As cryptocurrencies gain broader prominence as an asset class, they've become the focus of a growing number of mainstream investors. But many remain fearful of the digital assets—spooked by their still somewhat obscure status, their extreme volatility and in some cases the prohibitive cost per token.
Bitcoin, for example, trading at $7,641.8 at time of writing, is down 14.54 percent over the past 7 days; Ethereum, at 'just' $423.68 is down 24.33 percent over the same period; less popular and cheaper alt currencies, such as Cardano which is currently trading at $0.15272 lost 28.18 percent during the same timeframe.
Recently a number of newer, potentially safer investment products have been launched, aimed at those investors who'd like a stake in digital currencies and their underlying blockchain technology but with the possibility of lowered risk. Newly available crypto focused index funds such as the Coinbase Index Fund and Bitwise Asset Management's Hold10 Index provide that possibility, as do recently launched exchange traded funds from Reality Shares and Amplify.
For those unfamiliar with the concept, index funds are mutual funds that own holdings which match and/or track the components of an existing market index in order to provide similar returns. Their net asset value (NAV) is calculated only at the end of each trading day.
Exchange traded funds, more commonly referred to as ETFs, trade as stocks on a public exchange—meaning their prices can fluctuate throughout the market day. ETFs are built to track a broad array of assets including indices, single assets, bonds or a basket of assets.
Both types of vehicles are considered passive investment strategies since they're managed not by the investor, but rather by someone working for the company that controls the fund.
Note that the specific funds mentioned below do not constitute an endorsement. Each investor should do their own due diligence before entering any trade.
Earlier this month, Coinbase, the San Francisco-based trading platform, announced the launch of the Coinbase Index Fund which will give investors exposure to digital assets listed on Coinbase’s GDAX exchange. The fund will track the four biggest alt-currencies, weighted by market cap. Thus 62% of the fund will be Bitcoin, 27% Ethereum, 7% Bitcoin Cash and 4% Litecoin. It's expected that other coins will be added in future with yearly rebalancing. The fund will only be available to U.S. accredited investors at first.
Dr. Omri Ross, assistant professor at the University of Copenhagen and CEO of Firmo Network, stresses that crypto index funds and ETFs are a crucial development for the evolution and expansion of digital currency markets. He believes there will undoubtedly be a boom in innovative, safer solutions offering investors greater access to distributed infrastructure tokens.
“Index funds in the conventional financial industry are powerful tools for risk management. I believe that index funds such as the one launched by Coinbase make a lot of sense for the crypto markets.”
He points out that investing in an index fund allows investors to obtain returns from all the listed assets in the index. Thus, from an investor perspective, following a well-diversified index fund is almost as efficient as tracking the entire market, excluding fees.
Bitwise Asset Management also recently introduced their own solution: the Hold10 Index, which tracks the top ten cryptocurrencies on a rolling basis. Currently, the fund's top five holdings by weight are: 56.42% Bitcoin, 16.19% Ethereum, 9.58% Ripple, 6% Bitcoin Cash and 3.44% Litecoin. As with the Coinbase fund, right now it's only open to accredited US investors. The index is evaluated and rebalanced on a periodic basis.
Additional options for index coins or funds continue to be released. Ross says the introduction of index funds for alt-currencies signals the increasing maturity and indeed acceptance of crypto-assets. As well, the growing demand for passive investment vehicles indicates the expanding appetite for ways to manage risk exposure to these volatile but potentially lucrative assets.
The two recently launched ETFs, the Reality Shares Nasdaq NexGen Economy Fund (NASDAQ:BLCN) and the Amplify Transformational Data Sharing ETF (NYSE:BLOK), provide another way to potentially profit from burgeoning blockchain technology. Shares of both don't directly correlate to cryptocurrency price moves since their holdings are equities operating in the blockchain space rather than actual digital currencies.
BLCN tracks an index it created, which Reality Shares says is "comprised of companies committing material resources to developing, researching, supporting, innovating or utilizing blockchain technology for their proprietary use or for use by others.” Among the fund's holdings are a variety of well known global companies as well as a smattering of more obscure equities, including Intel (NASDAQ:INTC), Cisco (NASDAQ:CSCO), Microsoft (NASDAQ:MSFT), Hitachi (T:6501), NVIDIA (NASDAQ:NVDA), ZTE Corp-H (HK:0763) and HIVE Blockchain Technologies Ltd (OTC:HVBTF).
BLOK, which bills itself as "an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in equities of companies actively involved in the development of and utilization of transformational data sharing technologies,” offers similar, but not the same exposure across a broad array of known and less known global names. Holdings include Taiwan Semiconductor Manufacturing (NYSE:TSM), Square Inc (NYSE:SQ), International Business Machines (NYSE:IBM), Red Hat (NYSE:RHT) and Advanced Micro Devices (NASDAQ:AMD) as well as NVIDIA, Intel, HIVE and Microsoft among others.
A key problem within cryptocurrency markets is liquidity. Sergei Sevriugin, CEO and Founder of REGA says:
“One big problem in the crypto market is low liquidity. Less than 5% of tokens on the market generate 90% of volume.
Crypto funds that can maintain liquidity, enhance the market by making it more stable and predictable.”
Dr. Ross believes investing in cryptocurrency focused index funds or ETFs is a good entry point for the cautious investor. Newcomers with little knowledge of the digital coin markets or low risk-tolerance can more efficiently gain exposure to volatile crypto markets, without an asset valuation skillset for this category.
All that may be true. However as with every other investment vehicle, caution and asset diversification are necessary. Evgeny Yurtaev, CEO at Zerion says:
"Just a year ago Bitcoin was the clear winner in profitability. This is not the case anymore. Last summer Bitcoin's share of the total market capitalization dropped below 50%.
As other cryptocurrencies matured, people began to question the leading position of Bitcoin. Which in turn made them diversify their crypto assets.”
Yurtaev warns that simply investing in an index fund or ETF won't shield an investor from all the risk associated with the new technology. Merely investing in an index fund doesn't necessarily filter the overall volatility of the cryptomarket itself. The safest approach is to be sure your portfolio is spread across a broad array of markets and assets.
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