Yesterday Coinbase announced a new crypto index fund that will include a weighted mix of all the crypto assets listed on the popular exchange. In actuality, there will be two indexes:
Coinbase Index (CBI) – tracks the combined performance of all the crypto assets listed on the exchange weighted by market capitalization.
Coinbase Index Fixed Supply (CBIFS) – the investable version of the index, which is rebalanced annually based on the supply of each crypto asset at the time of rebalancing.
The need for the CBIFS is because most crypto assets are still increasing the coin supply on an ongoing basis (in fact all of the crypto assets listed on Coinbase fall into this category). So, to prevent the value of an investment in the index from decreasing relative to the index a fixed supply will be used for each asset and rebalanced once a year. More details regarding the methodology of the indexes can be found here.
Some key facts about the new offering:
- The index will be weighted based on the market cap of coins on Coinbase
- Currently Coinbase offers Bitcoin (BTC), Bitcoin Cash (BCH), Litecoin (LTC) and Ethereum (ETH)
- Available to accredited US investors only (min $10k)
- Listed on Coinbase’s GDAX trading platform
- Any assets added or removed from Coinbase in the future would be automatically added or removed from the index
Theoretical Asset Mix of CBI
Why is this important? Well, as the most popular exchange at least in North America any announcement of a new product or offering from Coinbase with their large user base is noteworthy. The reach they have to their user base as well as their marketing and PR reach to traditional news outlets like CNBC where the announcement was first made has the potential to draw more people into investing in crypto assets.
Is this important? Not really. Any investor who has done their own research into crypto assets (and you should ALWAYS DYOR – Do Your Own Research) recognizes that part of the advantage of crypto is that the investor maintains control of the underlying asset.
Leaving the investment on the exchange where the exchange maintains control of the private keys to access those assets is not a good idea as it makes exchanges very attractive targets for hackers, scammers and thieves.
Also, Coinbase currently only offers access to 4 crypto assets (BTC, BCH, LTC and ETH) whereas people familiar with the crypto space will tell you that although those are definitely important parts of any crypto portfolio, they do not necessarily represent the investments with the biggest upside potential.
Finally, weighting of the index by market capitalization, although common in other types of index funds, really doesn’t make sense for a crypto index due to the volatility of the asset prices, which will cause the asset mix to need constant adjustment that will increase the costs to have the index track correctly. In general, market capitalization just generally isn’t a good indicator in particular for crypto because the liquidity just isn’t the same as it is with other traditional assets where market capitalization is a good short form for the value of an asset.
In summary, it’s useful to see that new crypto products are being created to help investors get involved in the space. But the collective ‘nothingburger’ on Twitter goes to show that most of those in the know don’t think this Coinbase index is a product with a lot of legs.
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