Podcast: Crypto Index Funds & the Bitwise Hold 10 Index w/ Hunter Horsley from Bitwise Asset Management (Ep. 0010)

This post was last updated on July 3rd, 2019 at 09:04 pm

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Description

Hunter is the co-founder and CEO of Bitwise Asset Management, which operates the very first crypto-index fund called the HOLD 10, which tracks the top 10 crypto assets weighted by an inflation-adjusted market cap.

The HOLD 10 Index fund has several hundreds of investors that range from billionaires to professors, to large RIA firms.

What’s notable about this interview is that Hunter’s business model is the antithesis of hedge funds’.

The indexing approach is about collecting small fees from lots of investors, and about passive methodologies winning over an active strategy of picking coins. It’s a belief that a properly formed index can beat hedge fund performance without source code reviews, meeting founders, or creating value hypothesis.

Hunter’s thoughts and worldviews are sobering counterpoints to some of this podcast’s most popular interviews.

Topics Discussed In This Episode

The HOLD 10 index’s performance, and how that compares to the performance of hedge funds.
How coming from a product and technology background vs. an investment background led Hunter to start an Index fund.
The Hold 10’s fee structure, and methodology.
Whether or not Hunter has a favorite “shitcoin”.
What Hunter envisions as the goal of the HOLD 10 index.
Whether or not index funds in the crypto space solve the same problems that they solve in public equities markets.
How Hunter sees indexing playing out over time in the crypto space.
How many people are currently invested in their fund and what kinds of people have invested.
Why Hunter thinks that long-term investors should be diversifying portfolios in crypto.

Links Relevant To This Episode

Transcript

Clay Collins: My guest today is Hunter Horsley and this is one of the very best episodes of Flippening to date. I’ll tell you why in a second, but first some background on Hunter. Hunter is the co-founder and CEO of Bitwise Asset Management which operates the very first crypto index fund called The HOLD 10, which tracks the tops 10 crypto assets weighted by inflation-adjusted market cap. The HOLD 10 Index Fund has several hundreds of investors that range from billionaires to professors to large RIA firms.

By the way, RIA stands for Registered Investment Advisor. Bitwise Asset Management itself closed a $4 million equity round last December, and investors included Naval Ravikant, Keith Rabois, David Sacks, and people who operated at or invested in Stripe, Coinbase, Wealthfront, Palantir, and many other Silicon Valley unicorns. I think you’ll enjoy this conversation, here’s why. Far and away, my most popular interviews have been with hedge fund managers. I think it’s because it’s their job to spend time thinking deeply about the future and what it holds, and then they make bets on this envisioned future.

This requires hedge fund managers to be constantly reading, researching, getting on planes to speak with crypto projects and in some cases, gathering primary-sourced data that’s not available anywhere online. Hedge fund managers are among my most popular guests because recruiting and retaining fund investors requires managers to present compelling articulations of the future they’re betting on. And my listeners in particular love hearing diverse and compelling articulations of the future, especially when these articulations are backed by large monetary bets.

What’s notable about this interview is that Hunter’s business model is the antithesis of hedge funds. The indexing approach is about collecting small fees from lots of investors and about passive methodologies winning over active strategies of picking coins. It’s a belief that a properly formed index can beat hedge fund performance without costly source code reviews, meeting founders, and creating hypotheses. Hunter’s thoughts and world views brings some sobering counterpoints to some of this podcast’s most popular interviews, and I believe his level of thinking is up there with the likes of hedge fund managers, Chris Burniske and Ari Paul, who I would love to have on this show, by the way.

In this episode, we discuss one, The HOLD 10 Index’s performance and how that compares to the performance of hedge funds. Two, how Hunter, coming from a product and technology background versus an investment background lead Hunter to start an index fund. Three, The HOLD 10’s fee structure and methodology. Four, whether or not Hunter has a favorite **** coin. And five, whether or not index funds in the crypto space solve the same problems that they solve in public equities markets. Please enjoy my interview with Hunter Horsley from Bitwise Asset Management.

Hunter Horsley: I was at a dinner last week, it was a bunch of people in crypto. Everyone went around the table and talked about their favorite sh** coin, which kind of blew me away, I couldn’t believe it. Yeah, I was a little disappointed.

