisors you know how they think about crypto and how that's evolving and what's going to change for them moving forward but before we do i don't want to spend uh too long before we actually talk about what bitwise is because i think that's important context for understanding you've alluded to this that bitwise was sort of constructed in some ways to help these financial advisors to help unlock that 40 trillion in capital but what is bitwise and what are some of your core products yeah that's exactly right bitwise is a specialist crypto asset manager we manage about a billion dollars we're best known for having created the first crypto index fund in the world so it

holds the 10 largest crypto assets mostly bitcoin and ethereum but also uh you know chain link down to uniswap ave even is in there the 10 largest crypto assets it makes it easy for people to make a bet on allocating to crypto without deciding which particular asset they want to hold so yeah there's there's our website you can see 805 million dollars in this product that's up significantly over the last six months if you scroll down you can see the returns and the portfolio allocation there bitcoin ethereum litecoin shame link bitcoin cash etc we run this index in a very institutional manner so for instance the former head of indexing for s p uh who used to sit on the s p 500

index committee advises our index but what's unique about bitwise is we try to combine traditional finance experience with crypto expertise so alongside the former head of indexing for s p and a member of the s p 500 index committee spencer bogart from blockchain capital also said on the index committee uh actually uh but i i hired spencer i gave him his first job back in my etf days he used to work for me so i've known him for a long time but we try throughout to marry crypto expertise traditional finance expertise the people at our company come from companies like google facebook instagram from software backgrounds but also blackrock deutsche bank goldman sachs etc so we marry those

two together and then mostly what we do is we educate people on why crypto isn't insane and we do that around the world we talk to them about what it really is what it really isn't why their opportunities why their risks and just today i was talking to a group of financial advisors for an hour an etf focused podcast earlier the cfa society of slovakia there's huge interest in crypto and we try to sort of bring that to them and then provide simple products that let people invest so matt i want to ask about your guys's relationships with your customers i would imagine that customers who are interested in exploring the crypto space probably an index might come into their mind first because they're like well

there's a lot here maybe i'll just go with a simple route and get the index right but i'm assuming that they're still going to have questions right so what what's the relationship between your guys you and your guys's customers how do you guys how much handholding do you guys do how much questions do you guys how many questions you guys answer what's that what's that process like so much hand holding i know this sounds strange for the crypto world uh but we have a full traditional sales and distribution team with six people in six different uh categories or six different parts of the country who do thousands of meetings with financial advisors every month before covid i used to joke that like the future of the crypto industry was being built in morton's steakhouses because we would travel around the country and have 10 financial advisors

and the questions you would get they really start from the beginning how can this thing have any value if it doesn't have any cash flow is the government just going to shut it all down uh isn't china controlling crypto we still answer those the really interesting thing is the questions have started to get a lot better they've started to get a lot better and people have started to move beyond bitcoin which was the only thing they knew uh down chain into eth into d5 and and further on and that's really happened in the last year the sort of existential questions that dominated 2018 and 2019 which were anchored on this idea that crypto was just going to go away those have evaporated in the last six months and now it really is how big is

this opportunity what are the risks and what should we monitor to see if this is succeeding or not in the future yeah let's go let's go further down that hole one what about the biggest things that i enjoy about this particular bull cycle if if we're calling this a bolt cycle which i think we will is that you know in 2017 people will said say like you know don't invest more than you can lose because it could all go to zero no one is saying that it can go to zero in this in this cycle like no one believes that anymore and earlier in uh when you were talking about um how uh the recovery aspect is the uniquely compelling aspect about bitcoin the fact that it did go from twenty thousand dollars in 2017 down to three thousand dollars and then it came back

right uh and and so you alluded to some shifting sentiment in people's questions so let's let's go into that a little bit more like what in in addition to um bitcoin as hard money and perhaps the money printer go burme first first question is that is that part of the conversation uh and then also what else is part of the conversation especially when it comes to defy yeah so uh that definitely rising concern about inflationary outlooks and the ability to a search for an efficient head is part of the conversation a fundamental understanding of crypto as a technological breakthrough built on decades of computer science work is becoming an important part of the consideration right there's still a lot of people out there that think some guy

