The Golden Age of Crypto and the Case for Indexing

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By Matthew Hougan

The scope of what’s possible in crypto is changing fast. For many investors, that makes indexing especially attractive.

These days, things are moving incredibly fast in crypto. Ideas that seemed outlandish a month ago are now somewhere between possible and probable.

In the past week alone:

• Senator Cynthia Lummis (R-WY), calling attention to the pro-crypto “cavalry” coming to Washington, shared a proposal to have the U.S. government sell a portion of its gold reserves to purchase one million bitcoin.
• 18 state attorneys general filed suit against the SEC for “gross government overreach” against the crypto industry.
• BlackRock expanded its tokenized money market fund, BUIDL, onto five new blockchains: Aptos, Arbitrum, Avalanche, Optimism, and Polygon. Notably, the SEC has previously labeled one of the assets linked to these blockchains as a “security.”

We’ll see what next week brings.

The entire industry has spent the past four years facing lawfare, regulatory uncertainty, constrained access to basic banking services, and a hostile administration in Washington. All that is being washed away and replaced with a pro-crypto White House, a pro-crypto Congress, and pro-crypto regulators.

(In some respects the sentiment shift borders on the surreal. Elon Musk, for instance, is creating a new government agency that’s literally named after a meme coin: the Department of Government Efficiency, or DOGE.)

All of which is to say: Anything is possible in crypto over the next four years. Anything.

What Does That Mean for Investors?

As an investor, it’s easy to look at this and be generally bullish on crypto. It’s much harder to know, however, exactly which assets to be bullish on.

Outside of bitcoin—which is far and away the leading monetary asset in crypto, and should be a foundational asset in most crypto allocations—the future is hazy. For instance, there is a lot of excitement swirling around programmable blockchains like Ethereum and Solana, but widespread disagreement on exactly how things will play out:

• Will Ethereum maintain its current lead as the most valuable programmable blockchain, or will newer/faster/cheaper blockchains like Solana surpass it?
• If Ethereum remains dominant, will more value accrue to the ETH token or to the Layer 2 networks like Arbitrum and Optimism that help Ethereum scale?
• What about promising up-and-comers like Aptos and Sui? Will they leapfrog both Ethereum and Solana?
• How much value will crypto-based apps like Uniswap garner if they see increased regulatory clarity? 

Ask ten crypto experts these questions and you’ll get ten different sets of answers.

You can see the impact of this uncertainty in the recent returns of various crypto assets. How many people expected XRP to rise 77% last week? 

As an investor, you’re faced with two options. You can try to pick and choose the winners, researching dozens of different blockchains and their unique tokenomics and fundamental drivers. Or you can bet the field, buying a diversified index fund that holds the leading assets on a market-cap-weighted basis.

At Bitwise, the very first fund we launched—way back in 2017—was the world’s first crypto index fund. We imagined it as the “S&P 500 of crypto,” an easy way for investors to gain diversified exposure to the space. The idea then—as now—is that there’s wisdom in buying the big picture.

Sometimes you don’t know at the beginning whether AltaVista or Google is going to win out, but you know internet search is going to change the world. Indexes give you a way to participate in the growth and excitement of a new field without having to parse the particulars or make a specific call. 

For an innovation as bold, sweeping, and diverse as crypto—and one that’s suddenly entering a new era of possibility—this strategy seems more relevant than ever.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.