Clay Collins: What’s your favorite sh** coin?

Hunter Horsley: I don’t have a favorite sh** coin because they’re sh** coins, yeah.

Clay Collins: Okay.

Hunter Horsley: There’s a lot going on in the community and that lamebos and coins are part of it. At Bitwise, we’re mostly focused on the large caps and our clients and a lot of type of stuff.

Clay Collins: Every once in a while though, a coin will get into the top 10. In that case, will you pull out your Thor-style ban hammer and just say like, “This shall not pass,” or does your methodology take care of that for the most part?

Hunter Horsley: The goal of The HOLD 10 Index is to identify the 10 assets on five-year diluted market cap that are in most highly valued by the market. It has rules to help navigate some of the pitfalls: trade volumes, too much concentration on a single index, price pegging, not enough trade history, there needs to be availability on recognized exchanges. But the role of the rules-based approach is not to impose our own views on an asset or what an asset could become. And there can be merit there but there’s also, there’s a lot of room for misjudging something or overlooking something if that’s the approach you’re taking. For this vehicle, that’s not a component of the activity. There is an index committee and so, if something that was publicly convicted of fraudulent behavior, or about something particularly perilous for investors, we would intervene. But that hasn’t had to happen and generally, we want to be developing some logic rules that inform the selection.

Clay Collins: Let’s step back for a second, there’s so many interesting things we could talk about. We could talk about the general trend of indexing in the arc of investing history, we could talk about the role that that plays in cryptocurrency investing, but maybe let’s start at the origins. Can you tell us a little bit about Bitwise Asset Management and what sort of brought you to create what I know to be as the first index fund?

Hunter Horsley: Absolutely, so Bitwise got started last year. My partner and I, his name is Hong. His background’s in software, he did software security in the military, worked at Google briefly. We’re actually arbitrage trading in crypto. A friend of ours who works at a startup hedge fund in New York had reached out and said, “Hey, you guys won’t believe this, but there are 20% spreads across crypto exchanges.” And I studied finance economics at Wharton, and all classes are taught with the assumption of efficient markets.

We looked into it out of curiosity, and it’s true. For moments in time, there are spreads even now that are on the order of double digits, which on average, the S&P is returning seven or 11%, you can get that return in a moment in time, risk free through arbitrage. Doing that trading activity, writing software to facilitate doing that, was what sort of gave us our excuse to start spending a lot of time thinking about cryptocurrency, reading about different protocols, meeting people in the community, studying up institutional accounts dealing with the issues of acquiring assets holding them, securing them, doing bookkeeping, doing the taxes, et cetera, and also thinking about some of the potential for the future. All of those things taken together were something that we fell in love with and also felt like uniquely has the opportunity to be one of the most important things happening in the world in the coming decades. We knew from that that we wanted to be part of it and to contribute something to the space.

We didn’t feel like arbitrage trading, it was fun, it was profitable. A number of people approached us about spinning up a stat arb fund focused on crypto, which wasn’t really something in the space at that point. It was a really hard decision but we felt that it wasn’t what we wanted to be doing with our careers. Both Hong and myself like building something or creating something that other people can use. We like having a client, we like getting feedback, “This works for me, this doesn’t work for me,” and having that relationship. That wasn’t really present in arbitrage trading and that’s what made that feel like something we weren’t best suited to be doing. But at that point, we had concluded that we did want to be spending our careers in this space.

And so, in the process of running that trading operation, we came across the problem that we’re now working on with Bitwise, which is that we interacted with many individuals. Actually, we first encountered what we think of is the problem Bitwise is working on in a conversation with my older brother. He was a technology banker for several years, CFO’ed at a technology company, now president at a technology company. He’s tech savvy, he’s comfortable with investing, and he made a remark to me, he said, “Hunter, I’d like to invest in cryptocurrency but I don’t know what to buy and I don’t have time to figure it out and I don’t have time to be constantly monitoring and managing this stuff.” I was catching up with Hong and I told him this and he said, you know, “I’m surprised RJ feels that way.” And that sort of kicked off the series of dozens of conversations that gave us conviction that there needed to be an organization focused on abstracting away a lot of these complexities so that anyone can participate as an investor.