created a spreadsheet like a google doc online and keeps track of things now it's worth half a trillion dollars people are starting to step through that and understand the fundamentals of blockchain and what they are defy is really unique uh because it took years and lots of meetings to get past these sort of existential core questions about what bitcoin is and people still really wrestle with it how can you have this thing that's so volatile it's a store of value i don't think they're that complex questions i i you know it seems obvious to me a new store value can't emerge and be fully formed and not volatile it has to go through but people still wrestle with that but the thing about d5 is people get it instantly so the idea that the traditional banking

system needs to be disrupted by finance is something that takes exactly that long to explain once you say that once you say a lot of what happens on wall street is just if then statements that can be replaced by software people are like aha and the the investment and the speed at which people have invested in our d5 index fund swamps what happened in our our index fund even though it's a tiny slipper of the market i mean i've never seen something where it's so instantaneous does wall street need to be disrupted yes how do i invest it just is obvious to people so it's been a really fascinating phenomenon so when people ask about d5 how granular do their questions get like do because

there's some aspect of cash flow with these defy tokens which i would imagine investors can resonate with but like i can imagine if the further and further you go down this rabbit hole eventually you're gonna have to talk about this thing called uniswap which has this unicorn branding thing and it was mint is made by this guy with you know a ten thousand dollar grant and then if you go even further you ask you have to talk about sushi swap which is based off of sushi like how do these conversations play out yeah you know it's it's fascinating that you ask those questions i don't i don't think the unicorn brand definitely helps um but i use i use uniswap all the time it's really easy to talk about uniswap replacing some combination of the new york stock exchange and firms like jane

street right these institutional market makers that make huge amounts of money managing tiny spreads in the space um so i can talk about unit swap the thing that makes it that lets you get over the unicorn hurdle if you want to phrase it that way is it did 37 billion dollars in trading volume and it's generated huge amounts of fees and you could talk about how the token is pre-revenue just like traditional technology stocks were pre-revenue but went on to be multi-billion dollar behemoths you can look at coinbase in the valuation that it's getting and even though it has a unicorn and was founded by a guy who like didn't have any money and barely snuck by and there's the beautiful blog on unit swap with this phenomenal sort of classic

entrepreneurial it doesn't matter 37 billion dollars in volume hockey stick growth massive fees people get it and you don't have to get to flash loans and synthetics and like how does urine finance work people just accept that there can be a software driven analog of everything that exists in traditional finance and probably 80 percent of it can be disrupted uh and you just need to give them one or two examples and they're in this is amazing hearing you you you say this matt um i i i saw this tweet from from hunter uh horsley who's your c ceo and i retweeted this out but it's so important this kind of underlines it he said i've been surprised to notice that in many ways d5 makes more sense to many means mainstream investors than bitcoin

does bitcoin is digital gold sure but most don't like real gold either defy which can be used and has free cash flow or a fee cash flow much easier for many to wrap their heads around that that that sounds like he's summary summarizing it too so it's exactly what you said it sounds like the narrative of um financial advisors know that traditional finance is broken that there are all of these rent-seeking intermediaries that it needs to be disrupted so that's already a mental model that they understand they understand how to do discounted cash flows right because that's how you value a stock so they understand the nature of capital assets and the the hayden adams

uniswap story doesn't sound so crazy to them because they lived through an era of mark zuckerberg and facebook who created this weird thing from his college dorm room and they know that weird tech things can get really big really quickly and now they're seeing actual volume and they're seeing cash flow as a result of it so who the hell cares if it has a unicorn i'm in is that kind of how it goes that's exactly how it goes that's exactly how it goes and the tech piece is so important they have seen it multiple times that it's not just zuckerberg it's slack and i mean there are a million examples we've seen it over and over again and some of them are goofy like airbnb had the whole cheerios thing and people sleeping on their seats i mean we've seen these goofy stories um

and yeah it is just so visceral and the market is so large and it's so easy to see how it translates into the broader economy the the people from my industry the etf industry had mixed reactions when i moved into crypto but they have all come rushing to this this defy index concept i mean it it's it's incredible to me it really is is so resonant we do want to get to etfs in a minute because i think there's some interesting parallels that you can help pay but i also want to underline this point for them so at bankless we tend to categorize crypto assets into three asset superclasses chris berninski does this really well right and so one is a commodity what's a commodity that's something like like wheat for

