I have attempted to duplicate this index fund manually by purchasing the top 25 cryptocurrencies (market-cap weighted) over the past year or so. I'll say that it was hardly worth the enormous work involved, and these index funds cannot come soon enough to non-accredited investors. In some cases it's not possible to do perfectly alone: NEO has a minimum unit of 1 coin, and so if you wanted it to not be overweighted, you'd need to have a total portfolio that is an integer multiple of $6700 right now.
However, I would not buy this fund from Coinbase since they are not a neutral player, and the market is not regulated yet. There are still great advantages in owning coins yourself - I expect that, as an average investor, I will certainly be prone to manipulation in some way. Alas, the greatest gains are probably long-since gone. No risk, no reward.
I had the same problems with re-balancing my own portfolio and ended up creating a trading bot that automatically diversifies my investment portfolio across the top 20 coins by market cap (10% capped). It is heavily inspired by the crypto20 whitepaper.
For anyone that is interested, you can find the project here: www.hodlbot.io
I'm about 1-2 weeks from the MVP launch. Only the top 20 coins by market cap fund will be available at the start. In the future users will be able to create their own custom weightings.
The bot requires users to have a Binance account and uses their API key (trade only, no withdrawal access), to execute monthly rebalances. Users will always own their own coins.
At this point, I haven't run into any huge issues with min trading amounts given a reasonable initial investment amount (~0.5 ETH). For example, the NEO example you mentioned.... the min trading amount on Binnace is actually 0.01 NEO (~$1.1 USD).
I'll be making the project open source in the future and sharing with you all!
This is a really clever idea, but as someone who's trying to stay as legal as I can with reporting my crypto transactions for taxes, this sounds like it could potentially be a nightmare to report (or possibly to pay taxes on), especially with the recent GOP addition to the tax reform law that made every cryptocurrency transaction, even a trade from currency to currency, a taxable event.
I really wish I could just freely use this as a tool for investment, but the laws seem pretty draconian right now, and not reflective of the open and experimental nature of this space.
Once you get this up and going, consider some reporting tools to help keep track of the transactions, so people can use it for both personal and legal purposes.
We keep a log of transaction records. We can easily add a feature for users to export this as a CSV. Better yet in the future, I'd love to work with a user who is knowledgeable about this process to build a reporting feature.
Trading is taxed just like capital gains, and mining as income. For small investments with few trades, it's straightforward and you can likely use a free service. Beyond a certain threshold (like 200 trades), it's probably worth using something like https://bitcoin.tax/ or https://cointracking.info/ which will create your forms for you after you import (and painstakingly correct) trades, at a rather steep price ($120/mo) though cointracking has a lifetime buy for $380...
One big factor: traditional brokerage/investment accounts provide records of all stock transactions, including the cost basis and precise gain or loss. This typically comes via the 1099-B. It's straightforward to report and file taxes in this manner (relatively speaking).
Even the more legitimate exchanges in the US (ex: Coinbase) aren't currently providing these types of records. You may be able to export a list of trades, but often cost basis is missing. Or if, for example, you've moved coins through various exchanges, or traded one coin for another coin (say BTC to ETH), before converting back to fiat currency, it's very difficult to figure out how to report everything. There's no 1099-B.
Sounds great. Given that in stock market investing you are better off on average with passively managed tracker funds, there does seem to be a big gap in the market for a crypto asset equivalent. Having a crypto equivalent of an ETF as single tokens representing e.g. CMC100 would bring a whole host of challenges, e.g. regulatory, security, ease of manipulation (it is relatively easy for whales to temporarily get coins into the CMC100), etc. In the spirit of crypto, a solution you run yourself, and where you manage the keys to all the coins yourself, should go some way to addressing those concerns. Maybe in the longer term this sort of thing will be a smart contract you run yourself on a decentralised exchange to make it more easier.
Blocknet is an awesome open source project you may want to look into. It's an interoperability protocol and one example use-case project they built on it is a trustless decentralized exchange that allows you to trade directly from your wallet.
Correct, whether it's worth it or not depends on how much you care about security and decentralization. It works well for OTC trades, dark pools, escrow, no-limit withdrawals(because you're trading from your own wallet), and anyone who doesn't want to create an account and have their trades tracked.
How are you planning to deal with the tax implications which arises due to buying and selling of coins?
There is a certain benefit of using coinbase's (or any) crypto fund where you don't actually have to own the coins, and that is not having to deal with the tax nightmare situation that creates.
Sounds awesome. Can't wait for weeks, have signed up.
One request: Could you lower the monthly fee for people like me who are from India like in the range of $1 to $5 per month. $15 is a large figure for Indian common citizens.
I am genuinely interested: How do you feel about Saas pricing in general coming from India? Also how do Indian Saas products differ from e.g. US ones? Is it only the pricing point?
The referral link doesn't seem to work for me either. Maybe you want to add the referral link in the confirmation email as well? I lost my referral link after closing the tab on signup, forcing me to signup again :o
Looking forward to it! If only I wasn't 15k in line :D
I think it's a great idea and signed up for the beta. Just curious though - given the Binance hack today that seemed to only affect people who had given out their trade API keys, how will you ensure that people trust your bot?
This is assuming that you can trust the market capitalisation values. I'd bet that far more BCH is in lost wallets than LTC because it started as a a BTC fork.
Isn't LTC the main coin that uses a lightning network ATM?
Because if so, it is still a decent choice if you want a lightning network. BTC is moving in that direction, but it might still not go there.
Sorry, I meant no offense... I've been very confused lately with people using slang or ambiguous wording. Could be because I'm getting old. I do remember back in the 80's when "peace out" was a popular saying, it basically meant goodbye. In the 90's it evolved, saying one "peaced out" meant they had died usually murdered. I can't keep up on what it could mean now, so I asked. Perhaps my parenthetical went too far, it wasn't meant as an attack, just observational humor?)
I'm not sure this is such good advice. It means you're guaranteed to miss out on high appreciation of anything but the largest coins. That's all well and good for a less volatile scenario like the stock market where the top20 is pretty well correlated with the top2000. But given the volatility of digital assets, i would worry that this strategy leaves more on the table.
Why was there enormous work involved? Were you rebalancing very often? Note that Coinbase's fund will be made up of only four cryptocurrencies, not 25 like yours.
Yeah, this is an index of 4 securities and is rebalanced annually. Coinbase is charging a 2% fee for what amounts to automating a max of 4 transactions a year. I get that people are excited about cryptocurrencies becoming available in more traditional investment vehicles, but this particular index fund seems almost completely unnecessary.
Besides the fact that it should cost nothing like 2% of AUM / year, securing the private keys pays for itself when they claim every fork/spin-off coin that distributes based on bitcoin blockchain.
Are you saying coinage handling bcc in a sane manner is the exception, not the rule? Are there any other forks that have enough value/liquidity that they should be "given back" to the buyers?
The other fork people mention in this category is Bitcoin Gold, which traded as high as 10% of bitcoin but is now around 1%. There are other spin-offs but I can't easily track them -- great idea for a monitor website!