Clay Collins: This is a question I ask everyone who’s been on the podcast so far. If it weren’t for Satoshi Nakamoto and the whitepaper and the birth of Bitcoin and then distributed ledger technologies, do you think you’d be involved in financial services and would you have started an index fund?

Hunter Horsley: Probably not, right? I think that Bitcoin is the foundation of everything that is sort of blossoming now around distributed ledgers and crypto assets. One of the things that I think about a little bit is why is this happening now? There’s a certain path dependency of history sometimes and in contemplating that question, one of the thoughts I have is that the moment in time that Bitcoin was introduced to the world, 2009, was in many ways actually a uniquely fertile period for something like crypto currencies to be embraced by society.

There are two things that I see in that moment in time that really facilitated people being open to something like this. The first is the proliferation of social media. Platforms like Instagram, Facebook, Twitter, I think we’re all familiar with the term, the Arab Spring, but one of the byproducts of social media and the ability for anyone to become a content producer and then to distribute to anyone else is that it’s shed light on the behavior of large institutions, of large organizations, and allowed some people who previously weren’t able to express what they were seeing to do so more broadly.

Having that dynamic be in place when the financial crisis happened, in many ways was sort of a combination that really damaged people’s trust in the ability of the central banks, of the large private banks that we often think of as being the most trusted organizations. And to perceive the missteps and the perils of those organizations’ operations with the level of clarity and specificity that was hard prior to social media. I think that in addition to the business models and some of the concerns that many people have about Facebook and Google and others and how their data’s being monetized, sort of compounds to create an environment where people are more sympathetic and open to the idea of having decentralized systems for transferring value, or for accomplishing things. Whereas previously, maybe there was less of a feeling that there was any problem with the central organization serving a lot of those things.

Clay Collins: That’s profound, I’ve heard certainly, the financial crash, the housing market and everything that was happening then, that’s often cited, sort of the compounding effect of social media and the distrust of institutions that came with that, certainly, that was a catalyst.

Hunter Horsley: Yeah, absolutely, I mean it’s definitely, the role of social media is substantial, right? I mean, this is why I brought up Arab Spring. That’s not trivial, the fact that giving anyone the power to broadcast what they’re seeing as a result of all the platforms at our disposal today, has had really significant impacts in other parts of the world. It makes sense that it would affect people everywhere. That that’s definitely something that has been one of the prevailing developments in the past 10 years and plays into the world that cryptocurrency is now stepping into.

Clay Collins: Let’s fast forward a little bit. The Bitcoin Whitepaper comes out, Bitcoin comes out in 2009?

Hunter Horsley: 2009.

Clay Collins: And then, various works of Bitcoin come out, Ethereum comes out, for a while, we were living in a Bitcoin world, there was Bitcoin and then there was everything else. And then, Ethereum came on the scene and surprised a lot of people with the growth it’s seen. And that kind of brings us to the place where we are now, which is a truly multi-token world. In a lot of ways, that set the groundwork for an index fund because you can’t just bet on two tokens and assume you’re going to benefit from most of the growth in this space. What I’d like to hear from you is really the case for index funds. I was talking to someone the other day who was going to start an index fund but they also run a hedge fund, and they couldn’t speak freely about the benefits of an index fund over traditional hedge funds because–

Hunter Horsley: They’re at odds.

Clay Collins: Because they are at odds. What’s the case for index funds over hedge funds?

Hunter Horsley: To back up a little bit to the premise you set, the clear need for holding a portfolio in crypto has been something that’s new as of 2017. As you pointed out, crypto was by and large Bitcoin maximalist world for the years between 2009 and just last year. Bitcoin was always 85% or more of the market cap of all crypto assets. In May of 2017, it drops to around 55% and it ended the year around 35%. That’s a relatively new state of the world and what it means, and what really changed is many people were investing against an abstract thesis which was that cryptocurrency as a category might produce something meaningful one day, but investors don’t necessarily know which asset or that meaningful thing will be. And previously, if you wanted exposure to cryptocurrency as a category, just investing in Bitcoin seemed feasible because it was the majority of the value in the category.

