As cryptocurrency has gained popularity, it was inevitable that some of the elements of the conventional financial world would bleed over. Regulations, futures, and ETFs have all nosed into crypto markets (or have attempted to) in various ways, and index funds are right there with them.
In 2017, a large number of crypto hedge funds also cropped up. But for the average investor, affording minimums or having the right contacts to get into a hedge fund presents a real challenge.
This is where index funds come in. Index funds are mutual funds that are designed to track the returns of a market index. An index is a group of securities that represents a particular segment of the market. In Crypto, an individual token is often introduced to serve this function.
For professional traders, crypto heads, and other power players, index funds don’t represent a very exciting potential. But for those who are new to the space, they may be an attractive option.
Interested in blockchain but don’t want to spend the time learning about each coin or technology? Interested in cryptocurrency but don’t want to worry about the storage and custody of your tokens? Want an easy, diversified, and auto-rebalancing way to invest? An index fund might be the answer for you.
Let’s take a look the options.
(Note: Invest in Blockchain is not affiliated with any of the following index funds. This article represents objective research along with the opinion of the author.)
Launched on the BitShares decentralized exchange in December 2016, Bittwenty is one of the first indexes released to the market. According to a post by its founder on bitcointalk.org, “I wanted to create a tool that allows anyone to invest in the global economic growth of cryptocurrencies without a headache.”
The BTWTY token is an investment vehicle that takes into account the performance of the top 20 cryptocurrencies, thus functioning in a similar way to the S&P 500 (which tracks the stocks of the top 500 US companies).
Here is its performance since inception:
Crypto had a sensational year in 2017, and Bit20 is obviously a reflection of that. But how safe is it, you might be wondering? Since BTWTY is a smartcoin that runs on the blockchain, it enjoys the same level of security as other blockchain-based applications. To date, blockchains have proven to be much more secure than centralized alternatives.
How can you buy BTWTY? In order to buy into this index, you’re going to need to have some bitshares (the currency of the platform BTWTY runs on). This can easily be achieved by setting up an account and transferring bitcoin in. A step-by-step guide on how to buy can be found here.
What fees are involved? The BitShares ecosystem takes around 0.1 BTS (.1 BTS = 0.06 USD) for “trading operations.” This is comparatively tiny fee “aims to provide money for the development of Bittwenty, the website maintenance and future evolvements, publicity and anything that can help this market to grow.”
What exactly is it though? C20 is an ethereum-based token that works as “an autonomous, high-performance, low-cost cryptocurrency index fund.” It’s another prominent offering for those who wish to purchase a basket of coins.
The fund itself is currently pushing $160+ million. Here is the token value as of Nov/Dec 2017:
There was quite a bit of buzz surrounding C20, but also some skepticism. It’s fair to ask the question, how safe is it? The C20 also runs on the blockchain, thus offering full transparency and a relatively high degree of security. As for the company behind the token, initial feedback appears positive – strong communication, a growing community, and a pending audit by one of the big four accounting firms are all positive indicators.
How can you buy the C20 token? If you did not participate in the presale or ICO (which was not available to US residents), then your only option will be to buy into this index fund on an exchange. According to this Medium article, HitBTC will be the first exchange to list the C20 token starting on January 15, 2018. Initially, there will be pairs with BTC and ETH, meaning you’ll need bitcoin or ethereum to buy C20.
To sign up for Hitbtc, click here.
What fees are involved? Due to its unique structuring, C20 offers management fees of only 0.5%. These are among the lowest offers on the crypto market at the moment.
Another newcomer to the crypto index game is Bitwise Asset Management, who’ve recently introduced their Hold10 index. This fund tracks the top 10 cryptocurrencies on a rolling basis and “weights these currencies by inflation-adjusted market capitalization, taking into account the supply inflation schedules for the next five years.” More about their methodology can be found here.
Despite being headed by 2 relatively unknown entrepreneurs, Bitwise received $4 million dollars in seed funding, has gotten a lot of press, and is backed by the likes of Naval Ravikant. Hold10 allows you to “own the market not try to pick winners.”