It don't begrudge Coinbase's handling of bitcoin cash, because it's legitimately expensive to hook a new currency up to their framework, and nobody should be able to force them to do that just by declaring a new currency based on bitcoin.
BUT, everyone should recognize that part of Coinbase's business model is retaining all the privileges associated with holding private keys -- including choices about how to handle spin-offs, secondary services such as account mixing, and so-on.
It's pretty common to derive value from holding on to someone else's cash, so in other products (like bank accounts) some of that value comes back to you as interest, or at least offsets other service fees. Coinbase Asset Management seems to be targeting minimal services, maximum float capture, and maximum fees all at the same time.
Are they insured for 100% of the value of the coins on those private keys?
If not, you are paying 2% YoY + X%, where X% is your counterparty risk - the odds that someone at Coinbase fucks up, and your money is irreversibly gone.
That's a good question. If the answer is "yes" then maybe that's the reason for the high fee.
Currently they have insurance on their hot wallet coins, which I think is about 5% of the total. The cold wallets aren't insured, but they're paper wallets held in safe deposit boxes all over the world, so it's unlikely that a large percentage would be lost.
I'm admittedly not up on rebalancing policies. With a fund of highly volatile assets, would rebalancing more frequently be necessary? I'm not thinking daily, but perhaps every month or so?
A fund weighted by market cap doesn't have to be rebalanced. With crypto assets, you only have to adjust for newly mined coins. The Bitcoin supply, for example, is currently growing at about 4% per year. But if the other currencies in the Coinbase Index are mined at a similar rate, yearly rebalancing should be accurate enough.
Yes, at the most general level highly volatile assets should be rebalanced more frequently. However, that isn't going to be a universal rule. It will depend on what is causing the volatility and whether that is more a product of the market or something specific related to the assets. Rebalancing too frequently is also a very real possibility so more is not always better.
Another consideration specific to cryptocurrencies like Bitcoin is the relatively high transaction fee. You don't want to see your investments be whittled away by frequent transaction fees doing unnecessary rebalances. I haven't spent enough time researching cryptocurrencies to know how all these considerations shake out when it comes to this specific index fund, but as a pure gut instinct the annual rebalancing was less frequent than I would have expected from this type of fund.
Rebalancing cryptoassets on the same exchange (without withdrawing to a wallet [1]) doesn't require on-chain transactions. The fee would be the order fill fee, which for GDAX is 0-0.25%, much less than 2% of the account balance.
([1] For the not-your-keys-not-your-coins crowd: if you don't trust Coinbase with the coins, you can't trust it with the fund either.)
The point of market cap weighting is that rebalancing is mostly unnecessary. The only events that require a rebalance is when a coin is added or removed from the index.
I believe so. The worth of your portfolio is the worth of the assets. Bitcoin dropped a ton in even a month. There are still changes of a few percent possible in less than a day, so yearly balancing sounds insanely dumb to me.
Index funds are usually market cap weighted, so day to day changes in value don't require rebalancing, since if a security suddenly doubles, its market cap does too, and it's therefore still held in the correct proportion to the other securities in the index.
But they can't necessarily make those transactions easily with a ton of money in the fund, right?
I mean if the current price of BTC is $10,500, buying $10m worth of BTC will drive up the price as they're doing it. So how can you rebalance accurately if you're affecting the price of these cryptocurrencies while you do it?
Or do they just do like a "best guess" and overbuy a little and then sell off to get the balance right? I guess any index fund would have this issue, though.
The legal text says: "This announcement [...] is not an offer to sell or a solicitation of an offer to purchase interests in any fund or investment vehicle.
I think rebalancing with Coinbase's selection of coins is pretty easy. When you have a more complex basket (for context, I work at Bitwise Investments, which runs the Bitwise HOLD10 Index), it is more difficult to decide what goes into the basket.
For example, several coins (like Neo and Ripple) have supplies that grow and are centrally controlled, but many coins have planned inflation schedules. We know that the supply of many of the large-cap coins is going to grow over the next couple of years, and that needs to be taken into consideration when valuing them.
To explain why that is important: if people buy a coin at a certain price _knowing_ that a certain amount of inflation is going to happen, that means investors think that the market cap of the coin is actually much more (think of this like Discounted Cash Flow). Restated, if people buy these coins knowing that the supply is actually going up, that means that they think that the value of the coin is actually much higher than the current market cap.
Presumably they'll be launching many more coins this year. There are other advantages in holding crypto through a fund rather than directly, like simplified tax accounting and not having to worry about security, either digital or physical.
They've announced a few times that they are not planning on adding any coins, anytime soon. I think they are better off focusing on this sort of project to keep current customers, marketing to get new ones and strengthening their customer support. New coins make all of those tasks much more complex, for probably very little competitive edge, at the moment.
Shouldn't this be pretty simple with an API and a basic script?
You can get the overall market cap and percentages based on something like Coinmarketcap and then just set limit orders to buy/sell rounded to nearest coin requirement.
The people choosing which coins to include and how to weight them have tremendous power. They, and their buddies, will be tempted to (a) re-constitute the index to favour assets they own or (b) buy and sell ahead of re-constitution using insider information. “Painting the tape” is a problem with proper indices; here, someone on the GDAX side could conceivably just mess with the records.
> someone on the GDAX side could conceivably just mess with the records.
... On the blockchain?
I suppose you mean the pointers to which users controls what, in the internal db? Ie: straight up fraud. I'm not convinced having access to a large order lists doesn't already open the door to insider trading?
The index is market capitalization weighted. "The market capitalization of each constituent asset is calculated as the price of the asset multiplied by the supply of the asset" [1], where the "price for each constituent asset is the last trade price on the GDAX USD order book" (2.6).
The market capitalization, and thus weighting schema, is an entirely internal product of Coinbase's data.
> I'm not convinced having access to a large order lists doesn't already open the door to insider trading?
Currently, an insider could (a) give their orders better execution than the market or (b) foment a spike/crash by "painting the tape". This is risky and leaves a paper trail.
"The Coinbase Index Committee consists of one member representing Coinbase, and two unaffiliated independent members who have experience in index creation and oversight" (7.4). Those people are powerful. They can take economically-significant actions based on their subjective determinations. Convincing one of them to (a) tell you how they're rebalancing or what assets they're adding/removing when or (b) rebalance in a way that helps your portfolio can be done entirely over a glass of beer. Still risky and illegal. But less detectable than before.
This structure of incentives (small group of subjective decision makers operating on the basis of internal data) historically fails. (See the Libor scandals [2], where we only nailed those involved because they coördinated over instant messages.) Even if the first batch of three are honest, all it takes is one bad apple to spoil the bunch.
Not the person you're replying to, but perhaps the choice to add BCH to Coinbase and GDAX due to perceived personal connections between the founder and Ver? Out of all the coins, they've chosen BTC, ETH, LTC and now BCH (which crashed viciously not just right after the lockup period but immediately in the week following).
I suggest those interested in Crypto Index Traded Funds to look into Crypto20. This fund provides a way to track the performance of the crypto markets as a whole by holding a single crypto asset.
"Crypto20 is a tokenized, closed-end index fund (CEF) which passively tracks the top twenty cryptocurrency assets by market capitalisation.