As of 2017, everyone increasingly recognized that holding a portfolio is important. One of the merits to an index approach over an active approach. There are many, obviously, inequities index outperforms active management. With regards to crypto specifically, there are a variety of things. First of all, in 2017, The HOLD 10. There’s an index of the top 10 by five-year diluted market cap that we run has other methodology, which we can talk about, returned 2200%. HFR which runs an index of active managers, they take performance data from active managers and they combine it to produce an index of active manager performance, reported that active managers of crypto funds of which there now may be 100, returned 2500%, 300% more before fees. After fees, your money appreciated better in a vehicle like ours. If you invest 100,000, you wound up with 2.1 million in our vehicle, and you wound up with 1.9 million in an active vehicle. Just on a performance basis, both of those outperform Bitcoin last year, Bitcoin is up I think 1300%.

On a performance basis, I think that there are strong merits to an index, but there are other reasons to approaching it that way. The second important component of rules-based investing is that you do remove a lot of the subjective bias that the active managers are using to generate alpha. And some of them likely will be able to generate alpha and outperform, but not everyone, and it’s hard to know who. Naval Ravikant who’s an investor in our company, runs a firm called, MetaStable, which is an example of a really great active fund. But there are tons of biases that an active manager has to navigate. They have to navigate their philosophical biases, they have a model of the world and they have a model of what a cryptocurrency is, and it can be hard to change that model. There’s geographical or information bubble biases. I think a lot of managers are predisposed towards US-based projects or projects that are being built by entrepreneurs who know someone they know, and sometimes are a little bit more dismissive of, for example, something like NEO that’s based out of a different geoghraphy.

There’s reputational biases, if you’ve been very public about your stance on an asset, you may be slow to adapting your perspective on it. A second merit of, just aside from performance, is that it’s a different approach. It can fit alongside active management, I think it has its benefits in those ways. In general, holding a diversified portfolio is definitely something that long investors in crypto need to be doing today. There are a variety of reasons for that. Performance is better, still comparing The HOLD 10 to Bitcoin, in December, the index was up, that and Bitcoin was up 39%, the index was up 78%, and then we obviously had the draw down in January. Bitcoin was down around 30% and the index was only down around 18%. The volatility’s lower in the index. The other important thing to recognize, because crypto assets are so nascent, there are a lot of tail risks that remain for any of these projects. As an example, a blockchain could be hacked, some sort of overly cumbersome regulation could come into place.

There’s key man risk, if an important leader of a project is murdered or has a really unfortunate development like that, that can cut short the life of what is otherwise potentially a really good technology, or a really good and promising network. A microcosm of this would have been what happened with Tezos last year, which is I think a project that everyone had very high expectations for and had a tail event like this take place. They’re an incredible team and an incredible group, people had incredible backers, but there’s a lot of risks to operating in the space, and so that’s another thing that you can mitigate by holding a basket.

Clay Collins: Absolutely, so I actually, I looked up another article about average crypto hedge fund returns in 2017 and it was 1100. So, Bitcoin, by an order of magnitude, outperformed the average crypto hedge fund, so you got to think about people paying 20% for what are essentially beta gains on the space when a simple index fund, the hedge fund, was up 1100% versus Bitcoin, which is up 1400%.

Hunter Horsley: Our index was up in excess of 2000.

Clay Collins: When you consider the historical context in the arc of history and the increase that we’re seeing in public equities markets of indexing and index funds, and then you think about what indexing looks like for crypto assets, do you think that an index fund in the crypto space essentially solves the same problem that it solves in public equities markets, or do you think it solves a different problem?

Hunter Horsley: I do think it’s a similar, playing a similar role in inflection and reducing some of these biases as well as bringing down the cost of a selection and managing a basket. But in 2017, hedge funds were introduced, futures were introduced, we launched the first cryptocurrency index fund and there’s increased from people in traditional capital markets. That being said, I don’t think that it’s a foreground conclusion that the way crypto as an asset class will develop will be the same way that other asset classes have developed. A component of this, for example, is the ability to bring a public fund to market. It’s been, as you’re probably aware, a long dialog with the regulators, and particularly the FCC, to explore the possibility of an instantiated product. It’s not clear, maybe two or three weeks ago now, the FCC came back with 30 or so really good questions that need to get answered before they would feel comfortable with a public instantiating fund and it’s not clear that that will happen this year.

