According to Bloomberg, Matt Hougan, the former CEO of Inside ETFs and ETF.com, is leaving the industry after 15 years to focus on crypto, saying he believes crypto has “the potential to transform financial markets,” just like ETFs did when they first emerged in the 1990s. Hougan is joining startup Bitwise Asset Management as vice president of research and development.
Hougan has also embraced the “millennial gold” comparison that’s frequently touted by crypto commentators.
“When I think about individual applications, like gold which is a $3 trillion market, there’s the idea of Bitcoin as millennial gold. It’s a multitrillion-dollar opportunity, and then when you get into utility tokens, each of those markets can be substantial.”
Hougan isn’t the first financial industry stalwart to pivot to crypto. As we reported earlier this month, Mike Novogratz, a former Wall Street trader, is trying to launch a merchant bank that will deal exclusively with crypto assets.
The crypto market has grown 25x in the past year to about $500 billion and Bitcoin comprises a little more than a third of it, according to CoinMarketCap data.
The question of how quickly the market will develop is an open one, and the trajectory of individual coins, as well as their volatility, are difficult to predict. To try to make some order out of the exploding ecosystem, Hougan said he’s working on defining an index methodology for the digital-assets market, saying that criteria such as market capitalization and weightings should be structured differently from other assets like stocks and bonds. Meanwhile, Bitwise, backed by investors including Khosla Ventures and General Catalyst, launched its first fund last year. At the time of writing the Bitwise HOLD 10 Private Index Fund holds the 10 largest crypto assets.
There is at least one notable parallel between the early days of crypto and the early days of ETFS: In both markets, retail investors are taking the lead, while institutions remain skeptical.
“Institutions are in learning mode. That will translate into investing mode and we’ll see the early adopters as early as this year and really significant activity in 2019 and beyond.”
In anticipation of the coming surge in interest from institutional investors that Hougan has staked his career on, companies are already setting up products and trading venues that mimic certain aspects of the institutional market for stocks and bonds, according to the Wall Street Journal.
One Singapore-based company raised more than $30 million this month from some of the biggest crypto funds to launch a crypto “dark pool”. As all crypto transactions are publicly recorded on the blockchain, a dark pool helps to break up and obscure orders placed by institutional traders. This allows funds to trade bitcoin and ethereum in large quantities without moving the market against them.
The company, Republic Protocol, expects to launch its dark pool product during the third quarter. They claimed it should help bolster trading volume.
Dark pools are enormously popular in the US stock market. In December, nearly 40% of stock trading took place off-exchange. Republic Protocol is designing algorithms that will break orders down and spread them across a variety of trading venues.
In the past, large crypto orders have been filled over-the-counter in party-to-party transactions. However, several prominent crypto exchanges have launched dark pools of their own, or announced plans to launch a dark pool.
At the moment, most investors who hold large quantities of bitcoin trade over-the-counter, said Arthur Hayes, CEO of BitMex, a Seychelles-based cryptocurrency trading platform. That means they have to locate other investors to buy and sell with directly rather than using an exchange.
Arthur Hayes said:
“The dark pool might aggregate more liquidity. And for coin-to-coin transactions, in theory it would remove counterparty risk.”
There are already some cryptocurrency exchanges, including Kraken, own their own dark pools. Bitfinex last week announced plans to launch a similar product to Republic Protocol’s.
Legacy Brokerages including Barclays and Credit Suisse paid $154.3 million to the U.S. Securities and Exchange Commission in 2016 to settle charges that they misrepresented their dark pools to clients and failed to stop predatory traders from buying and selling stock before big asset managers had the chance.