All profits are reinvested into the fund."
One thing I really don't like about Crypto20 is this:
"The liquidation option offers a price floor
protection – this ensures the price never drops below that
of the underlying assets because of market manipulation.
Prices are, however, free to increase as speculative value is
created by the high demand for a low-cost, diversified and
automated cryptocurrency portfolio that can be held as a
single token"
A unit of Crypto20 can be trading at a premium to the actual underlying assets.
Bitwise Investments has a fund (the HOLD10 Index: https://www.bitwiseinvestments.com/) that handles a lot of the hard work around rebalancing/taxes/security. We are currently only open to accredited investors to, but have plans to open up more widely.
You won't be able to withdraw anything other than round numbers to a proper NEO wallet. When the 'coins' are in the exchange they can slice it up however they want because they aren't actually transacting on the blockchain every time you buy and sell, just using their internal database.
NEO's current price is ~ $108, so I believe the parent post is saying that NEO represents somewhere around 1.6% of the market cap of top 25. Since you must buy at least 1.0 NEO, if you want to balance things out just right, you'd need to have a total investment of at least $6700.
Anything less and you either have to leave NEO out entirely or you have to still have the minimum of 1, which will be a larger share of your holdings than its relative market cap.
For anyone wondering why this is better than just buying the coins yourself, here are some reasons:
1. Non-technical investors don't know which coins to buy. There are some genuinely good coins, and lots of scams, and they look pretty much identical to the untrained eye.
2. Non-technical investors don't know how to store coins safely. Words like "cold wallet" and "Trezor" don't mean anything to them. Even if they wanted to learn, it's hard to separate useful information apart from scams. There was a guy a while ago who bought a hardware wallet on ebay and lost all his coins. Even smart people sometimes do dumb things, and in this case it could cost them everything.
3. Investment firms with more than 1 person involved have additional challenges. Who gets the coinbase login? Who gets access to the safe deposit box where the private keys are held? If only one partner has access, he might steal the coins and say "we got hacked" and no one can prove otherwise. Or he might get hit by a bus, and then no one else can get the coins out. If multiple partners have access, one of them might screw the others and steal the money and there's no way to know who did it. Crypto nerds will say "use multi-sig wallets," but that's way too complicated for most people. Screw-ups when creating a multi-sig wallet could render your coins unspendable.
4. If you make a crypto portfolio (as opposed to just holding bitcoin), you'll trigger a capital gains event each time you rebalance. Many people don't seem to realize that crypto-to-crypto trades are still taxable, but it's true. If you want to rebalance more than once per year, it becomes short-term capital gains and your tax rate goes way up.
1) They are publishing which coins are held by the index, so the choice of coins is being given away for free, not just to investors.
2) Coinbase's main product is a SaaS account that lets you buy the same coins without knowing how to manage a wallet - so you can implement the index and skip the management fee using an account with them.
3) Controlling administrative access to an account with a fund has the same challenges as controlling administrative access to a coinbase account.
4) Funds have to pass through taxable events to customer (other than some structures which must pay the tax themselves) -- the taxation doesn't disappear because it's wrapped by another entity. Plus, the prospectus shows that the Coinbase fund will only need to rebalance once a year when it recalculates available supply on Jan 1.
There's really no excuse for the high fees on this fund. It's 100 times easier to manage than a typical stock index ETF, which must manage many more names plus dividends, splits, etc. And it charges 20x the fees.
> 4) Funds have to pass through taxable events to customer (other than some structures which must pay the tax themselves) -- the taxation doesn't disappear because it's wrapped by another entity. Plus, the prospectus shows that the Coinbase fund will only need to rebalance once a year when it recalculates available supply on Jan 1.
Doesn't that depend on the structure? Mutual Funds pass taxable events but I don't believe Index Funds/ETFs do, since there is an incorporated entity that you own shares in that is making the trades and paying the taxes.
Also, mutual funds can be forced to take fewer taxable distributions since they can use cash inflows to handle things they’d otherwise need to take a distribution for.
1. I'll mostly concede this one. You're right that investors can look at this index and mirror it, but any investor who does this should be thankful that Coinbase created this fund and gave them something to mirror!
2. Coinbase's main product lets you buy the coins, but storing them safely is another matter. Just wait until c0inbase.com sets up a duplicate site and buys Google ads for "coinbase" so it shows up above the real site in search results. Two-factor auth won't help because the fake site will just prompt you for the 2FA and immediately use it to log into your account on the real site. This isn't a hypothetical -- things like this happen all the time and target all of the most popular online bitcoin wallets.
The difference with an index is that there's no "withdraw crypto" button. Even if your account is hacked, the worst they can do is try to force you to sell your position -- and even that could probably be rolled back when you get in touch with Coinbase. The hacker couldn't take your money because adding a new bank account for withdrawal is slow and produces a bunch of emails to you. And even if they did add a new bank account and withdraw, that would generate a paper trail that could be used to undo the bank transfer or prosecute the thieves.
Setting up bank accounts with a fake identity is much harder than creating a new bitcoin wallet address to withdraw your stolen coins to.
3. Again, the lack of a "withdraw crypto" button makes all the difference. If that button exists, business partners will always be eyeing each other with suspicion, wondering if one of them is going to steal the coins and claim that a hacker did it. If it doesn't, there is no easy way for one partner to screw the others. The worst he could do is add his personal bank account and try to withdraw to it. Even if he succeeds, that will leave a huge paper trail. The other partners will know who did it and he'll soon discover that the FBI frowns on such things.
4. You're right that you don't avoid the taxation burden, but there is still a difference. First, the fund is more likely to have tax experts who can figure out how to minimize the tax burden from rebalancing. They'll be aware of tricks like tax loss harvesting that a random investor would find burdensome to implement even if they knew about them. Second, as an investor, getting a 1099 from an index fund makes my life simple because I can just copy a few numbers into TurboTax and be done. If I've been running and rebalancing my own portfolio, I instead have to download the year's worth of trade data and fill out IRS form 8949 with a list of all trades.
Debating this should bring up some interesting details!
1) Non-investors have more than that to be thankful for, as Coinbase has offered us a terrific front-running opportunity! Rebalances due to supply changes every Jan 1, and due to added constituents 5 days after trading begins on GDAX, offer great chances to buy with a guaranteed follower. And the more we buy, the more they have to follow! Like the high fees, these gifts to the community are of course extracted from investors.
2-3) You make a good point that withdrawal friction offers a form of security. By far the biggest impact is the fact that withdrawals are "quarterly with 30 days notice". This is the first time I've seen incredibly restrictive withdrawal rights listed as an advantage to investors, but I admit that someone sufficiently risk averse about their account management could see it that way. I still think it's pretty funny to charge a high fee for the inability to access your money. And, we shouldn't pretend that Coinbase's internal handling of capital is uniquely safe -- they are not SIPC insured or such, so a common brokerage account (with no management fee) has better protections against structural events.