Here is its performance YTD:
Again, you can see that Hold10 has had an exceptional year, mimicking crypto’s meteoric rise. But what kind of safety concerns are there? If you buy into Hold10, your funds are held in 100% air-gapped cold storage, except for when the portfolio is rebalanced once a month to account for fluctuations in pricing among the basket of assets. The company itself is based in San Francisco and appears rock solid.
How can you buy into Hold10? The requirements here are a bit more stringent. In order to purchase, you must be a US citizen and an “accredited investor,” and since it’s a private vehicle and not an ETF, the minimum is $10,000 – which is still less than other current alternatives. The fund comes with an annual passive management fee of between 2% to 3%.
While the three we’ve mentioned here might be the best known or most interesting, that doesn’t mean they are the only options. Here is a list of other index coins or funds that may be worth a look.
- AgreCoin – a platform that works to compile the top 6 coins in the market at any given point, and makes them into their own fund.
- Symmetry Fund – (SYMM) offers investors the opportunity to gain exposure to the cryptocurrency market without the complexities of personally trading it themselves.
- Digital Developers Fund – a fund that invests in a spread of digital assets such as domain names and cryptocurrencies.
- Iconomi – a platform that offers investors an opportunity to get into the crypto world by index investing in a fund that is managed by experts.
With some of the options laid out, it brings us to perhaps the most important question…
Should You Invest in a Crypto Index Fund?
In terms of stocks, index funds have tended to outperform actively-managed funds substantially in recent years. An index fund can provide broad market exposure, low operating expenses, and low portfolio turnover. To use the words of Warren Buffet, “A very low-cost index is going to beat a majority of the amateur-managed money or professionally-managed money.” So why not give one a spin in cryptoland?
Many people are currently running or participating in this experiment as we write this. But as with all things crypto, no one really knows how it will turn out. That doesn’t stop people from trying to make predictions, though.
At the end of 2016, crypto researcher and Coindesk author Willy Woo ran a series of simulations (based on the prior 3 years) to see if an index of the altcoin market could beat bitcoin’s performance. He concluded that “bitcoin is really hard to beat with index funds, may be unbeatable with the present state of altcoins we have. Not only do they underperform bitcoin by a significant amount, but as a combined basket their day-to-day volatility is higher.”
Things have changed a lot since 2016, however, and current index offerings incorporate bitcoin, rather than pitting it against the rest of the market. But the question remains: is spreading your money across a spectrum of coins more likely to yield the profit maximizing–risk minimizing effect investors hope for?
How you answer this question will come down to the perspective you choose to adopt.
Some people think that the altcoin market is overvalued and that many of the coins are not good investments (even in the top 20). They see only a few cryptocurrencies surviving the inevitable growing pains. From this bearish perspective, buying an index accomplishes little. To quote Woo again, “my conclusion is we don’t really parallel the stock market (where indexes are very successful) because we are in a world of unvetted shitcoins.”
Other people see an altogether more optimistic landscape. They see bitcoin as an anchor of value, and they see many other tokens starting to address real-use cases through innovative tech. This second group feels that we are at the dawn of something huge, and with the benefit of more data (a year has passed since Woo made his statement) are more bullish. From this viewpoint, diversifying across the market could be seen as an excellent strategy.
Many people will overlook index funds as they chase the next pump or try to prognosticate the value of technology barely in its infancy. Others will take a DIY approach to indexing, but this requires far more know-how than the average beginner has.
And the problem remains, crypto is still pretty technical and hard for people (especially newbies) to approach. Buying a single token or index is an easier and less-stressful approach than just about anything else.
Whether or not you decide to invest in a crypto index largely comes down to two things: where you fall on the optimism/pessimism spectrum (as it relates to crypto markets) and how much you value the ease of use an index provides (i.e. are willing to pay a little bit in fees).
At the end of the day, everyone will have to make these determinations for themselves.