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Today on the podcast, I sat down with repeat guest Hunter Horsley, the co-founder and CEO of Bitwise Asset Management, one of our portfolio companies here at Castle Island. Hunter recently announced a big Series B financing round with some terrific new investors, and he and the Bitwise team have been busy launching a number of new products since the last time I spoke with him on this podcast. This conversation was a lot of fun. We talked about DeFi, the state of the financial advisor channels, NFTs, and a lot more. So without further ado, here's my conversation with Hunter Horsley.
Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market and the Fed is asleep. The federal government is stepping in to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars and all of a sudden people start to worry. So out of this worry, we have something called Bitcoin.
Well, Hunter, welcome back to On the Brink.
Great to be with you, my man.
Well, I think there's a lot to talk about. A lot has happened. I think you were the fifth person to ever be on the podcast when I was in your office in San Francisco.
What an honor. When was that? It must have been 100 years ago.
Yeah, it was a couple years ago. We were talking about a lot of big ambitious things and you guys have started to really tick them off. I guess the place to start would be congratulations on this recent financing. A lot of big names joining the ranks of crypto asset investors. So tell us a little bit about the Series B that you just wrapped up.
Thank you. And we're incredibly excited. So Series B, we raised 70 million. It includes some great backers from tech, co-led by Andreessen Horowitz and Electric Capital, you guys participated, and also some renowned investors from traditional financial circles. So Henry Kravis, Dan Loeb, Kevin Warsh, Daniel Loeb's Third Point, Daniel Och, Lewis Bacon, just a really extraordinary group of people. And for us, Bitwise is profitable. Bringing this group in, I think, helps signal that Bitwise is here to stay, that we're building a best-in-class institution, and it gives us the resources to double down on some of the things we're doing. So we're thrilled with the group we're getting involved and with how the round turned out.
So I think you were super thoughtful with the round construction here and maybe I want to poke in a little bit around just how you thought about that from your entrepreneurial journey here. You could have raised this from two or three funds, one fund even, but you made the conscious choice to go out and get these individuals on board. What was the strategy behind that?
A few thoughts. The co-leads of the round, Andreessen Horowitz and Electric Capital, are incredible partners to an entrepreneur. You know them. They've seen multi-billion dollar franchises be built from scratch. They've also seen Bitwise for a number of years and have a lot of context in us and they have a lot of conviction in crypto. So it gave me confidence that they would be great partners who understand the landscape that we're navigating and were willing to be part of a bigger round, a round that was more than just them and wouldn't take all the space, which from my perspective is incredibly appealing because one of the unique opportunities we have as an independent company is that we can sell equity and allow other people to have ownership in what we're building and do that as a way of bringing some of the best people around us. And so as I thought about there's inbound interest in a round, again we're profitable, wanted to increase the balance sheet but wanted to minimize dilution, and as I thought about what an ideal round would look like, I thought what are the perspectives that we could bring around the company if we did a round and felt that one big piece, we have our background in tech, we have some of the best crypto investors involved, but if we could bring in some great investors from traditional financial circles, that would be really additive.
I love the way you thought about it. And as an asset management firm, you have a great business model. You depend on distribution to a large degree and so I'm curious how you thought about the investor composition with an eye towards folks that could help you with distribution and maybe we could use that as just a launching off point into the state of distribution for crypto asset-based products at this point.
So as you know, today Bitwise is the largest cryptocurrency index fund manager in the world. We primarily focus on the way we sort of describe it is long-term oriented investors. People who are not trading day-to-day. They're not necessarily looking at the price day-to-day. They think about whether they want to include this in their portfolio and then they make the allocation and they want to understand what's going on but have a different relationship to the investment. That means for many, working with a financial advisor. So we focus on working with financial advisors, investment professionals. As it relates to the round, as you know, as everyone follows the podcast knows, crypto has really grown up over the last few years. And whereas previously it was a small portion of advisors who were willing to spend the time to understand crypto and help their clients manage it, that's growing and banks and BDs are starting to think about how they want to approach the space. So, it felt like the right time to us to make ourselves, we already have relationships with many of those institutions, but to bring more people around the company that have that expertise, that have that network, can signal that we're building the best-in-class provider here and are bringing all the right people around.
That's great. Let's talk a little bit maybe about the product lineup as it exists today. It's obviously changed quite a bit since the last time we had you on the podcast. So maybe give us the landscape view of what is on the platform today.