If it takes long enough to bring a public fund to market, it might be the case that one of the differences in the way the category will unfold is that more people end up just holding direct exposure, and are participating through private vehicles like ours or buying baskets of assets themselves. That there’s certainly, in what we’re doing, there’s very strong parallels to index funds in other equity markets or fixed income markets. But I think that the evolution of the market itself is not yet fully played out and so that will definitely impact the landscape of products like ours and the options people have for getting exposure.

Clay Collins: When you think about indexing in the space and your future roadmap, there’s a lot of different paths you could go down. One route could be a token model, and I know that there are kind of smaller token projects that attempt to do some indexing. Another route could be an index ETF. There’s a lot of different things this could turn into. How do you see indexing playing out over time in this space and how do you think of your product roadmap, given your thought about where things are going?

Hunter Horsley: There’s two things that come to mind here. One is we think about how categories evolve within crypto. When we talk about crypto, we often, by default, are talking about the assets that are targeting monetary use cases. Payments, remittance, store value, et cetera. But there are other pockets of ways that public distributed ledgers are being applied that are a bit different and might result in the desire to sort of split or have more focus in the set of things that you’re getting the exposure to.

There’s not a good taxonomy or categorization today. We’re actually going to announce a senior hire that’s joining the firm who has experience in this from traditional asset classes. But it’s something that we’re thinking a lot about as it pertains to the category and indexing exposure, is what are the different pockets of assets that have a common but distinct strains? You’re also getting that a little bit, what are the right vehicles? Right now, most of the fund vehicles are our vehicles, we talked about instantiating products, we talked about tokenizing a fund. Those are all things that are on the table. A lot of the question with crypto is timing, when it begins to have public vehicles, a lot of that has to do with the dialog with regulators. For some of the really compelling and interesting possibilities around creating protocols, specifically for holding baskets, or writing a smart contract to facilitate that, or tokenizing securities.

One of the things that I’m frequently thinking about is is the time right? And the lens that we use to help us clarify if we think the time is right is what we hear from clients. A lot took place in 2017, obviously, the market appreciated incredibly, a lot of people created accounts on Coinbase and Blockchain. But most of the world and most people are not ready yet to be involved with that level of complexity with a smart contract or sending private keys somewhere. Our view right now is that bridge still needs to be built. Most people still need people to come to them and to leverage them into models and points of reference that they have. And with regards to some of the amazing possibilities around doing things in a more crypto-native way, they’re fascinating, and they will be the approach in time, the question is just, for us, timing.

Clay Collins: When you think about where your sweet spot is, is it providing private investment vehicles for accredited investors, is your mission to get safe exposure for as many people as possible with the lowest fees? How do you kind of carve up the market place and where do you fit?

Hunter Horsley: Talking about the clients that we serve is an interesting framing, but just taking a slight step back from that, the way we think about ourselves is crypto is bringing together two worlds right now. It’s bringing together people from the software world who are excited because this is one of the most interesting and potentially important things happening in internet and in software. It’s also bringing in people from the finance world who are excited because this is one of the most interesting things happening in the markets and the development of the new asset class. The way that we see ourselves is that we want Bitwise to be at its core a software organization who can stay on top of these details and be the expert in creating rules-based abstractions for investors, and be a partner to them over a long period of time. The structures that we set up are low cost, high volume, and have necessitated taking venture investment. We are trying to pull in the best people or the best minds in crypto, technology, fintech.

Our investors, which you’re familiar with, have been involved in or invested in PayPal, Square, Stripe, Coinbase, Wealthfront, Palantir, many others, Naval’s an investor, Keith Rabois, David Sacks. The way I think about what we’re trying to do is we’re trying to build a meaningful institution that is bringing a software experience and a software perspective to navigating this landscape. In terms of specifically the investors that we interact with, the reality so far has been that it’s been across the board.

Our funds now has have several hundreds of investors in it, that includes billionaires, it includes professors, it includes doctors, it includes large RIA’s, we’re talking with some very large family offices, institutional investors, we don’t have a strong bias there. The reason that I wanted to start by describing a little bit about how we see ourselves and our identity as an organization is that we’re interested in getting to think about the details of crypto assets, the evolving landscape, categorizations, the technologies, on behalf of investors, and as long as we can do a good job for them, and granted, you know, not all vehicles are suited to all investors, we don’t have a strong bias along those lines.