instance or oil those are commodities right supply and demand driven as far as valuation goes and then we also have the store of value assets that are monetary premium type assets so bitcoin is an example of that we would certainly argue that ether also exhibits store value qualities and then we've got this whole other category which is uh everything that traditional investors typical typically buy these are stocks and bonds these are capital assets so that's the third asset superclass and defy assets tokens when they uh when they throw off cash from fees essentially they occupy this capital asset space so free like cash flows for example that's how you value them

how important is that piece of the discussion because the the comment that hunter just made i think you're echoing it is traditional financial advisors they're kind of bearish on gold too i mean like they've made all of their their clients money through capital assets through stocks and bonds during during other market cycles they haven't made their clients money through through gold traditionally so can you talk about uh defy tokens as a capital asset and how important that is to the narrative here no that's exactly right i mean there is a small sliver of the world that loves gold and some small sliver of the world that loves gold also loves crypto for its gold-like characteristics but this idea of crypto is capital assets this idea of crypto is

doing things that you can see uh and that you can participate in uh is huge for two reasons one it's very visceral i can explain it to my wife and she's like oh that makes sense i see where that will go uh and two it has cash flows it doesn't actually matter that much what the price to sales ratio you know we can all track that on token terminal it's fun to watch uh and and uh they it can look quite attractive versus their growth but what matters is that it's early stage and it's hockey sticking up to the right i mean one thing i think people do understand about crypto is this is like early stage open architecture venture capital investing these are new experimental protocols ideas companies entities dapps whatever you want to call them they're showing

significant traction and just like early stage venture capital rounds can look like they're overvalued you're paying what for a company doing what revenue as long as they're showing product market fit generating cash flow and you can see it go up and to the right they can make strong senses and investments so i think people are able to put them into a traditional financial framework and attach valuation assets the other side digital gold look there are a bunch of valuation characteristics or protocols there's stock to flow there's there's mpv there's lots they're all terrible is my view in the bitcoin space bitcoin is really hard to value aside from like total addressable market we wrote that in our cfa guide to crypto i think

they're all pretty terrible i admire people for trying but they're pretty terrible this other one on when you look at discounted cash flow and you can look at it's much easier to fit in a traditional allocation framework uh and and that makes it much more easy for people to get and want to get exposure to matt there's one part of defy and well crypto at large but specifically with these defy assets that i think is uniquely compelling and i want to ask if this is a conversation that you guys have with your customers which is the inherently verifiability and auditability of these capital assets right like we know exactly how much volume went through unit swap over the last month week day one hour period three years ago like as granular as you want to get and like one

of my favorite websites is makerburn.com which literally like just shows where all the revenue is coming in real time and this is something that's uniquely different from quarterly reports which not only are they once every quarter but they're also slightly subjective right like can we put like this balance this this asset into this column or like where do we put this can we kind of tweak this to make ourselves look better there's an inherent difference between these two worlds does this conversation come up with you guys and your customers it comes up in a major way and it's such a major proof point that this whole thing is real look before this before those sorts of statistics we were living on air you could see market cap you could see volume you couldn't really trust the volume we had a few examples of how

significant companies in this space were you could see finance burning bnb and proxy out there revenue we just got the coinbase s1 and people dug into it but you can see all this in real time you can see it as you said over the last 24 hours and the important thing about that is that the most difficult step to take with traditional financial investors is to get them to go from zero to one on crypto to get them to go from like this is a ridiculous tool of bubble that's going to burst and end in nothing to oh there might be something here once you do that one to 100 is super easy and the fact that you can point to these revenues and trading volume and and loans and and derivatives that are being created uh and insurance pools that are

up and operating and you can show them that in real time makes it impossible or not impossible very difficult for them not to go from zero to one it's just this irrefutable proof point that you can point them to uh and it's a beautiful thing guys this is super exciting and uh we've got plenty more to talk about with matt in particular we want to dig into the new defy index product that they launched and talk about what that's composed of as we explore this conversation further uh but before we do that we want to tell you about the fantastic sponsors who made this episode possible gemini is the world's most trusted cryptocurrency exchange i've been a customer of gemiini since i first got into crypto in 2017 and it's been my main exchange of choice

