Crypto: 3 things driving the pullback in bitcoin and ethereum

Bitwise Asset Management CIO Matthew Hougan sits down with Yahoo Finance Live to discuss the 2022 outlook on cryptocurrencies amid debated regulations, the secular trends of crypto, bitcoin's dominance in the blockchain, and investing in crypto stocks.

Video transcript

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EMILY MCCORMICK: Welcome back. I'm Emily McCormick, and you're watching Yahoo Finance's special, [? Crypto ?] in 2022 presented by Intuit Turbotax Live. And with us now, a true pioneer in the investment world, Bitwise Asset Management Chief investment officer, Matt Hougan. Matt, it's great to see you. Thank you so much for being with us this afternoon. I want to ask first about the price action that we've been seeing in cryptocurrencies.

Now, Bitcoin is below $40,000, Ethereum below $2,700. And this comes, of course, after a record run that we saw in these prices last year. But as the CIO, does this latest slide concern you?

MATT HOUGAN: It always is uncomfortable when the market goes down, but I think we're actually setting up for an extraordinarily strong second half of the year. Look, the current pullback is being driven by three things, which are going to resolve. One, of course, is the broad market shift to a risk-off market that's pushing through all sorts of risk assets, of which crypto is one.

I think we're most of the way there to adjusting to this new reality. The second piece is Biden's executive order on crypto, which is coming out this week. I think once we get past that, that'll be a relief and then some tax-related selling. So I think there's short-term hurdles in front of us. But as I look at the underlying trends, I'm extremely [? bullish ?] about where we end up by the end of this year.

EMILY MCCORMICK: And where do you think Bitcoin ends at the end of this year if you have a certain price target in mind?

MATT HOUGAN: I'd love to put out a price target. I think we are going to go substantially higher. I wouldn't be surprised to see us challenged and even surpass the previous all-times highs, as long as things break along positive lines. Examples of what that would mean, if we get a Bitcoin ETF-approved, if we see reasonable regulatory outcomes out of Washington DC, and if we get broader continued positive trends in terms of institutional adoption of crypto, I certainly think new all-time highs are in sight by the end of the year if we see those kind of things.

EMILY MCCORMICK: And in terms of the price action we've been seeing now, we have been seeing these major cryptos sell-off alongside other risk assets like stocks recently. Two-part question here-- what do you think has been driving this increased correlation? And then, second of all, does this create challenges for bitwise? Because if you want to create an ETF that can generate a return that potentially outperforms the market and yet the holdings are moving similarly, at least directionally to the broader market, does that impact the way that you think about your holdings?

MATT HOUGAN: Oh, I think that's such a great question. The thing about crypto, which investors are learning, is that crypto-assets are driven by two factors. One, they are risk assets. So when you have a risk-off trend in the market, they can fall out of favor from a short-term perspective. There's also the crypto-specific drivers, right? Those sort of fundamental characteristics, which I spoke about earlier-- institutional adoption, positive regulatory developments, technological advances.

In short periods of time, that risk-off sentiment can overwhelm those secular trends. And that's what we're seeing right now. That's what we saw in March of 2020 when it's sold off at the start of the pandemic. The important thing for investors to remember is that those long-term trends are exactly that. They're long-term trends, and they're extremely powerful. So over meaningful periods of time, the correlation of crypto to other stocks and other risk assets is very low.

It's just during these short risk-off periods that you can see this correlation bounce to one. The message for investors and what we emphasize at bitwise is that means you need to hold for the long-term and even think about these pullbacks as opportunities to establish new positions.

EMILY MCCORMICK: And Bitcoin continues to be the dominant cryptocurrency by market cap, with the overall market value of cryptocurrencies hovering below $2 trillion currently. It's also the top holding in bitwise's ten crypto index fund. Do you expect Bitcoin to remain the leader in crypto, or when might another overtake it?

MATT HOUGAN: Oh, it's a great question. I think Bitcoin has a lock on the market for digital gold, a lock on the market for noN-sovereign currency. I'd be very surprised to see another crypto asset overcome Bitcoin's lead. It's just too welL-suited for that particular market. I think what you're pointing to is we're seeing this Cambrian explosion of new applications of crypto-- DeFi, Web3, the metaverse, NFTs, all of which are being built on non-Bitcoin blockchains-- on the Ethereum blockchain, on the Solana blockchain, on other blockchains like that.

Ultimately, I do think the addressable market, captured by those more performant blockchains, could arguably be bigger than Bitcoin. Will it get there this year? I don't know. Will it get there eventually? I wouldn't be surprised. We're extremely bullish on that all-purpose blockchain space-- the [? layer ?] one space, which is led by Ethereum.

EMILY MCCORMICK: And bitwise has funds that offer exposure directly to baskets of crypto assets and also to crypto-related stocks. What do you think presents the bigger long-term investment opportunity? Is it investing in a crypto stock like a Coinbase, or is it a crypto asset directly like a Bitcoin?

MATT HOUGAN: You know, I love all my children equally. Look, we think crypto-asset indexes that own Bitcoin Ethereum, a diversified basket of crypto indexes, is a great way for many investors to access the market. In the long-term, there's probably more opportunity in that space-- more opportunity for those network protocols to grow really substantially.

But crypto equities are a great way to play this market and really easy for investors. You can access ETFs by companies like bitwise, the ticker [? BITQ, ?] in your brokerage account. It holds traditional stocks. We're all still waiting for a spot Bitcoin ETF, and we're many years probably from an index based Bitcoin ETF or crypto ETF. In the meantime, these crypto equities offer a nice way for everyday investors to gain exposure to the enormous growth we're seeing in the broad-based crypto ecosystem.

So I think it just depends on what you're looking for-- ease of access or maybe the slightly larger, more volatile, but larger opportunity in crypto assets themselves.

EMILY MCCORMICK: And when we think about the long-term impact of greater institutional adoption of cryptocurrencies, the latest bitwise survey of financial advisors' attitudes towards crypto assets found that 94% of advisors received questions from clients about crypto last year, up from 81% the year prior. How do you expect increased allocations to crypto in client accounts to impact the space overall?

MATT HOUGAN: Oh, it's a huge story. I mean, you just mentioned that crypto is about a $2 trillion asset class, which has been built largely on the backs of retail self-directed investors. But we know that that's a small fraction of the market. That's maybe 20% of the wealth market in the US. Financial advisors control another 40% of the market, and institutions control another 40% of the market.

We're just at the earliest days of financial advisors moving into crypto, but I think they're going to move extremely rapidly. The percentage allocating in client accounts is growing by 50% or more each year, and that compounds aggressively over time. So if you look at the size of the market cap today, you look at that 40% of US wealth that still needs to move into that market, the potential impact on prices is very material, and it's starting to happen. It's happening at an accelerating rate, and I'm very excited for what that will mean.

EMILY MCCORMICK: All right, we'll leave it there for now. Matt Hougan, Bitwise Asset Management Chief Investment Officer. Thank you again so much for your time this afternoon.