While 2017 was the year of the digital asset hedge fund, it also brought with it the arrival of the cryptocurrency index fund.
Hold up – what is an index fund?
An index fund is a form of mutual fund that is inherently designed to track the return of a market.
Traditionally, an index consists of a group of securities that represents a market segment.
While investors staking their wealth behind a single asset may see large returns, the move brings with it extreme volatility and exposure. For example, should an investor have no other exposure to other assets, their investment is solely linked to the performance – good or otherwise – of one market entrant; meaning that they cannot effectively ‘hedge their bets’ should their chosen asset fail to generate a convincing financial performance.
Accordingly, index funds typically provide investors with broad market exposure, where they can expect low operating expenses and lower portfolio turnover.
What are cryptocurrency index funds?
Index funds may invest in assets in a market segment, such as stocks in leading companies. Standard and Poor’s 500 Index, for example, is based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange.
Cryptocurrency index funds, then, typically involve individual currency tokens or coins to fulfill this role, and now propose an easy way for both rookie and seasoned investors alike to invest in popular cryptocurrencies without tacking day trading or extraneous research or risking vast amounts of capital on single and potentially volatile investment.
The Coinbase Index Fund
Earlier this year, Coinbase announced the entry of a new product to tackle the burgeoning cryptocurrency customer experience through the development of a new passively-managed index fund.
The Coinbase Index Fund, which launched with a $10,000 USD minimum investment, charges a 2% annual management fee (and no performance fee).
As the first investment vehicle developed from Coinbase’s new asset management division, the fund will include all digital currencies listed on GDAX weighted by market cap, and at launch was constituted by 62 percent Bitcoin, 27 percent Ethereum, 7 percent Bitcoin Cash and 4 percent Litecoin.
The fund rebalances once a year to account for supply changes, and whenever a new asset is listed on GDAX.
CRYPTO20 kicked off in April of 2017, where the project introduced C20 – an ERC-20 token – through an Initial Coin Offering (ICO).
Principally, CRYPTO20 is an autonomous ‘token-as-a-fund’ – the project leveraged its ICO funding to purchase its underlying cryptocurrency assets.
Today, CRYPTO20 tracks the top twenty cryptocurrencies by market cap in a bid to mitigate volatility. Given CRYPTO20’s structure, the index fund boasts management fees at just 0.5%.
Launched in December of 2016, Bit20 stands as one of the first cryptocurrency index funds to have reached the market space.
Called a “Contract For Difference”, Bit20 is underlined by a smart contract wherein the BTWTY token comprises the performance of the top twenty cryptocurrencies by market cap.
Interested investors can purchase BTWTY tokens in exchange for BitShares – the BitShares ecosystem requires a 0.1 BTS management fee to sustain its operations.
Bitwise Hold 10
Bitwise Asset Management’s Hold 10 Index is designed to represent the performance of the cryptocurrency market by tracking a basket of digital assets.
The fund, which tracks the top ten cryptocurrencies by market cap, continually weights its composition by measuring each cryptocurrency’s supply inflation schedules for the next five years.
As a traditional investment vehicle, Hold 10 is open to accredited US citizens for an opening investment of $10,000 USD. Hold 10 customers see their funds stored in cold storage save for the fund’s monthly rebalance.
Hold 10 arrives with a monthly management fee that ranges between 2% and 3%.