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preferred crypto asset when i get my gemini credit card i'm going to make sure that i get my cash back in east so whenever i buy something i get a little bit of eth bonus back to me at the same time you can open up a free account in under three minutes at gemini.com gobanklist and if you trade more than 100 within the first 30 days after up you'll be gifted a free 15 bitcoin bonus check them out at gemiini.com go bankless ave is a borrowing and lending protocol on ethereum and just recently released ave version 2 which has a ton of cool new features that makes using ave even more powerful with ave you can leverage the full power of d5 money legos yield and composability all in one

application on ave there are a ton of assets that you can deposit in order to gain yield and all of those same assets can also be borrowed from the protocol if you have deposited collateral here you can see me getting a 200 usdc loan against my portfolio of a number of different defy tokens and eth i'll choose a variable interest rate because it's a lower rate than the stable interest rate option but i could choose the stable interest rate option if i wanted to lock that interest rate in permanently one of ave's v2 features is the ability to swap collateral without having to withdraw your assets trade them on unit swap and then deposit them back into ave ave does all of this for you all in one seamless transaction so you don't have to repay loans in order

to change the collateral you have backing them check out the power of ave at ave dot com that's aave.com guys we are back here with matt hogan we are exploring bitwise and how crypto and defy uh is is is bridging really to the mainstream traditional investor market uh now matt before we we cut for break we we promised that we would talk about this i was super excited to hear you guys announce this of course bit wise as we talked about has all of these different crypto index funds but this is your first defy specific crypto index fund which once again is now available

to traditional financial advisors can we talk a little bit about this so first of all maybe you can guide us through uh when did you have the idea to create a defy crypto index fund like what were the seeds of that idea and how how did this product come to be sure it's always been our intent to to move down from the broad-based index fund to sector funds right in some ways we're not reinventing the wheel this is something traditional asset managers do they start with a broad-based index fund and then they have a financial fund or a technology fund and crypto has a few interesting sectors regarding d5 specifically it was hard not to notice starting last summer just the

spectacular growth in assets i mean you can look at total value locked you can look at whatever part of the story you want but as we started to see compounding monthly growth of 100 or more we started talking more about d5 internally around the turn of the year you started to see the assets become liquid enough to support real investment right one of the issues we don't want to run into is building a a fund that can't handle the kind of investment we we expect like if we get too much money in and we can't actually purchase the assets that's a bad thing so around the start of the turn of the year we started to believe that this market was big enough to support a traditional financial product and we started working on the index right there are some big questions what is a defy

asset how do you grade out security risk how long should assets have to exist does ethereum belong in a d5 index does chain link belong in a d5 index and so we went through a whole process we pulled together an advisory panel of some of the biggest venture capital investors in the d5 space and we started to build a an index for it really starting around the first of the year i come from a deep indexing background if you can believe it i edited the journal of indexes and academic published publication on index investing for a decade literally the most boring magazine in the world but it's come in handy in terms of trying to build a high quality index in this space so so love to dig into that more all right let's

let's first talk about because people listeners to bank lists are familiar with all of these d5 tokens we talk about them all the time let's talk about what's in the bitwise defy index and why sure so the core defining question is what is a defy asset right is ethereum in is chain link in and what goes below that the way we answered that question was pretty simple we looked at the traditional financial sector right their financial etfs that capture all the lodges financial names and we asked ourselves does this particular asset compete with a business line of a holding of a traditional financial etf so does it compete with the new york stock exchange does it compete with the business line of jpmorgan does it

compete with the business line of a major insurer and if the answer was yes then it went into the index right and that was that's our saw does it compete and directly tried to disrupt a traditional financial firm then it goes into the index now beyond that there are a huge number of screens so we can't just let everything into the index we have to evaluate things is it likely to be labeled as security by federal security regulators can we custody it with our custodian or with any u.s registered custodian is there actual liquidity and so there's some big projects that haven't made it in for those reasons sort of existential risks that maybe traditional investors aren't ready to handle things like pancake swap which just emerged or even sushi

is on the out of that although we continue to evaluate it but that's the core metric does it compete with the traditional business line of a major financial institution if it does let's put it in disrupt the banks and so that's why we actually don't find chain link in the bitwise index right because chain link is an oracle providing service which is not necessarily a financial activity is that is that the analysis chain link was the hardest one but that's exactly right the analogy we made to chain link for those familiar with traditional financial services is the company it's most like is thompson reuters and thompson reuters is this big provider of financial information but the interesting thing is from a traditional financial perspective it's not actually a financials company it's