The latest would be in Q4, the Bitwise 10 Crypto Index Fund, which is the largest cryptocurrency index fund in the world, holds the top 10 assets, Bitcoin, Ethereum, other up-and-comers, got approval to become the first publicly traded crypto index fund in the United States. It trades with ticker BITW. That was Q4 of last year. Q1, we felt that DeFi had gotten to a place where it was large enough, liquid enough, developed enough that we could create a product there and open up access to those opportunities. We launched the Bitwise DeFi Crypto Index Fund in Q1. That's growing nicely. It's the first of its kind. In Q2, as you know, Coinbase went public. They're increasingly public crypto companies, companies that are fully focused on crypto, not just doing it as an initiative or a side project or a pilot. And so the Bitwise Crypto Industry Innovators ETF launched. It's the first ETF in the United States to have crypto in the name. It tracks our index. It trades with ticker BITQ. So those are the latest products that have come from us. We have a Bitcoin fund. We have an Ethereum fund. We're also going to have others. This round gives us resources to continue to introduce new products this year. We have a lot of things in mind. Philosophically, our perspective is we're not advocates of just one coin. We don't have a religious connection to Bitcoin or Ethereum. We think that they all have merits and are all relevant for investors to consider. Today, crypto, the market cap of crypto is over half things that are not Bitcoin. Bitcoin is certainly the largest and most exciting. But the story has gotten much bigger. And we want investors to be able to decide for themselves which of those opportunities fit with their goals, fit with what they want to do, with what their clients want. And so we'll continue to expand the product suite to make sure that all those options exist. Again, today we have the Bitwise 10, we have the DeFi Index Fund, we have the Bitwise Crypto Industry Innovators ETF that tracks our index, there are the other single asset funds, and there will be more.
The Crypto Industry Innovators Fund is a really cool structure. So, how do you guys think about the composition of that fund, the underlying companies, and I'm curious what your view is on just more and more companies being in the surface area of innovators as more and more R&D initiatives graduate from the lab.
So, that product came out in May. It's called the Bitwise Crypto Industry Innovators ETF. It trades with ticker BITQ. We custom-designed the index that that ETF tracks and we designed it specifically to hone in on those companies who have over 75% of their revenue coming from crypto, 75% of their balance sheet. So these are real crypto names. It has big positions in names like Coinbase, Galaxy, Marathon, Riot. So it is Bitcoin miners, it is exchanges, it has Silvergate, Voyager for those who are familiar with those names. But generically what that is, those are the miners, those are the exchanges, those are financial services providers and the thing moves quite a bit. It's a concentrated portfolio and it really is giving you exposure to the leading companies who are innovating in the space. And so for an investor who says e-commerce created new winners relative to traditional retail and I think there are going to be new winners that emerge in the crypto space by being on the frontier there, I want to own those businesses. It's a way to do that. And for an investor who says, I need to use an ETF. I want some exposure to crypto somehow, but it needs to fit into my existing life, my existing workflows. It's a standard ETF and it shows up on the statement. It has crypto in the name and it has these holdings. I think it can serve both of those dimensions. The really interesting thing about that product is that you have companies that have started as startups and graduated to public companies and then you have kind of non-crypto companies that really just leaned into crypto and made a big splash. Silvergate comes to mind as a perfect example there. So, it'll be interesting to see as that product grows and more names kind of come into the surface area where they're coming at it from.
Maybe you have some portfolio companies that will end up in that product. I don't know.
We hope so. We hope so. It's a growing set. You couldn't really have a portfolio like this even before this year because there weren't enough businesses that were really focused on crypto that were publicly traded. So people were pulling together portfolios that include Walmart because they had a pilot where they're putting lettuce on a blockchain or IBM because they were doing experimental things. But ultimately for an investor who wants exposure in their portfolio, the returns of those public companies are not influenced by their crypto initiatives or at least historically that's the sense. There are companies like PayPal and Square in the index, but they've made giant initiatives in the space. PayPal's opened up crypto trading to 200 million US users and 20 million US merchants. Square obviously in the Square Cash App, those are real businesses and for that reason they're included.
The other product that I want to talk a little bit about is the Bitwise DeFi Crypto Index Fund. So you guys were really early in seeing that DeFi was going to be a big thing here and you got on board early. So talk a little bit about what the thought process was around launching this product, what the uptake's been like, and I'm curious how you just stay up on all of the stuff that's going on in DeFi.
