Leading cryptocurrency exchange Coinbase recently announced that it plans to get into the crypto-fund business with the creation of the Coinbase Index Fund, designed to allow investors to get exposure to several major cryptocurrencies in a single investment. Here's a rundown of what we know about the fund so far, and if it could be right for you.
Here's what we know so far
Coinbase is the largest cryptocurrency company in the world, so it shouldn't come as too much of a surprise that it wants to be an early mover in the largely untapped cryptocurrency fund market -- a market for which there is major investor demand. Product lead Reuben Bramanathan said "we're seeing strong demand from our customers and the market generally for a passive investment management product."
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The company has created a subsidiary named Coinbase Asset Management, which will be responsible for the index fund's operations.
We also know that the fund will initially only be available to accredited investors who are U.S. residents. Generally speaking, this includes individuals with annual income of $200,000 or more ($300,000 for a couple), or a net worth in excess of $1 million, excluding their personal residence.
Finally, we also know that the fund will come with a 2% annual management fee. This is rather high for a fund that simply tracks an index, but to be fair, it's on the lower end relative to other cryptocurrency funds.
For comparison, a 10-coin cryptocurrency fund launched by Bitwise in December charges 2.5% annually, although it offers exposure to more coins. Greyscale, the company behind the publicly traded Bitcoin Investment Trust (NASDAQOTC: GBTC) charges a 3% fee for a fund that invests in the four coins listed on Coinbase plus the third-largest cryptocurrency Ripple (XRP-USD).
What we don't know at this point is exactly when the fund will be open for investments. According to Coinbase Asset Management's website, the fund "will open for investment in 2018."
What will the fund invest in?
The fund will track the newly created "Coinbase Index." In a nutshell, this index tracks the performance of all cryptocurrencies listed on the Coinbase exchange. Currently there are just four -- bitcoin (BTC-USD), Ethereum (ETH-USD), bitcoin cash (BCH-USD), and Litecoin (LTC-USD). If other cryptocurrencies are added in the future, they will automatically be added to the index.
It's also important to mention that the index will be weighted -- that is, the larger currencies by market cap will make up a greater portion of the fund's assets. As of this writing, here are the prices and relative weights of the four cryptocurrencies in the index.
Bitcoin cash (BCH-USD)
Data Source: www.investing.com/crypto. Prices and market capitalizations are as of March 7, 2018. Percentages may not add to 100% due to rounding.
The allocations, based on market capitalization, will be rebalanced once a year on Jan. 1, as opposed to on a daily or continuous basis.
Is it a good choice for investors?
To be clear, I never suggest putting any money into any cryptocurrency products you can't afford to lose. Cryptocurrencies -- even the larger ones like bitcoin (BTC-USD) -- are still extremely speculative.
Also, while the 2% annual fee is significant, there is some value in not having to buy four different cryptocurrencies and keeping your holdings safe and secure. Plus, with the lack of ETF products available that accomplish the same goal, cryptocurrency funds can command a somewhat hefty premium. Over time, as more products become available, this may change.
However, if you are in a position to speculate and have the desire to do so, an index fund like this can allow you to spread your money around and give you exposure to some of the largest cryptocurrencies.
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