4) Keep in mind that this fund trades once a year (plus once more when a currency gets added). There are minimal opportunities for them to exercise expertise in tax characterization -- not to mention that they don't claim they will, and have no incentive to under the terms of the fund. I also would doubt that you're getting a 1099 -- based on requirement for accredit investors, they are probably handing you a K-1, which as a pass-through might or might not simplify your reporting. And finally, producing the most compact tax-form ever would still be something that is done as table stakes for funds with fractions of the management fee.
> There was a guy a while ago who bought a hardware wallet on ebay and lost all his coins.
Was this because he sent his coins to a paper wallet that the seller generated for him? I would be impressed if someone had actually managed to produce a fake trezor, but even then, it's pretty straightforward not to buy them on ebay.
Yes, what happened was the seller went through the initial setup process for the wallet and put a nice-looking laminated card in the box with the recovery key. The buyer didn't realize there was something unusual about this, and didn't re-generate the keys before using the wallet.
My point is, many investors are worried that they'll make a mistake, lose all their money, and then people will just shrug and call them stupid when their story hits HN the following day. With this Coinbase fund, there is no such risk.
You'll still have to pay taxes on capital gains if you have shares of a mutual fund. There will be capital gains/losses generated any time a mutual fund buys or sells the underlying assets (for example, if shareholders liquidate their shares, and there's not enough cash on hand to pay them). Mutual fund managers are required to pay out these capital gains to shareholders on a regular basis. These get reported to you (and the IRS) on a 1099-DIV as "capital gains distributions", and you report them on your tax return for that year.
The fund may try to minimize trading to be tax-efficient, but this may not always be possible. For example, if asset prices drop suddenly and lots of investors try to cash out, the fund may be realizing (and distributing) large capital gains if it's forced to liquidate assets that it has held for a long time. If it's forced to liquidate assets that it has held less than a year, you'll get a short term capital gains distribution which is taxed like ordinary income. (Of course, when you sell your own shares, you'll incur a long/short-term capital gain or loss based on the difference between your sales and purchase price.)
Regarding #4, you may still have a capital gains event[1] on rebalance depending how this is structured. A good analogy is the tax treatment of mutual funds vs ETFs.
It seems a little ironic that any Joe Blow with a credit card can buy cryptocurrency, at presumably higher risk since he's managing the assets himself, but he can't invest in this fund.
This whole regulation is unneeded. You can bring your money to a casino and put it all on zero. Or buy a thousand lottery tickets. But investing in risky businesses needs to be walled off to the wealthy.
What we really need is the real consequences for fraud / false financial claims.
At the casino your risks are known, and well-defined. In blackjack with basic strategy your expected value is, what, 49%? Craps, it's similar. Just look it up. Nobody at the table playing, or even running the show, can manipulate the outcome except by changing the parameters of the game as posted in the (I assume) regulated odds boards.
Investing in an unregulated market is absolutely nothing like that. Your outcome is undefined, but you're subject to front-running, tape painting, wash trading, fake news stories and tens of other well-known scams.
The regulations aren't to stop the poor from making money. If it were a sure-fire way to make money, everyone would just do it all the time. It's the Trumpian "trade wars are easy to win" argument. If it's easy, everyone would win, so nobody would win, end of story. It's to limit people to what they can afford to lose (or at least try). And it's done in the social good also, as people who become insolvent then utilize the social safety net to get back on their feet.
Yes, we need the real consequences, and what you're describing is literally regulation.
But don't they, even in Blackjack, use multiple card decks to kill the odds calculation unless you're Rain Man?
Sorry, but if cryptocurrency is prone to manipulation and fraud (it is), casinos are tens times worse because not only do they do that, as the House must win as a business strategy, but they appeal to people who have addiction issues.
I'm not against casinos but to defend them against cryptocurrency trading and suggest average Joe is better off playing Roulette is in my opinion a misplaced attempt at morality.
That's to make it difficult for a player to calculate the odds of a particular hand. The odds of the overall game are still pre-defined and regulated.
Casinos can't/won't promise that you'll make money by playing their games. Securities are generally purchased with the expectation that you'll make money, and are marketed up to the allowable line of suggesting they are good ways to make money.
Allowing people to play a game where the odds are openly against them, vs. buying a security where they're being told the odds favor them but it may be otherwise, are very different propositions when you're asking if they're "fraud".
That's to make it difficult for a player to calculate the odds of a particular hand. The odds of the overall game are still pre-defined and regulated.
My Average Joe brain is too small to calculate probability when there are a bunch of hands involved, much less one. It is, however, large enough to place bets on which cryptocoins might be more useful than others, based on a lot of data and current event news that I have access to.
Casinos can't/won't promise that you'll make money by playing their games. Securities are generally purchased with the expectation that you'll make money, and are marketed up to the allowable line of suggesting they are good ways to make money.
I don't recall Coinbase or any exchange promising anything. And trading is just that - trading. There are waves of ups and downs of supply and demand, of various volumes of buys and sells that lead to intraday, intraweek swings in which you can attempt to play your 'hand'. Even if you don't believe in the underlying security, you can attempt to ride those waves using technology provided to you by GDAX or Bittrex or whatever - the entire order book is laid out for you to learn and think about, and speculate on. That's easier to parse than odds for .. a blackjack hand? Even a roulette wheel probability play requires some basic training in probability.
The Casino ALWAYS wins, in aggregate.
Allowing people to play a game where the odds are openly against them, vs. buying a security where they're being told the odds favor them but it may be otherwise, are very different propositions when you're asking if they're "fraud"
Okay, fine, so then regulate the 'telling' part and not the 'playing' part. I don't recall being told that the odds favor me. I was presented with an interface that let me purchase these coins. There were no words telling me what to do or not to do. The only people telling people what to do are peers and various Internet news sources that no one is obliged to follow.
Consider the contrast between the two things you just said:
* "place bets on which cryptocoins might be more useful than other"
* "The Casino ALWAYS wins, in aggregate."
In the former, you expect you have some better than even odds of winning money -- otherwise you wouldn't be doing it. In the latter you clearly understand that the odds are against you. See how different those are?
We can argue about the ability to day-trade the cryptocurrency market, but it's hard to argue that the odds there are more clearly defined than in a casino. The reason there's a moving market is because we don't all agree on those odds.
> Okay, fine, so then regulate the 'telling' part and not the 'playing' part
They do regulate the telling part, quite tightly. But it's extremely difficult to control what people may tell each other outside the bounds of an issuance document. E.g. the SEC can't control what folks in r/bitcoin might be out there telling people as reasons to buy this Index fund.
Consider the contrast between the two things you just said:
"place bets on which cryptocoins might be more useful than other" "The Casino ALWAYS wins, in aggregate."
In the former, you expect you have some better than even odds of winning money -- otherwise you wouldn't be doing it. In the latter you clearly understand that the odds are against you. See how different those are?
We can argue about the ability to day-trade the cryptocurrency market, but it's hard to argue that the odds there are more clearly defined than in a casino. The reason there's a moving market is because we don't all agree on those odds.
Hold on a second. I never argued that the odds are more clearly defined. How in the world can you calculate political odds, legal odds, and other odds? Can you calculate odds on a commodities trade like oil? What happens if a war breaks out between Iran and Israel? If a new technology takes hold? All of these things are another way in which odds can't be calculated as cleanly as, say, a Blackjack hand.
