Coinbase cryptocurrency index fund: What to know and how to use it

Posted: 7 March 2018 2:23 pm

The Coinbase index of BTC, ETH, BCH and LTC is a big deal but might not be the most impressive product.

Coinbase is launching a cryptocurrency index fund, to give speculators broad exposure to the asset class as a whole rather than needing to pick and choose individual coins to put their money into. The fund will be passively managed, and customers will be able to invest once per month and withdraw once per quarter.

But they won't be able to trade shares in the fund, and it won't be listed on any exchanges. Prices will track the newly created "Coinbase index," which will essentially be the aggregate price of the four included coins.

Coinbase isn't the first company to start offering these kinds of products, but it might be one of the most prominent to date, with Coinbase already having a solid reputation as a large and popular exchange.

"We are noticing people coming to the space for the first time, being excited about cryptocurrencies, but not knowing where to start, so we're excited to give people the ability to get broad exposure to the entire asset class rather than having to select individual investments," said Coinbase product manager Reuben Bramanathan.

"We're seeing strong demand from institutional and high-net-worth individuals."

The fund will be weighted by market average, following the coins currently available on Coinbase:

"It's an easy way to get exposure to the crypto assets that we offer on our exchange," said Coinbase president and chief operating officer Asiff Hirji.

"I think the investors are not going to want to pick specific winners or losers."

Who can invest in it?

Only accredited US investors will initially be eligible to buy into the fund. Investors must have a net worth of US$1 million or an annual income of at least $200,000 per year, and the minimum investment amount will be set at US$10,000.

This requirement is due to the regulatory challenges involved in making it available to "less experienced" speculators who can't necessarily afford to lose their investments.

However, Coinbase is also reportedly looking at implementing a retail cryptocurrency index fund.

Alternatives to Coinbase Index Fund

The strict requirements rule out a lot of potential speculators, but there are many similar products designed to let speculators put their money into a wide array of cryptocurrencies rather than backing any specific horse.

One of the more technically interesting ones might be the Iconomi cryptocurrency which lets its users purchase "digital asset arrays". These arrays are like index funds, allowing people to invest in a broad range of different projects. The main difference is that the Iconomi asset arrays are managed funds, and they come in a much wider range of flavours than the relatively straightforward Coinbase index fund.

Other than that, there are plenty of other digital currency index funds which follow different combinations of cryptocurrency prices.

What to consider

The "Coinbase index" might be an unusual metric. The four coins it tracks are all straightforward monetary tokens, and in the future crypto town might not be big enough for two of them. Or any of them, possibly. With more than a thousand different cryptocurrencies available, hundreds of which aren't garbage, a listing of four functionally identical coins is far from "the entire asset class."

Today many people also consider some of them to be competitors of each other. Bitcoin and Bitcoin Cash, in particular, have a contentious history, and their communities have tended to stay at each other's throats with price increases in one coming at a loss to the other. While many people also see Ethereum as bitcoin's natural successor.

Despite that, over the last 12 months the fund would have outperformed bitcoin alone, Fortune Magazine points out. The Coinbase index fund would have given returns or roughly 995% over the past 12 months, while bitcoin alone would have given returns around 754%.

Of course, Bitcoin Cash didn't even exist 12 months ago, while investments in Litecoin and Ethereum would have netted much more impressive returns in the ballpark of 4,500% over the same period. An index fund might offer the security of hedging, but it's probably not where the major gains are.

It's also worth considering whether any newly added Coinbase cryptocurrencies would end up immediately joining the index fund. When a token shows up on Coinbase, or any other major exchange, its price tends to jump considerably and will often stay at a higher floor than before.

If Coinbase really wanted to supercharge that index fund, the best way to do it might be by adding more already-popular cryptocurrencies, or hunting for viable not-yet-popular coins, and watching their price jump thereby lifting the index fund average.

Arguably, this kind of diversification would be a good idea going forward. With the exception of Ether, the current Coinbase range consists strictly of monetary tokens without any particular functionality. Despite their differences, and different price patterns, bitcoin, Bitcoin Cash and Litecoin are functionally almost identical.

If the goal is to pick a diverse set of investments, it might not be found here. Plus, depending on the kind of fee structure Coinbase will use, speculators might as well just buy each of those four coins themselves and experience an identical result, except with the ability to choose their exact weighting of each, and cash in or out of each whenever they want, instead of being locked into once-a-quarter withdrawals.

The product itself isn't anything special, except as an accompaniment to more traditional investment types, and a way of further promoting the mainstream adoption of cryptocurrencies and pumping a bit more money into it. And fortunately for the market, that money will be staying there for at least a few months at a time, shoring up prices even when its owners would much rather Tether or cash out in a market crash.

This inflexibility means experienced cryptocurrency investors and successful day trader types might not be too interested in the Coinbase index, lending a slightly ironic undertone to the "accredited investors only" regulatory requirement.

Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, SALT, BTC, NANO

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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