in the industrial sector and the reason is it basically doesn't handle money it's digits and data and that's what chain link is providing now we love chain link it's in our bitwise 10 index i think it's phenomenally interesting it's obviously an important cog in the d5 system but it's not a pure play on d5 it does other things as well but that that was definitely an edge case one where we lied on our advisory panel uh and i'm happy where we ended up i love this mental model because it fits the bankless mental model right so like this entire movement mat is about disrupting the traditional financial system uh it's about doing having less banks and and and doing more banking with less banks right that's that's what we see this entire industry

uh with this entire d5 space moving towards let me just ask you a quick segue question of like do you think the banks see this coming i mean are they paying attention to like uniswap volumes are they paying attention to what ave is doing with loans do they do they is this even on their you know radar no no no is the answer they have no idea what's coming uh and if they do if they have this inkling i mean look the word decentralized finance has been used in the wall street journal four times in its history four times and this is something where you're doing 37 billion dollars of volume in february on unison as you mentioned fort it's unbelievable so no they don't see it coming it's coming much too fast and they face a traditional dilemma where

it's going to be hard for them to compete otherwise so yeah i'm i'm totally on board cheaper more efficient more open more transparent more verifiable no they don't know what's coming but they're going to find out you know soon let's talk about one of some of the more uh granular details of the inclusion criteria how long does an asset need to exist before it can be included in the bitwise define index yeah pretty pretty quickly so we rebalance it every month uh assets have a certain seasoning period i think it's a couple months in terms of their liquidity so it can't just emerge overnight and be there there is some level of discretionary um uh adjudication of it such that a new asset that hasn't gone through sort of a security audit that hasn't proved itself

in the market probably won't qualify our advisory panel probably wants to see it mature a little bit longer so you're going to see assets take a few months look the one risk that we can't have happen we can't bring in an asset and have a major hack and all the money be lost that would be bad that's not the service we're trying to provide but we do try to be pretty quick right so we reconstitute monthly assets can move in pretty quickly but you'd expect to see them exist on the market for a handful of months before they they're really eligible to qualify so there's definitely some sort of balancing act to to go here right and and some of the most lucrative defy opportunities are from just really down in the weeds anonymous projects maybe like sushi swap right and except sushi

swap you know and anonymous founders right anonymous creators anonymous team or pseudo-anonymous at the very least yet it's also doing an insane amount of very legitimate volume so how do you guys balance because like if you if you ignore all of like the lower cap stuff that are that is provably legitimate then you are actually perhaps having a lesser quality defy index if you forget to include those things yet those are also like it's weird to include an asset that was produced by an anonymous set of people like that's just not what somebody at uh uh like the traditional wealth advisor space would be able to get their head wrapped around how do you guys balance these things it's it's a great question i mean when you take sushi particularly we would love to include sushi right now it

doesn't pass our tests for whether it may be deemed a security by federal security regulators that doesn't mean it will be we just think there's too much risk given the current distribution of tokens in that ecosystem we're not concerned about where it's come from right we just talked about uh where uniswap came from and look at it today it's really does it pass these exidential hurdles one of which is that federal securities risk you know sort of that has it passed through the ethereum like process from centralization to decentralization another can it be custodied with a with a leading custodian right we use anchorage they're very you know fast moving forward tech savvy but many of those really rapidly new emerging assets it's not going to be the

single best investment in d5 right that's absolutely true if you can pick the new up and comer and get it before it gets into our index you're going to get an exponential return but it's still pretty early right you still have some relatively small assets that are making it in but you're pointing out a risk in any index strategy um and this this one definitely applies to us as well yeah everything you said so so far resonates sort of with um uh what i've seen like my parents in particular they're retirement age they have a um registered financial advisor basically advising them uh and i you know they know their son is really into crypto i've been like preaching the gospel to them um but when they when they talk about crypto to their financial advisor

previous to this year it's been like oh you know maybe one percent if you like to gamble now this year uh the tune has somewhat changed on crypto it's like oh like bitcoin maybe some of the other things you should have some allocation so so that's completely changed but but i'm curious like if their financial advisor wanted to get some exposure into defy how would that process work with bit wise because um you know i i see this investor qualification section that investors must be accredited investors obviously like none of these assets that we're talking about they don't trade on the new york stock exchange or or the nasdaq they're not in the you know