That many in the HN crowd consistently compare stocks and now cryptocurrency to casinos, and pad their argumentation that casinos are the same or better with an underlayment of probability calculation -- that shows the inherent mathematical bias of folks in tech. For how can one ascribe odds to purely human factors? Here's a probability prediction: chances of this comment being voted down > 50%.
You specifically said "That's easier to parse than odds for .. a blackjack hand?" Presumably what one is parsing when making a speculative trade is the odds of a positive outcome.
(You don't need to parse a blackjack hand, btw. The odds are pre-calculated and easy to look up[0]. But I was talking about the overall odds of playing, anyway, which is usually about a 0.5% house advantage per hand.)
Note: I'm not arguing that casino odds are better or worse than the odds of a crypto trade. Just that they're better defined, which you seem to agree with me on.
Right - it seems we agree on that and probably when I wrote:
Even if you don't believe in the underlying security, you can attempt to ride those waves using technology provided to you by GDAX or Bittrex or whatever - the entire order book is laid out for you to learn and think about, and speculate on. That's easier to parse than odds for .. a blackjack hand? Even a roulette wheel probability play requires some basic training in probability.
You read that as, the odds are easier to parse for crypto. That's not what I was saying, even if I worded it poorly such that it could be taken like that. It's just not an apples to apples comparison, since with a card game you can construct a mathematical model of probability around it. You can't do that so easily with many other types of speculation and investment (let's suspend argument about THAT distinction for a moment).
But my point all along is that it doesn't matter; investments can be assessed non-mathematically by following non-mathematical sources of data and making predictions. History, politics, law change and it's extremely difficult to ascribe statistics to every possible outcome, at least for almost everyone. Otherwise, there would be no market at all for the vast majority of 'investments' / 'speculations'. Only mathematicians could be involved. Now, there are people that make a living out of creating statistical models around stock movements, but that doesn't mean that every other person alive who doesn't and still pursues purchases of stocks is doing so with more risk than throwing all their chips on Black 26. And it is the same with cryptocurrency.
To circle back to the original point, yes, I feel it's rather hypocritical that casino games are open for business for the little guy, but when the little guy uses a web app with a UI with order book details to try to play the cryptocurrency market, a tool of the type really mainly known primarily on stock trading floors until recently, suddenly the little guy needs the law to step out in front to protect him from himself.
> In blackjack with basic strategy your expected value is, what, 49%?
Assuming you number is correct, that's after just one game. So you're expected to lose 2% each game (51-49). So if you play 20 games, you lose 33.3% (1-0.98^20).
And you can't win against the casino in the long run. With cryptocurrency investments you can. In fact, if you choose a random time to invest, in, say, Bitcoin, you will win most of the time.
The Libertarian in me agrees but then I think of the psychology of how people approach casino gambling vs business investing. For the former, I feel like people know going in that the odds are in favor of the house and they come to terms with that by saying to themselves that its entertainment. In other words, they kind-of expect to get screwed.
In business investing its the opposite. They really do think they stand a chance at making millions even when the odds may actually be worse than gambling in some cases, especially if they fail to do their due diligence.
So maybe instead of regulation we simply need a legal, notarized document signed for every investment that states "I am aware that I stand a very high chance of losing all of my money and relinquish my rights to sue anyone involved unless outright fraud has been established." Probably still wouldn't work, but its worth consideration.
I've always suspected that was part of the reason- it's simply far easier to defraud small fry who don't have the experience to spot fraud or the resources to prosecute it.
> it's simply far easier to defraud small fry who don't have the experience to spot fraud or the resources to prosecute it
Legal and diligence costs on most illiquid investments are tens of thousands of dollars. Anyone investing small amounts (a) can’t afford the diligence, (b) probably doesn’t know what they’re doing and (c) can’t afford to lose even that small amount. That attracts a specific variety of fraudster (see Bitconnect). We’ve seen this happen every time we break the wall between markets with high and low information assymetry.
Generally any compliant securities issuance will have something to this effect - the "Risk Factors" section. The problem is it's often drowned out the broader hype of an offering, or a seller will say "they make us say that, don't worry about it."
Unscrupulous issuers have historically targeted less-sophisticated buyers who are less likely to be experienced investors - and also less likely to retain their own counsel to review an offering. Hence the accredited req.
Casinos (and lotteries) are subject to heavy regulation, including oversight on the odds of the games they offer.
The problem with back-end enforcement (and those laws do exist) is that it doesn't remove the incentive to try issuing a scam-ish security and hope you will evade prosecution, and the damage done can take years to unwind, if it's even possible at all. This is why there are regulations on public offerings of securities to non-accredited investors.
1) Here's the lottery code for CA. Payouts are regulated - by it's nature, the odds of a lottery depend on the number of tickets, but typically, there are strict rules about the minimum % of receipts paid back to winners (which is effectively equivalent to setting house odds), and in many cases, only the state government can run them.
http://static.www.calottery.com/~/media/Publications/Lottery...
A history of gains to investors aren't an definite indicatio that an investment is good, or that the overall odds favor the investor. If I go into a casino and win roulette 3 times in a row, that doesn't mean the wheel is biased in my favor. Similarly, in most ponzi schemes, all of the early investors make money.
(And even in a non-fraudulent situation, simply having an investment go up doesn't mean it was a good investment, when examined on a risk-adjusted basis vs. other alternate options.)
You wildly overestimate how good most people are at evaluating risks. This isn't a couple hundred bucks over a weekend in vegas we're talking about, it's peoples' life savings or retirement accounts or childrens' college funds.
If given the opportunity to invest in something with potentially extreme returns and poorly represented risks, many people will take it either because they don't understand the risk involved or are not very good at internalizing the probability that they lose money. Just look at the ICO scams that abound today or the 2008 financial crisis.
While massive deregulation is nice in spirit and would theoretically allow people more financial freedom, I can't imagine it being viable (at least without a ton more compulsory financial education).
> This isn't a couple hundred bucks over a weekend in vegas we're talking about, it's peoples' life savings or retirement accounts or childrens' college funds.
You think people had never lost their life savings in casinos or lotteries?
I can walk into a casino and bet $5K on every roulette roll. I personally know people who lost $30-40K in Atlantic City casinos.
Lol. It’s not about risk, it’s about keeping poor people out of the market. It’s why they are trying to change the rules to make it even harder—because there are simply too many people with a million in cash liquidity today. Can’t have that.
> But investing in risky businesses needs to be walled off to the wealthy. What we really need is the real consequences for fraud / false financial claims.
This "index fund" is made out of four currencies, BTC, ETH, LTC, BTC cash. Just buy a bunch of those and you're "investing" in their "index". Also you don't have to pay their fee for their immense expertise in putting this together.
I imagine fund investors will get instant exposure to any new crypto asset listed to coinbase or gdax. Which might be worth the price of admission alone if you think Coinbase listing an asset has the potential to drive the price up
Nah, the fund starts trading only 5 days after trading becomes available on GDAX. From the methodology paper: "Each reconstitution will occur at 5pm Pacific Time on the fifth day that the new asset is traded on GDAX. This is designed to reduce the effect of any temporary price volatility in the new asset in the first few trading days after its listing."
