Exclusive Interview: Matt Hougan, Chief Investment Officer of Bitwise Asset Management

The History of Crypto Crashes, Recent Stablecoin Instability, and More

Ric: We've been talking about the incredibly sharp decline in the price of Bitcoin and all digital assets this past week brought on by a crypto lender called Celsius, announcing they're suspending withdrawals, which has freaked everybody out. Imagine you've got a bunch of money in your bank and your bank finally says, Oh, hey, sorry, you can't withdraw your money for a while. That has freaked everybody out, causing a big run, so to speak, on the value of the asset. And so to help us understand and unpack this, what does it mean? What does it mean going forward? How did this happen? I'm happy to bring on to the program Matt Hougan. He's one of the world's leading experts on crypto, as well as ETFs and financial technology. He's a crypto columnist for Forbes magazine. Matt, thanks for joining us on the show.

Matt Hougan: Thanks for having me, Ric.

Ric: Well, Bitcoin has crashed many times in the past. Seven or eight times it has fallen 50% or more. But this past week, in just one day, it fell 20, 25% in value. Talk about what happened and what your observation is about all this.

Matt: Yeah, this story starts really, Ric, back in November of 2021, as you remember, that was when the Fed started introducing the idea, they may begin raising interest rates to combat inflation. That created a selloff in all risk assets and drove Bitcoin's price down from 68,000 into the 30,000 range. What's happened since then is that that price collapse has shaken the foundations of different parts of the crypto ecosystem. We saw the Luna Stablecoin collapse that shook the foundations of crypto, and now we're seeing this lender Celsius, a well-established lender backed by serious investors, including pension funds in Canada. We're seeing it collapse as well. The old saying that once the tide goes out, you see who's been swimming naked. We're seeing who's been swimming naked. In crypto, it's important to note that nothing about this has changed the core capabilities of blockchain or the things that crypto can do for the world. But during any liquidity crisis, any liquidity cascade, you see these series of weak entities fail until you get to the solid foundation. And so the question investors are asking now is, is Celsius the last shoe to drop? Have we found the solid foundation or are there more things to come?

Ric: And my view, as I've shared with you, is I don't think this is the last shoe to drop. Celsius was a huge company - but not as big as it used to be. And there are other smaller players that were shakier. So if this could happen to Celsius, I'm a little concerned that it will mean something negative for some of the other lenders as well. Do you share that view?

Matt: I do share that view, Ric. You look, crypto went through a massive bull market from 2018. It was trading around $3000 for crypto at 20X to nearly $70,000 by November of last year. During any major bull market, you see great companies built and you see not so great companies built and those not so great companies are going to feel this shaking and I suspect there will be more to collapse. Now, Celsius is very large. A real question for investors is will we see another large entity stumble? Will we see something like tether stumble? Will we see some of the larger sort of stablecoin protocols or other things stumble? I'm not sure that will be true, but I do think there'll be more small entities that are revealed to not be as secure, robust and liquid as maybe they promised investors in the past.

Ric: You know, I hate it when I'm right. Matt and I were having dinner at a conference just this past week. And what did I say was going to be the price of Bitcoin before the bottom was reached, Matt?

Matt: You did say it would trade down to 20,000 Bitcoin and we're almost there, Ric.

Investing Long-term with a Diversified Perspective Is the Key to Crypto Investing

Ric: And I hate it when I'm right, but I didn't think it would happen immediately and I didn't think it would happen so suddenly. But that just demonstrates the volatility, the inherent nature of this emerging asset class that you don't know what's going to occur in the short-term, which is the reminder, the reinforcement. You can't invest in crypto with a short-term mentality, long-term and a diversified perspective is so vitally key.

Matt: That's exactly right. You have to right size your portfolio. You shouldn't have a huge amount of your wealth in crypto because it is so volatile and you absolutely have to hold for three, five and 10 years. Look, Bitcoin has gone through seven 70% pullbacks in route to being the best performing asset class in the world over the last 10 years. It's still up 8X from where it was even at the start of the COVID pandemic. So it remains a good long-term bet. But over the short-term, volatility reigns. And as you and I just discussed, it could go down further from here. There could be more shoes to drop. So no one should be buying, expecting a V-shaped recovery. No one should be buying, thinking it's not a risk asset. It is. It still remains an interesting, exciting long-term prospect for the right kind of investor.

Ric: And that's why you have to take the attitude that if you bought it at 70 because you liked it, well, now that it's at 23 or thereabouts, you got to love it and recognize that dollar cost averaging is an effective way to engage. Slowly investing over long periods of time to smooth out that volatility, rebalancing a portfolio to take advantage of the new lower price by selling off other assets that may be higher in value. And recognizing, as Matt says, that it's a long-term play. I've got to acknowledge, Matt, that this sure looks reminiscent of the real estate and mortgage markets. In 2007, we saw incredible amounts of leverage in the market, people buying homes with borrowed money, watching it go up in value, borrowing again to buy more property with leverage. And then we had leverage. On top of leverage, it was the game AIG played and they collapsed as a result of it, along with Lehman and so many others. You're seeing similarities like I am to what's happening in crypto now versus what happened in real estate in 2007.

Comparisons to the Real Estate Collapse in 2007?

Matt: You know, I absolutely am. You had a macro induced shock of falling of real estate prices, and then you saw a series of liquidity driven cascades of failed entities. We saw Bear Stearns collapse. We saw AIG. We saw Lehman. The difference and the uncomfortable difference for crypto investors is that the government stepped in to stop that liquidity cascade during the global financial crisis. And there is no such equivalent here, right? There is no Hank Paulson of crypto waiting to go to Congress with his hat out. So this market will need to just clear naturally. Now, I do think that will lead to a stronger foundation, a solid foundation long-term. But we have seen this before. This is a classic tale in finance. Eventually the markets find a clearing level and then they build from there. That can be a great moment to invest but knowing when you're at that sort of foundational core is very challenging. It was challenged during the global financial crisis, and it's going to be challenging here in crypto as well.

Ric: So if you want to take a look at what's going on in crypto, look back to what happened in 2007. Look what happened to the financial markets through the credit crisis of 2008 and how they finally, after years, emerged to an all-time high in the stock market over the ensuing 10 years, I think we may be finding history repeating itself in the world of crypto. Matt Hougan, thanks so much for joining us on the show today and providing us with that clarity. I really appreciate it.

Matt: Thank you, Ric. This was great.

Ric: That's Matt Hougan, the Chief Investment Officer of Bitwise Asset Management. You can learn a lot more about the investment strategies and the educational information along with the investment opportunities in crypto from Matt Hougan and his colleagues at Bitwise. Just go to BitwiseInvestments.com.