charles schwab accounts that many of these wealth advisors are are generally using they're kind of outside in this other world and are there accredited investor regulations around this like how does a a um a see a registered investment advisor get exposure to these things with with bitwise and can they do it with all of their clients or must they be accredited great question right now they well the way they do it is they come to bitwise and they can open up what's called a a dual c account so they have an account for your client at bitwise uh or for your parents at bitwise and they can see the results of that as well as your parents can it is only available to accredited investors at this point so only if financial advisors accredited investors can come into the fund we're working to

make it available in the same way that gbtc or index fund bitw is available where you can buy it through a traditional brokerage account the thing about those products as you know as well as anyone they can trade at significant premiums to their their real underlying value so there's there's hair on it either way the way i think about it is there's no perfect way right now to allocate to crypto you could buy it on an app on your phone and your phone could be sim hacked and you could lose your money you could buy it through an accredited investment like bitwise at net asset value but it's only available to certain investors and there's a paperwork burden that makes it a little bit of a pain you could buy bitw or gbtc but it trades at a potential premium it's difficult you're being rewarded for

being early and dealing with that difficulty with the kind of returns that we've seen eventually you'll be able to buy it in an etf at the push of a button from your charles schwab account uh and it still may be a good investment but some of that early return is going to be uh away so there is no perfect way right now everything has its pros and cons and advisors just have to decide what's right for them but we would love to speak to your parents advisor yeah well so like why is can you can you talk about why it's so hard matt right just like like skinning it down for us like so we know there's no such thing as a crypto etf uh we know that crypto custody is hard you know those two things aside why is it the case that it's so

difficult for you know uh middle america who's not an accredited investor to get exposure to these assets through the channels they they traditionally would for all other assets is this a regulatory gatekeeping thing that's just kind of keeping them out through some like loophole or like what's the bottom line reason for this right so so the etf specific thing is a regulatory thing that i think will get through on bitcoin at least in the next say 12 to 24 months uh and other assets eventually but what you're pointing to like our funds and other funds aren't available through the schwab platform is an individual company decision perspective and what's keeping it out is what i call the ghosts of crypto past

look the thing about crypto is it emerged from this antarctic uh world with lots of issues right there was silk road there was mount gox uh there's quadriga like it was messy there was bad arbitrage there there were all sorts and and so many people first encountered crypto at that point that they're anchoring on what this asset class is is so far behind reality if they were to approach it to novo and say hey this is an asset where you can custody at fidelity and you can trade it with jane street and the largest single market is the cme regulated futures market there's federally chartered crypto banks there's a huge wealth of regulation the travel rule applies this is a beautiful well-regulated market of course they

would have no problem allocating to it but they have these ghosts of quadriga mount gox silk road ross albrecht lingering in their heads and so not it doesn't have to get over the 50-yard line it has to get to like the 99-yard line of security and comfort before they're willing to allow people to invest and the impact of that is that their customers are missing out on one of the great wealth creation opportunities of the last generation right bitcoin's up 43 million percent since it came to market it's a four thousand percent over the last four years it's been the best performing asset class in nine out of the last 11 years and these uh these people are protecting traditional investors

from accessing it i think just for that reason they're just anchored on a story that's no longer true one thing i've been fascinated by is that uh being mindful and checking one's bias and being zen and being open to new experiences is incredibly lucrative in the crypto industry right and if you can't get over that hump you actually aren't rewarded for having those like personality dispositions it's so true it's so true you need to be a contrarian optimist and open to new ideas and then you need to size your bets appropriately right because they won't they won't all work out naturally matt i have one question about the more the internal constructions of

the defy index a lot of these defy assets ave would be one and ether itself i know it's not in the d5 index but a lot of these assets are productive right you can stake ave to the ave protocol and get four percent of a denominated yield uh and then this is going to be true for many other d5 tokens down the line which means that if you have these tokens in the bitwise defy index and they aren't being productive you might be falling behind on some of that yield that you could be getting in the background how does bit wide think about this it's a great question and one that we thought a lot about and one of the reasons why we went to work with anchorage is our custodian for what it's worth we use coinbase custody for our other index fund we use