You can't easily go buy a fraction of every stock in the S&P 500 whereas I can easily go buy a fraction of the coins in the Coinbase index. This means it is easy for me to go turn $100 into a market cap weighted index of the 4 coins on Coinbase, but it would be impossible for me to go turn $100 into fractional shares of all the companies in the S&P 500.
Yes. You can only buy this if you can show income over 200k USD for the past 2-3 years (or meet other criteria which are less common for people on HN).
My guess is that there are a lot of young people on HN who may have negative net worths - just got out of college a couple of years ago and still paying off student loans. Probably more of those here than there are millionaires.
Doubt it. For one, HN is a global community and in many other countries the problem of college leaving you with crippling debt isn’t as big as what you see in America. And second, the largest demographic in HN by far are straight white males, who often come from middle class families with high earning incomes, enough to pay for education on top of whatever scholarships are earned. Aside from that, many have been in the tech industry for years or even decades earning six figure salaries. Assuming they keep decent savings invested or have had a few big wins it’s easy to see how this crowd can have some big pockets. And then there’s a sizable amount of outliers: cryptocurrency millionaires, founders of acquired companies, early stage employees post IPO or even current founders of multi-million dollar companies, maybe even a billionaire or two.
My theory is that the only reason the SEC hasn't classified all cryptocurrencies as securities is that doing so would be too unpopular politically. Anything that fails to get wide backing before the regulators hear about it, will get cracked down on.
The upside of crypto currency is the amount of agency it currently gives to the holder. The downside of crypto currency is that as personal agency increases the protections from making bad decisions usually decreases. Ulterior motives aside, of which there are a few, the historical reasons that Joe Average is blocked from certain types of investment is because he was making enough bad decisions to warrant aid. Whether or not it's right to impose restrictions on Jack Everybody to protect Joe Average depends largely on your political outlook.
2% annual management fee is peanuts for coinbase. Thats not how they are going to make their money on this.
Its clearly is about market information. If they were to capture enough funds in the index, they can straight up manipulate the market to choose the coin they want to release: they can charge whatever they want for the next coin release upfront, no cost to them or to the coin seller.
why is it dishonest to not use a linear scale? When you're investing, you're generally looking for relative-yield-over-timescale, which is appropriately charted as logarithmic.
When you're investing you usually become suspicious of 300% per year returns. Yet that's what this fund would have returned over the last three years if it had been available since the start of the graph. Using a log scale makes it look sane in comparison.
In the modern era of central bank capitalism, the dominant purpose of investment is to fight inflation, which is an annualized quantity, so using a linear scale is nonsensical for the most common practical purposes.
Cryptocurrencies have characteristics of other high-risk assets -- diamond mines in war-torn regions, shares in politically unstable countries, bonds of provinces or states with a history of defaulting, venture capital, exotic commodities trading etc etc.
The risk is higher, the volatility is higher, liquidity is lower, the overall market is at an early stage of development.
For such asset classes, paying a fat premium is common.
It’s really not. Gdax charges 0.25% (only to one party, so let’s call it 0.125 on average). You only have to buy less than $10,000 worth before the fee is higher than $8
And Gdax is totally required to charge their index fund customers that 0.25%?
I figured that the comment I was originally responding to made it sound like transaction costs are a technical reason for the management fees being high.
There are transaction costs for exchanges but there are also transaction costs for miners. Coinbase I think just lumps these into a single number, but other places you can choose the amount that goes to miners, on the risk of taking longer to confirm your transaction if you pledge a low amount.
So? We're talking about an index by an exchange. I seriously doubt it that they'd actually transact on the blockchain; and if they would, that's just plain stupid, because it only increases costs without any benefit for the investors (who still don't actually own their coins).
Kudos to Coinbase for launching this but a 2% fee and the fact that Coinbase is far from being trustworthy in my book I am going to wait for when/if a company like Vanguard starts such a fund.
You should check out the Bitwise HOLD10 (where I work). We are backed by Naval Ravikant (Cofounder of AngelList and CoinList. Partner at Metastable), Avichal Garg (Part-time Partner at Y Combinator. Previously Director at Facebook), and Keith Rabois (former COO at Square: https://www.bitwiseinvestments.com/about
It should be labeled or otherwise shown, but I think that semi-log is the most appropriate choice of scale for long-term price change graphs like this. I can buy linear-linear for intraday charts, but anything long-term should be log-linear IMO.
This is a great move by Coinbase to make "owning more crypto" easier for the average (accredited) investor. But 4 coins != the market.
Like others, we've tried to maintain our own index of top cryptocurrencies, and experienced all the same repetitive issues of calculating asset shares, etc.
So we created a tool to help ourselves, and hopefully others: https://thecoindexer.com. It takes an input portfolio (on CoinFYI or others) and periodically calculates and emails the optimal* rebalancing trades to match a target index. Current indexes are based off CoinMarketCap's top 5, 10 and 25 assets.
We've still got a lot of kinks to work out, but feedback/suggestions are welcome.
*optimal = fewest # of trades on preferred exchanges
I'd avoid this. Coinbase knows the time and price of potential crypto entrants, and this fact can be manipulated to make the fund the bag-holder for shitcoin pump-and-dumps.
Like, a fundamental thing about market-cap weighted index funds is that they buy a fixed percentage of a security in the index, regardless of price. If the fund has 1/100k of the market cap of all the coins listed on Coinbase, you can buy 1/100k of any coin and offload it at whatever price you can manipulate it to at the date it enters the index.
Reading the weighting section of the index fund ( https://am.coinbase.com/documents/cbi-methodology.pdf -- linked in a few sibling comments too) the following statement, while standard language and approach, makes me wonder in this case:
"The market capitalization of each constituent asset is calculated as the price of the asset multiplied by the supply of the asset."
There are always some small mistakes in the supply of the asset. Bitcoin however has a considerable amount of lost coins. This has been discussed a lot and there are a couple of studies out there (here is a quick link via fortune (placeholder till I find the original study): http://fortune.com/2017/11/25/lost-bitcoins/).
They seem to ignore this fact in their calculations (they follow a fixed supply approach it appears. Does anyone with experience in investing have any opinion? Shouldn't indexes at least attempt adjustment?
Note paragraph 2.10 mentions that no supply adjustment ever is going to be made. I think this considerably inflates the nominal value of the fund (for the eyes of the world). Thoughts?
There is a concept in index weighting called float-adjusted where you remove shares that have not been issued.
that isnt really the same as what you are talking about, but it is a similar concept. The real problem would be finding out how many bitcoin exist or have been lost. I dont think there is any way to do that at this time.
How would that increase the nominal value of the fund? Worst it would do is inflate the market cap of a specific coin in relation to others, altering the weighting a little bit. They note there's no definitive way to calculate true supply so they aren't going to get in the business of trying to do so.
If they adjust the price of the coins by removing lost coins from the supply (how would they even know with certainty which coins are lost, making this definition on their own would be going against the sanctity of the blockchain) then the price per coin would increase.
