Coinbase has just announced that they are now accepting investments into their new index fund product. The fund offers exposure to Bitcoin, Ethereum, Ethereum Classic, Litecoin, and Bitcoin Cash. This announcement comes hot on the heels of the the announcement yesterday that the company would begin to support Ethereum Classic soon. Each asset will be present in the fund in a proportion that represents their market caps. The only problems? Only the rich can participate, and the fees are crazy high.
The Coinbase Index Fund
At first glance, it seems a bit odd to call this an “index fund” at all. That’s because traditionally, index funds are ETF’s that represent many hundreds of individual investments like the stocks of different companies. Usually, ETF’s are made up of 100 or more individual assets. The Coinbase index fund, on the other hand, only consists of five.
With that aside, the fund is part of a relatively new service offered by Coinbase under its asset management arm.
The idea behind the business arm is to offer ways for institutional investors to get access to cryptocurrency where they otherwise would be unable to either out of fear or out of uncertain legal compliance. By investing in a fund offered by someone else, they reduce their risk and increase their appearance of legal compliance.
This fund is not without its flaws, however.
Only the Rich (and US-Resident) May Apply
One glaring issue that appears immediately when reviewing the announcement post written by the portfolio manager, Reuben Bramanathan, is that potential investors must hit three very high and stringent minimums. Those include that the investor be a US resident, that they are accredited, and that they can put up a minimum investment of $250,000.
Anyone who can invest $250,000 into a single investment is already rich. But not only is the minimum incredibly high, but you also need to be “accredited”. The mention of this requirement on the sign-up page links to an SEC website, investor.gov. This site states that in order to qualify as accredited, you must either have an income of $200,000 or more as an individual for the past two years and expect that to continue, or you must have a net worth of over $1 million, not including the value of your primary residence or house. Needless to say, meeting these requirements would easily put you in the top 1% of earners.
One final potential negative to consider is that the fund charges a high fee of 2% per year. This is high because if you compare this to an established index fund provider like Vanguard, such as their popular Vanguard Total Stock Market Index Fund, you could expect to pay 0.04% as a fund expense fee. As you can see, 2% is drastically higher in comparison and should be taken into consideration for those wealthy enough to even be able to consider the Coinbase fund.
Individual Investors Free to Duplicate the Fund
Let’s say that for whatever reason, you are a normal individual investor, are not accredited, or not a US resident, but you still want to have access to this type of investment structure. Lucky for you, as this index fund is quite small in terms of the number of assets it offers, it should be quite easy to replicate this fund on a smaller scale yourself. That being, one could buy the five assets in a portfolio of any size, but maintain the exact percentage of holdings as Coinbase lists in their fund.
Composition of the Coinbase Index Fund
Even if you are eligible to purchase from the Coinbase fund, there could be a number of advantages in doing it on your own.
First, if you intend to hold the investment for several years, the fees would likely be much lower if you did it yourself. Even if you have to buy your assets from Coinbase and pay a fee for doing so, that would just be a one-time fee and not a recurring annual percentage-based fee.
Second, if you decide to run this fund yourself, you can do so while still maintaining total control of all of the assets within the fund. If security is a concern, all five of those assets are compatible with hardware wallets. This means you could set up the wallet, buy and transfer the funds and then forget about them until you’re ready to cash in.
Is an Index Fund the Right Approach for Crypto?
To sum it all up, Coinbase offering its index fund is interesting in that it could allow for a very specific set of investors to get into crypto that otherwise might have not been able or willing to get in.
But is an indexed approach the right way to invest in crypto? In the end, that’s up to the individual investor to decide. For some people, perhaps a hybrid approach of investing in an index like this (run by yourself or someone else) and then keeping your eyes and ears open for other interesting crypto opportunities could yield the best results. Or, perhaps just sticking with the blue chips of the space would net you better results. No matter what you decide to do, just make sure you know what you are doing and can tolerate the losses that could come from it.