fidelity for one of our um for our bitcoin fund we went with anchorage in part because what you said is true you have to do things with these assets so you have to be able to stake them to keep track you also probably owe it to the community to participate in governance activities and have a real view on how these protocols are developing particularly if as you as we hope to be you plan to be a significant you know player in the d5 space so it's not the case that you can always participate in all of the the sort of use cases of these assets in this fund but we do work with our custodian to make sure that we're staking where it can be done safely and securely because you have to or else you're you're going to get passed up by inflation and

issuance interesting okay so you kind of leave it up to your custodian which makes sense to me they're the experts that's kind of their job uh who does the smart contract security risk analysis is that you guys or did you guys also leave that up to the custodian i mean i think i think it's par you mean in terms of the underlying assets themselves and whether they themselves are secure you know we we do that on on one end when it comes to entering the index with the advice of the advisory council right who are people who are very close to many of these protocols um and then in terms of utility and and staking in action and whether that's secure we push our custodian to do as much as possible in a secure manner and ultimately they let us know if it's possible

matt do you think there'll be a time where you actually like tokenize these funds themselves so um we've seen this of course with with token sets they're able to to create these fun compilations and create an erc20 out of them that gives them exposure does bitwise have any plans to do that i know mainly your customer focus seems to be bringing traditional investors to crypto right uh but these crypto rails are also very powerful any plans in the works there yeah it's definitely on our long-term players plans we're aware of the irony of being a crypto asset manager sort of bridging into the traditional c5 world and so we would love to make our indexes the standard in the industry which means making them available through crypto

platforms right now i think we're dealing with so much opportunity on the traditional side that we don't have that as a top priority but it is important to us and we're always excited to see development activity taking place whether that's something as simple as ftx you know offering synthetic exposure to our indexes uh or eventually a token of our own is something we'd love to do in the future no immediate plans but uh stay tuned yeah this is kind of a message i think to to the bankless nation it's very much uh we want as many people and as much capital as possible to jump into into crypto and to the extent that whether it's coinbase or gemini or whether it's bitwise serving as that bridge that's all all boats rise together and that's all net beneficial

for the bankless movement so even if it's not like pure self-custody what what you're doing is essentially getting like you know david's parents uh financial broker for instance or or my parents into crypto where previously they couldn't because you're never going to get a financial advisor from edward jones to like open up an erc20 on metamask you know for their clients like that's just not going to happen so if you're sitting there and pressing their legs sitting at their desk reading bankless with metamask on their ledger it's not going to happen right and um like it's not even uh legally they're they're not even able to to do that right so these bridges i guess is my general commentary that the bitwise is providing

is super important because it unlocks this whole um this very large set of capital into crypto that's only going to help our industry grow so all of these things are very important um i have a question about kind of education matt and just in general like so there's so much to do on the education front with traditional investors uh read your report that you put together with with the cfa to traditional investors that was fantastic it's the first time i've seen the cfa institute put something out around this that's amazing i guess maybe my question is is two parts um do you see the education process sort of similar to when you started with with etfs like that was a whole new asset i guess the asset type or asset category

and and there there's some of that in crypto and like what's what's the work that's required to educate traditional investors on this on this space maybe those two thoughts it's such a great question and there's so many similarities to the etf land which i think people don't understand you know today people think of etfs as sort of the mother's milk of investing right they're the core of traditional financial advisor and institutional portfolios they're thought of as a net great good back 15 years ago that was not the case the financial times called the called etf's weapons of mass destruction people referred to them as efts there were congressional hearings where they brought the etf industry in front of congress and grilled them about whether

etfs were destroying american entrepreneurialism and ending the american dream so it is not the case that these were always like a beloved tool of investing vanguard you know the sort of largest one of the largest asset managers in the world was very reluctant about etf jack bogle who famously pooh-poohed bitcoin said etfs were weapons of destruction for investor capital as well so you know what what happened in etfs was there was a fundamental technological advance that's all etfs are they're a new technology that lets you gain exposure to the markets in a more efficient manner than traditional mutual funds and a lot of people did a lot of work after recognizing that advance doing core etf 101 presentations i co-authored a report

for the cfa institute called the guide to etfs uh i co-authored the same thing for for crypto i mean one of the reasons i moved into crypto four years ago was i saw that this there's this major technological advance and that there was a terrible quality of information crypto was the land of hyperbole either it was gonna you know save the world or destroy everything and what was needed and what's still needed today is people to tell the core story over and over again it's podcasts like this it's publications like the cfa institute it's the wall street journal finally tackling d5 which is going to happen at some point this year in a serious way and it takes time but it can happen to a bigger degree than you think if you