Kind of sad when a major player likes Coinbase invites the pure speculators in. Yes I know that 99% of people were just speculating before but at least they had the possibility of transferring their crypto assets off the exchange and using them for something. Now it's just some magic number you can root for. It's no more interesting or decentralized than any other financial instrument.
When you think about it, crypto currencies may have been too successful. The market got so big that it has to start looking like every other financial product instead of something different with a chance to shake up finance.
Part of the problem is that if you buy a coffee with cryptocurrency, the IRS wants you to pay capital gains on that transaction. Personally I've avoided actually using crypto because I don't want the hassle.
Germany recently passed a law that excludes small crypto transactions from tax reporting. The U.S. already has this for foreign currencies.
This is a terrible deal. A 2% annual fee is a hedge-fund-esque fee. For 2% I'd expect an actively managed fund that gets in on ICO presales, carefully vets teams/technologies behind new coins and gets in early, has a strategy for hedging risk, etc. etc.
Instead you get a passively managed fund with FOUR assets that are all tightly correlated with each other (they all crash at the same time), that is only rebalanced once a year, and offers no tax benefits. Tax loss harvesting, for example, is not possible - there are only 4 assets to choose from!
You could replicate this yourself in a few minutes, and you wouldn't need a script.
Interesting. The fund creates another potential source of revenue for them and at the same time, the more people that invest in it, the higher it's likely to go.
Why would anyone choose to invest in a fund that is basically the same as investing in the 4 currencies they currently support directly (without fees or limitations on trading)?
Its a great business for coinbase: if it had plenty of investors, then they have a very definite measure on what to ask coin makers before putting their coin on their exchange.
Figure they can ask 10% of the outstanding tokens in exchange for the legitimacy that will pump the coin sky high.
Pardon me, the construction is as transparent as something like this can be, i.e. generally, whatever their committee feels like. My qualm is with the word “balancing” which implies diversification as this term is used within portfolio theory. You can’t balance a book of correlated assets. (You can track them, which this index tries to do.)
Rebalancing is the correct term of art here. The index reweights, the fund rebalances its holdings in order to track the new reweighted index. Source: traded a lot of index funds.
Also, based on the blog post, the fund (or the index managers, who are the same people here) would say they are rebalancing in your sense of the word too. They are adding diversification compared to a portfolio that just holds, say, bitcoin. Sure, it's not as diverse as one that also holds stocks and bonds and real estate, but nobody's perfect.
This is a somewhat debated topic in cryptocurrency. IMO what you said is not the case.
If gold and silver aren't treated "like kind", and facebook and google stocks aren't treated "like kind", why would bitcoin and ethereum be treated like kind?
I'm not a tax professional, but I did consult with one, and they confirmed my hunch.
> If gold and silver aren't treated "like kind", and facebook and google stocks aren't treated "like kind", why would bitcoin and ethereum be treated like kind?
For the same reason that, say, transferring your wealth from an Irish bank account to a German bank account doesn’t trigger a capital-gains event in the US?
I.e., those other things you listed exist “within” the US financial system. Cryptocurrencies exist outside of it, similar to the way assets held in other countries do. If one of these countries had multiple active currencies (say, the GBP and the Euro in the UK), a US citizen telling their UK proxy-holder to start moving money from one into the other has nothing to do with US financial regulation, only UK financial regulation. It just so happens that moving money from one cryptocurrency to another has to do only with the financial regulation of the country known as “the Internet”—which has no capital-gains regulations.
(Of course, things are slightly different if the management company exists as a US corporation—in either case. Ask yourself what a US company offering GBP+Euro management would do in this case. The answer should be obvious.)
>>For the same reason that, say, transferring your wealth from an Irish bank account to a German bank account doesn’t trigger a capital-gains event in the US?
If there's a currency change, it absolutely does trigger a capital-gains event, unless you have a truly terrible accountant. Just like when any other asset is disposed of, the value is calculated at that point. If you move USD from one bank to another that's different, but try to move USD - EURO - CAN - USD and you'll absolutely be taxed on any gains that happen (if they catch it).
I think you're talking about currency changes that happen by moving around within US banks, or by moving money between countries where one of those countries is the US or has a specific treaty supporting US foreign taxation.
If it wasn't possible for a US entity to move money between (at least a few) countries that aren't the US without paying US capital-gains, US corporations wouldn't love holding money in Ireland nearly as much as they do. :)
Two things on that: first, moving money between banks but in a single currency wouldn't generate a taxable event - there's no possibility of profit or loss like there is with a currency exchange (i.e. you're not buying euros and then selling them, you're just moving dollars). Second, all the Irish and Dutch craziness relies on multiple corporations (all owned by the parent, of course), which complicates the tax situation a bunch.
Your intuition is coming from seeing things as being in an equivalence-class on some axis of comparison—but you're looking at the wrong axis.
Gold and silver mined within the US exist within the US financial system, because it's US companies doing the mining, who sell the resulting commodities to other US companies, who then list them on US exchanges, etc. The US government can boss around all of these US companies—because it's the one giving them a right to exist. The US government can also, through this regulation of US companies, also enforce regulations on the activity of private citizens to some extent.
Gold and silver that never existed within the US at all, were never possessed by US corporations, and were otherwise never part of the US economy, are not regulated by US law.
Crucially, if an exchange of gold for silver occurs entirely outside of US jurisdiction—i.e. no interested parties in the transfer have anything to do with the US—then there is no US capital-gains event.
Consider, for example, if your great uncle is a UK citizen, while you are a US citizen. You are the recipient of his legal estate upon his death per his will. He exchanges silver for gold, and then immediately dies. Do you have to report the exchange to the IRS? Of course not. You didn't do it. You didn't even cause it. It just happened, somewhere outside the US, by non-US parties, and then eventually the money generated by this exchange made its way to you.
Now, consider another example: I buy BTC from a crypto exchange in Bermuda. This exchange is scared of the volatility of BTC, and so actually operates by holding ETH, and then using ETH to buy BTC the moment someone sends them e.g. USD. You send USD to the exchange, and receive BTC. Do you need to pay capital gains on the exchange of BTC (which you temporarily "owned", in the "what you'd get as a creditor if they went bankrupt that instant" sense) for ETH? Of course not, for the same reason as above. You never held any ETH, despite being temporarily owed ETH.
Now, let's say you go to an exchange and "buy in" to their trading system by buying some random crypto-token of theirs. You own this token. You then ask the system to allocate a portfolio of other things to you, temporarily, in exchange for loaning the system back this token. If those things do well, you get paid... in more of this token. The system might rebalance your virtual portfolio, but you never hold any of the portfolio assets.
You know what I'm describing?
Why, it's an investment savings account! The "random crypto-token" is "USD held in a TFSA."
No. All of that is just an extremely convoluted way of trying to be cute and get around tax laws, which any judge would immediately shut down just like the "sovereign citizen" stuff. Sorry, but there is no cheat code for taxes.
> a US citizen telling their UK proxy-holder to start moving money from one into the other has nothing to do with US financial regulation, only UK financial regulation
This would be reported to the IRS by the UK financial institution under FATCA [1].