Clay Collins: Crypto assets have created an opening for folks who wanted to become venture capitalists but perhaps didn’t have the pedigree or the background or experience to break into that market. But now that this new asset class exists, they’ve got a way in and they’re doing a lot of, crypto hedge funds are doing things that, traditionally, VC’s have done like talking to teams or viewing code, getting on airplanes, and making rational assessments about the longterm value of these tokens. But often, the markets don’t care and when we have, I’m not even going to name specific projects, but we have projects that have made it into the top 10, the top 15, that have no business being there. And the market is highly irrational, a lot of this is based on sentiment and momentum. What are your thoughts on value-based investing versus perhaps momentum or sentiment-based investing in this space, and do you think it’s even wise at all to make rational assessments of these projects when placing an investment?

Hunter Horsley: My view is that it’s very hard to anticipate where the prices of assets will move in the short term. Any honest active manager or person participating in the space would recognize that. It’s worthwhile that people try to understand and predict, but it’s very hard. And so, the best opportunity for an investor is thinking about longterm exposure and if you have a thesis around something appreciating in the longer term. A challenge that we all face as investors in crypto as an asset class, who are thinking about what we want exposure to in the long term, is two dynamics of the category today. I wrote a piece for CoinDesk’s year in review, called 2017: The Year Cryptocurrency Became An Asset Class, it has some discussion of these things.

The two things that I think make it challenging to decide what to invest in are first, there is no framework for fundamental analysis that the community has agreed upon. So, we can take discounted cash flows. There’s some promising ideas around, you’ve probably heard people talk about the quantitative theory of money, or this equation, M divided by QV equals P, there’s some ideas around staking as being a way of pulling cash flow analysis into crypto assets, but there is no framework that has been battle-tested and that we know will be a true predictor. And then certainly, as you mentioned, many investors are taking a more venture style approach to thinking about things, which has a lot of merit. Thinking about the team, thinking about the market, thinking about their advantages. The second thing that makes it complicated is the reflexive nature of crypto assets which is a little bit different from other things.

Let’s take Ethereum as an example. Ethereum, as now a very large cap asset, has advantages over something else trying to do the same thing. The advantages are it’s more attractive to investors, it has more liquidity. It’s more valuable as a network, there’s more hash power, there’s more incentives for minors to come on, there’s more people who hold the asset, are willing to exchange the asset, there’s more adoption by the ecosystem. But also, many of the surrounding constituents, in Ethereum’s case, the Ethereum Foundation, Consensus and certainly developers, become strongly incentivized and are well resourced to make Ethereum work. If something needs to change, if there is a narrative problem, I think Consensus has a business consulting division, a lobbying division, a government consulting division, they train solidity developers, they fund applications on top of Ethereum, and certainly the Ethereum Foundation does tons of research, advocacy, participates in the community, and they both have billions of dollars at their disposal to do those things. Hundreds of centrally-coordinated employees working on those things, those are huge advantages that Ethereum now has just as a function of being one of the very highly valued assets. As it becomes more valuable, it’s likelihood of being valuable in a way increases and that’s what it makes it sort of reflexive.

The fact that we don’t yet have well-tested frameworks for valuing assets, and you know, many probably form the finance world are thinking about cash flow models or other, you know, DCS comps, other models form traditional asset classes and people from the venture world are thinking about teams, and the technology, and the market opportunity, and sort of both bringing their typical frameworks, and we’ll see what works out as being the best way to think about things. Not knowing what the right frameworks will be is one challenging thing certainly, and then I think the second thing is that there’s this reflexive nature to projects. As something becomes so well resourced and has a really strong network in terms of hashing power or the ecosystem accepting it, even if maybe it wasn’t the best project or it wasn’t good on some dimension, that in a way really increases its odds of succeeding. And that’s part of why we think that The HOLD 10 Index is such a valuable basket to hold and a way of getting broad exposure because those assets have huge advantages over other things.

Clay Collins: Let’s just talk through the fundamentals of the product offerings. What are the fees, what’s the lockup terms, are there gates, what’s the minimum investment, are there early withdrawal penalties? If you could just walk us through sort of the high level parameters of the offering, I’d be grateful.

