The vast majority of retail cryptocurrency investors buy and sell individual coins on exchanges using their own accounts and wallets. The rise of online guides teaching crypto newcomers how to open accounts, trade, and secure their funds is a big factor. However, bond and equity investors have long bought and held through passively managed index funds. Though some big players are attempting to create crypto index funds, the endeavor is challenging as they must comply with regulation, be practical and attract investor interest.
In March, Coinbase announced a crypto index fund weighted by market capitalization. Only open to accredited investors from the U.S. with a minimum investment of $250,000, the Coinbase Index Fund contains Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC). It also assesses investors an annual management fee of 2%. Officially launched in May, it accepts investment in US dollars and has a quarterly redemption window.
The Coinbase Index Fund is not innovative and does not make sense for retail or institutional investors. It is a poorly diversified basket and weighted too heavily towards BTC. The fund passively tracks an index, but the redemption window restricts liquidity in the manner of hedge funds. The management fee is too high for an index fund, compared to something like Vanguard’s Total Stock Market Index Fund Admiral Shares (VTSAX), with an annual expense ratio of 0.04%. Institutional investors would be better off buying large amounts of crypto in over-the-counter (OTC) markets.
The startup Olympus Labs has partnered with BB Index, a platform that offers numerous diversified crypto indices. The first 8 indices include up to the top 50 cryptos, and large cap and mid cap without BTC. Another 18 indices include blockchain currency, infrastructure, and token investments. The funds are market cap-weighted and regularly rebalanced. The funds’ fee structures and minimum investment are unclear. Liquidity is provided by decentralized exchanges like the Kyber Network (KNC). The BB Index fund family seems a better choice than the Coinbase Index Fund. The indices are more diversified, offer greater investment options, and undergo automated readjustment.
Circle is also exploring crypto index funds as its valuation continues to grow. Circle recently launched a new service with its Circle Invest app called “Buy the Market” that allows users to buy all of the coins available on Circle Invest, in a market cap-weighted collection. The coins include BTC, ETH, BCH, LTC, Monero (XMR), Ethereum Classic (ETC), and Zcash (ZEC). BTC and ETH comprise over 59% and 26% of the basket, while ETC and ZEC are at less than 1% each. Bloomberg reports that Circle wants the service to be geared toward crypto newbies looking for passive management.
The hidden catch of “Buy the Market” is twofold — no real ownership and a wide bid-ask spread. Buyers of coins on Circle Invest do not actually have access to the private keys and cannot transfer them to external wallets. Effectively, Circle owns the coins, not the investor. Circle Invest also assesses a 1% bid-ask spread, so users lose 1% of their portfolio’s value immediately after buying. These factors make Circle Invest less appealing than exchanges like Coinbase and Binance.
Startup crypto investment platform IronChain Capital recently announced two index funds, MiX10 and an institutional counterpart. The funds include up to 10 altcoins, charge a 1% management fee, and offer daily liquidity and high security. The minimum investment is $10,000, and investment is limited to accredited investors. The fund accepts investment in dollars, bitcoin and ethereum. IronChain’s two index funds have better features than the Coinbase Index Fund but could still improve.
In late May, Huobi, the third largest cryptocurrency exchange by trading volume, announced that it has launched its first exchange-traded fund (ETF), HB10, a trading vehicle that tracks the HUOBI 10 Index. Within 30 minutes of the announcement, the new ETF gained over ten million subscribers.
Although more crypto index funds have been launching in recent months, the funds face many challenges until widespread adoption is possible. The issues include liquidity, accessibility, diversification, security, and fees. Until these funds become more similar to typical equity and bond index funds, investors will likely save money by creating and managing a portfolio of coins themselves.
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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official position or opinions of SludgeFeed. This article is for informational purposes only and should not be taken as investment advice. Always conduct your own due diligence before making investments.