The market is too immature

This week, Matt Hougan, the head of research of the Bitwise investment fund spoke at the Digital Asset Strategy Summit in Dallas, an event attended by many of the big crypto fund players, as well as allocators. In his speech, he stated that we should have the humility to admit that no one knows the exact future of the blockchain space, and that we must therefore diversify. This diversification, he claimed, was the best way for investors –especially the institutional kind, to get exposure to crypto assets.

Matt Hougan, Head of Research at Bitwise

Bitwise has certainly been very successful with this message, having attracted more than $50 million in investments. While their sales pitch may sound reasonable, it relies on their clients making a false equivalency between the traditional stock- and the crypto markets. Index funds make a lot of sense on Wall Street, but are a terrible idea for crypto at this time.

Of the top 10 coins right now, at least five are not feasible in the long run, and at least two are arguably a scam. Further, the turnover rate of the top 10 is staggering. Only a few months ago, DASH, NEM, NEO, Zcash and IOTA were all part of this exclusive club. In another few months, the list will look very different once again. Even though Bitwise rebalances regularly (yet not consequently, since they still hold Zcash for some reason), they are down 21% since their inception on October 1st, 2017, while Bitcoin is up 50% during that same time span. This may not sound too bad in a bearish market, but other funds attending the same conference in Dallas, using more actively managed strategies, have had far greater success.

The typical pattern we observe is that most crypto assets rise in a wave-like pattern through the ranks, only to fall, and continue to fall, forever. They are replaced by the next big thing, the next speculative fad, the newest hype. This has been the case since 2014, and will continue to be the case for quite a while. You can read some of our research on relative coin rankings here.

If Bitwise keeps buying cryptos at the peak of their wave, they are merely capturing the tail end of a fad, only to have their holdings slowly fall through the ranks again, until they sell it for the next big thing.

Being humble about our ability to predict the future does not justify a blindfolded, shotgun approach. Just because no-one knows what will happen, doesn’t mean no-one knows what won’t happen.