always think crypto is going to be on the outside if you always think congress is going to hate crypto if you always think regulars are going to be uncertain about that that's not true it was it was they felt the same way about etfs and now they're front and center and i think eventually you know crypto's going to be boring and traditional and everyone's going to accept its place in society and you know they'll be they'll be you know lingering for the good old days when we're a band of brothers tackling you know the traditional finance market uh but the market will be much bigger and much more robust so it's gonna happen uh we've made a lot of progress and we continue on that road well matt it makes me feel very good that we have people like you and people like you on team crypto so thank you for

for doing everything that you're doing to help promote this industry i have one last question and i think you briefly mentioned it but i just want to address it directly the possibility of the bitwise defy index actually becoming an erc20 token on ethereum is that in in the playbook in the cards or or not well if people are interested in that drop me an email matt at bitwiseinvestments.com if i get enough of those emails then it'll move up the stack rank of priorities at bitwise so uh there's one way to make that happen and i appreciate you bringing it up you heard him bankless nation that's what we have to do if we want this to to move even more in the direction of banklessness uh matt this has been such a pleasure you are a true professional like your computer goes down you log

back in we're doing the live stream like amazing uh like fantastic you know i i uh maybe i have one last question for you too which is what what would you say is one thing that crypto investors need to understand about traditional investors and then vice versa what's one thing that traditional investors should understand about crypto and crypto investments [Music] what's one thing that crypto investors need to understand about traditional investors i think at the core look they're trying to do a good job financial advisors aren't out to hate on crypto they're trying not to put their investors into into an asset that historically has gone down 60 70 80 percent of the time which is a lot for

most investors to stomach and so you have to understand that they're wrestling with and looking at that volatility they're naturally skeptical but eventually they're going to get on board uh so you just have to be a little bit patient um you know what's the what's one thing that the traditional investors need to understand about crypto they just need to understand that zero to one is done but this thing is here and it's not going away that there's real activity in the decentralized finance space that major institutions and corporations are using bitcoin in lieu of gold as a store of value uh that regulation is here that this is not all used by criminals i guess that's like seven or eight things but um there's additional finances to learn about

crypto but look the two worlds are going to come together eventually right if we're talking about uh bankruptcy nation disrupting traditional finance eventually you know it's going to move in to be more of traditional finance it's going to get bigger um me think if there's one more thing one more thing i would say regulation is not always a bad thing right in part the increases in regulation that crypto was sort of reluctant about over the last five years is what's made it possible for the market to get as big as it is today and so while regulation is a risk you have to evaluate each regulatory step independently some will be good and help guide this asset class forward and some might be overreaching but but don't look at it as a singular hole oh fantastic

advice uh toward the end there and as we said so often on bankless you know uh the end state for decentralized finance and defines we drop the d and it's just finances this is a melding of the worlds here uh well matt it's been such a pleasure to have you thank you so much for coming on the bankless podcast thank you for having me this was great all right guys some action items we are going to put the show notes uh full of some fantastic reports from bitwise in particular the cfa institute research foundation uh the report that matt co-wrote called crypto assets the guide to bitcoin blockchain and cryptocurrency for investment professionals so this is how matt bitwise are educating the investment professional space will

include some links like that in the show note action items go check those things out of course risks and disclaimers crypto is risky defy is risky bitcoin is worthy all of these things are risky you could lose what you put in but we are headed west this is the frontier it's not for everyone but we're so glad you're with us on the bankless journey thanks a lot hey we hope you enjoyed the video if you did head over to bankless hq right now to develop your crypto investing skills and learn how to free yourself from banks and gain your financial independence we recommend joining our daily newsletter podcast and community as a bankless premium subscriber to get the most out of your bankless experience

you'll get access to our market analysis our alpha leaks and exclusive content and even the bankless token for airdrops raffles and unlocks if you're interested in crypto the bankless community is where you want to be click the link in the description to become a bankless premium subscriber today also don't forget to subscribe to the channel for in-depth interviews with industry leaders ask me anythings and weekly roll ups where we summarize the week in crypto and other fantastic content thanks everyone for watching and being on the journey as we build