We hired a full-time DeFi analyst, so that helps. Today, we have a four-person analyst team. We have an equities analyst who covers crypto equities. We have a DeFi analyst. Our director of research is a 10-time institutional award-winning sell-side analyst. And then Matt Hougan, who just wrote the CFA's book on crypto. So, we view understanding what's going on, being able to provide answers to advisors and clients is important to our role and being a good partner. In terms of DeFi, so the product is called the Bitwise DeFi Crypto Index Fund and it holds a basket of the top 10 assets. What it does is it diligences the assets for non-obvious things. So it looks at is there enough trade volume? Is it trading on legitimate venues that are reasonable for a US professional investor to rely on for liquidity? We do an assessment of is there undue risk of it being deemed an unregistered security and running into securities laws issues. We look at history of exploits and hacks. Is the risk there? There's an advisory council that also buttresses our perspective that includes ParaFi, Scott Lewis from DeFi Pulse, Avichal Garg from Electric Capital, Michael Anderson from Framework, Alex Larson from Blockchain Capital and so not all of but some of the great minds in the space who can make sure that we're not missing something. So we basically do all of that diligence. We just don't take a view on prices. So then the index weights things. We don't say something's overpriced or underpriced, but we do that diligence. And for an investor, what that allows is if they say, 'Okay, DeFi is really compelling. I want exposure. I don't have time to be diligencing all those dimensions trying to hold them securely and I don't know what's going to emerge as the winner.' It's a solution that they can use. And we've been surprised with its uptake. It offers some things I think DeFi in general has some merits that were always felt like were missing from Bitcoin.
Say a little bit more there. So in terms of just on-chain cash flows and things like that or?
As mentioned, we serve primarily investment professionals, over 20 institutional managers, over 200 RIAs, over 1500 family offices, high net worth individuals. So that's the audience that we interact with and our opinions are based on what we see there. And what we've seen is it's taken people a long time to get their heads around Bitcoin and then really fast a lot of them move and say, 'Oh my gosh, DeFi.' And in fact, we've seen some skip Bitcoin and go straight to DeFi. Why is that? With Bitcoin, you know, all of the hang-ups that many investors have. It doesn't have cash flows. It doesn't have yield. You don't know how to value it. People are not using it to buy coffee. The demonstration of utility use cases using payments or exchange is somewhat limited and so the industry has sort of decided it's digital gold and that has huge merit and a big role to play but a lot of investors don't like gold. Gold is not the most popular investment. Gold is a $10 trillion asset class globally, equities is a $60 trillion asset class just in the US. So gold is not the most popular thing for Bitcoin to be and it's a digital version of that. So for a lot of investors who said this is complicated, it's a non-productive asset. It's digital gold, fine, but I don't like gold. We don't use gold. This is digital gold. Okay, it's hard for something to swap. But then you talk about DeFi, and DeFi is taking the disruptive blockchain technology. It has use cases. Developers are applying it to financial services like savings and loan, brokerage, trading. It has traction. Some of these decentralized exchanges are doing more volume than the Winklevoss's exchange and it throws off cash flows and an investor's eyes open wide when you say all of those things because that's a productive asset. It's disruptive. It has use cases. It has fast-growing traction and a lot of investors say, 'Wait a minute, that's exactly what we love to invest in. Tell me more about that.' So, I think it has some attributes that are really appealing to investors.
That's really fascinating. That's been my experience as well, just explaining to someone, hey, this is a community-owned software network that is competing for a money market mutual fund. People know how big that market is. They understand it really well. This is community-owned software that is disrupting an exchange. Okay, I get that. That spits off cash flows. So, I could definitely see how that would be appealing to some.
And that's a territory a lot of investment professionals, what are they familiar with? They're familiar with how the investment world works. They know what T+2 is. They know what settlement is like. They know that markets open and close. They think about solvency, collateral. Those are all the things that DeFi is addressing. So, it's actually really intuitive to a lot of investment professionals.
That makes sense. In traditional equity fund management, you'd have securities lending arms that are helping returns. In the context of DeFi, I've always wondered at what point do we start to get investment managers that are really active around things like staking and yield generation? Is that something that's possible now? And how do you think about that?
It's something that we're researching. We work with PwC. We're researching that question. It really depends on the vantage point that you look at it through how you regard the topic of can we engage in yield-generating activities through these decentralized DeFi platforms. In the context of managing funds, you have to come to a view on what type of income it is and if it's non-qualifying income. If it's non-qualified income, then it can break your pass-through tax status and that just wrecks the whole thing with funds. So, we're working to develop a view there and it's important that anyone who's managing a fund has a strong basis for their view on that topic. I think like so many other parts of crypto, there are these questions. They're not unsolvable. They just take a little bit of time to get answers to and that's the one I'm most familiar with when it comes to generating yield.