Hunter Horsley: Yeah, absolutely, the Bitwise HOLD 10 Fund, it’s tracking these rules-based strategy, The HOLD 10 Index, I sort of mentioned a few of these things before, but is looking at five-year diluted market cap. Market cap was not a concept designed for crypto assets. It’s one of the really helpful bridges of understanding that has been built, but market cap’s sort of assumes a fixed supply. Inequities supply changes in a step function with a split buy new issuance. But for crypto assets, sort of definitionally, it changes continuously and the function is different for different assets, and even for assets that have the same function, like take Zcash and Bitcoin for example, depending on their age, they’re in a different moment of supply increase. We take the five-year diluted market cap, we look at then a number of eligibility criteria to navigate some of the pitfalls of assets, so, if there’s sufficient trade volume, if there’s over concentration on a specific exchange. For example, Cardano has an alarming amount of its trade volume coming from one exchange. I’d have to look at the numbers, but I think it’s something on the order of 70%. We look at if there’s price pegging, we look at if it’s available on recognized exchanges. That’s the index, we can talk more about that. The index informs the fund, the fund has no performance fee, it has a management fee. The management fee is 2.5%. In general, we’re trying to set ourselves up to be a low-cost, high-volume firm and vehicles to that end. The assets are stored in 100% cold storage.

Security’s obviously one of the most important things about what we do, what we offer for clients, and so, we evaluate each individual asset, and then put them in cold storage. In terms of liquidity, liquidity’s available quarterly. It’s very different from an exchange-traded fund in that way, there’s a soft lockup for the first year. In general, we think about the fund as being best for people who have a multiple-year time horizon on their investment thesis, the soft lockup reflects that. What the soft lockup means is that there’s a 3% withdrawal fee in the first year. After the first year, there’s no withdrawal fee, there’s no fee for investing in the fund, liquidity’s available quarterly. In addition to tracking the index, buying the assets, we the assets across a number of liquidity providers so exchange is GDAX, Poloniex, Bitfinex, Kraken, et cetera. We also trade on the OTC trading desks, so in the private order books. Circle, Cumberland, Genesis, there are a number of other large firms that have reached out to us now who are thinking about getting into this space.

We have software that allows us to chop up orders and then execute at the best prices across these different pools. Assets are moved into cold storage, and then the other thing that we do for investors is when there are hard forks, air drops, Ethereum rules have proof of stake in the Casper update, will evaluate the ability to stake assets to generate extra return. If the Lightning Network becomes a production-ready technology in 2018, we’ll evaluate the ability to be a supernode to generate extra return on the Bitcoin. We think about what we could do with the underlying to take advantage of events like this or developments in the protocols to generate extra return on the assets in the vehicle. The last thing which I hadn’t mentioned is that the fund rebalances monthly to keep current with what’s in the top 10. The minimum investment is 25,000, which I recognize is fairly substantial. That might increase over time, we’ll have to see.

Clay Collins: Do you find that the customers that put in the least amount make the most noise for your customer support reps?

Hunter Horsley: No, no, no, no. I would actually also say that everyone on our team loves interacting with clients, and that’s one of the pleasures with what we get to do. It’s more a matter of focus for us as an organization, and for this specific vehicle.

Clay Collins: I was going to ask about back-testing, 10 versus 15 versus 20, why 10, why monthly rebalancing versus every two weeks, every one week?

Hunter Horsley: We evaluated holding five, six, seven, eight, nine, 10, all the way up to 20. Holding more is valuable because it allows us to capture more of the upside. Obviously, as you go outside of the top 10, trade volumes get much lower and so, that’s a significant consideration you have to have. But hold more, like I said, allows us to capture the appreciation for longer in the basket, and it minimizes turnover. For example, the smallest position in the index fund right now is a 1% holding of Monero.

If there’s a change, if Monero drops out of the top 10 and something else comes in, there’s only turnover on the gains on that 1%, right? Versus if you don’t rebalance frequently enough or if you only hold four assets, and when something changes, you have to liquidate 20% of the fund, or 10% of the fund, that’s a lot less favorable, both because you didn’t capture the performance, but also you have a much larger trading event.

Clay Collins: Hunter, you’ve been very generous, I appreciate you making time for me.

Hunter Horsley: I really appreciate that, thanks.