Actually not true. You have to pay gains from coin to coin transactions. For example, let's say you buy 1 BTC with $10k. Then you turn the 1 BTC into 10 ETH. Then, later you convert 10 ETH into 1.2 BTC after the conversion rate between the two changes. At that point you have to pay capital gain on the dollar amount of 0.2 BTC, even if you don't convert any BTC back into USD.
"The index level for CBI is calculated by dividing the sum of the current USD market capitalizations of all constituent assets by the Divisor and multiplying the result by 100."
If anyone's interested in a similar concept, Iconomi does a number of managed funds. I don't believe any are actual indexes (BLX comes closest with market cap weighted - https://www.iconomi.net/dashboard/#/daa/BLX) but they do cover a number of different crypto spaces.
Yes, much more interesting than the Coinbase 4-coin-index, for me at least.
I have a small amount in one of their DAAs, and as a customer, I really enjoy the transparency in their communication. They do regular Reddit AMA's (https://www.reddit.com/r/ICONOMI/), financial reports on Medium (https://medium.com/iconominet), and simply make me feel like there are real and motivated humans behind. Quite rare in crypto.
Couldn't anyone just copy the composition of this fund and buy the same cryptos themselves without paying management fees or being locked in to Coinbase?
The transaction costs would probably add up to more than 2% depending on how accurately you wanted to track the index, plus it sounds like a bunch of work.
(Edit: I'm not saying it's actually worth 2%, which seems excessive)
With a 0% maker and <=0.25% taker fee on GDAX [0], I'd be surprised if you ever came close to paying 2% of your total holdings in fees over the course of a year.
You also have the job of figuring out how much you lose by not rebalancing and then figuring out the interval that maximizes total profit (oh and don't forget to include taxes in that calculation)
"The index level for CBI is calculated by dividing the sum of the current USD market capitalizations of all constituent assets by the Divisor and multiplying the result by
100."
In particular the reconstitution variable:
"CBI will be reconstituted each time that a new asset is listed on GDAX, in order to allocate the correct weight to each constituent asset and to prevent an artificial increase in the index level. Each reconstitution will occur at 5pm Pacific Time on the fifth day that the new asset is traded on GDAX. This is designed to reduce the effect of any temporary price volatility in the new asset in the first few trading days after its listing."
>* Coinbase Index Fund will invest in assets in proportion to their relative market capitalizations and rebalance annually on January 1st. This strategy will track Coinbase Index (Fixed Supply) - a modified version of Coinbase Index which is adjusted to remove the effect of supply increases, so that it can be tracked by investors. For more information, see Section 6 of the Methodology and Construction.
So if you invest in this, you're basically making a bet that 'the flippening' will not occur because you would lose bigly relative to the market if bitcoin tanked since they don't rebalance for a year (which is forever in crypto).
"Index fund" has a meaning if the economy itself the fund is built on top of is stable.
For example, stock market index fund makes sense because stocks are built on top of capitalism, which has proven to work for a long time. Nobody would buy a index fund from a communist country, because time has proven communism is not profitable.
I think people are missing the point if they're investing in crypto index funds, because the whole point of cryptocurrencies right now is that the economy it's built on is extremely unpredictable. The whole point of "index fund" is to minimize risk, but they're not exactly minimizing risk since the whole industry could just go to zero if something radical happens (for example BTC crashes), while not really getting a good deal in terms of upsides which you can get by actively trading.
For most people who lack knowledge I think a better strategy is to invest in aggressive crypto hedge funds which are springing up like crazy nowadays--that is, if you value the potential gains more than potential loss.
And for the rest of those who are risk-averse, I would just keep it in the bank if I were them.
Risk-averse people investing in cryptocurrency is like going to las vegas and thinking they'll make tons of money.
>>For example, stock market index fund makes sense because stocks are built on top of capitalism, which has proven to work for a long time. Nobody would buy a index fund from a communist country, because time has proven communism is not profitable.
That is not what index funds are for, or aren't for, at all.
Parts of bond index funds I own are invested in "communist" countries and I'm glad to have the diversification.
Was there ever? The Warsaw Pact countries had "communist" parties, but the country itself was usually called "socialist", and the propaganda tended to refer to "building socialism", as if they hadn't even finished socialism yet, let alone communism. So "communism" seemed to be a sort of nirvana that people were supposed to eternally strive towards rather than something that they could claim with a straight face they already had.
Anyway, China is ruled by a "communist" party, and I guess they have as much right as anyone else to decide what they mean by "communist", or whatever the corresponding expression in Chinese is.
Of course the lack of consensus about what "communism" means is as nothing compared with the confusion about what "capitalism" means. We can't just follow Marx because Marx was writing about a world (19th-century England) that no longer exists.
As we agree, there has never been a pure communist country. When I mention communist country, I'm talking about this hypothetical communist country. If such an economy did successfully exist, the concept of "money" will be very different in their world.
I used this as an analogy to explain how the concept of cryptocurrency is very different from the gold standard or fiat based money we've been accustomed to.
A lot of people think of cryptocurrency as just another speculative investment asset like stocks, but that's the stupidest thing anyone can do, because unlike stock market which exists on top of capitalist economy, backed by government's legal system, cryptocurrency is a whole new world.
In fact, the whole point of cryptocurrency is that it's "trustless"--if you lose your money to a scammer, no government will help you, it's your fault for being an idiot.
Cryptocurrency and stocks look the same to most people because all they see is a way to get richer, but most of them don't realize they're jumping onto a completely different economy.
This is why I think index funds are meaningless. Index funds in traditional economy can never go to zero because governments will bail them out. Cryptocurrencies in my opinion have a good chance of going to zero (and this is coming from a cryptocurrency believer). And when it does go to zero, there is no government to bail anyone out, and coinbase won't help you either, they'll just move on.
There are index funds for pretty much anything you can build an index out of. Hell, there are index funds on an endless downward spiral[1]. Intentionally.
That's totally in line with my argument. When you say "pretty much anything", that's "pretty much anything tradable with what we consider money".
Cryptocurrency is a completely different class of currency than what we are accustomed to (bank backed money), so this argument exists on a completely different level.
Great to see innovation in the crypto-index space, but as others point out 2% is way overpriced for some administrative efficiencies and a once a year rebalancing. This is a very 'classic' approach to the diversification problem, but as an alternative financial system we should see crypto-focused solutions that move past this.
I'm working with a group of folks on a version of this that re-balances in real-time on GDAX with immediate withdrawls, no pass-thru tax burden, and low monthly fees. If anyone is interested in participating or learning more reach out to me via email to philip at postral dot com.
Dang, I was looking everywhere for something like this just a couple months ago! I ended up digging through the GDAX API docs, writing a node script, and scheduling it [0], but I'd rather not be in the business of script maintenance.
The fees and accredited investor requirement will keep me with what I've got, though :/
It’s been shockingly easy, actually! I do relatively few orders (2 per month) and can get a record of my filled orders [0] on the day I know my buys will occur.
I plug those automated buys into a spreadsheet where I maintain a record of my orders. That spreadsheet does a FIFO capital gains calculation, and I’m good to go.
I must admit, I haven’t sold yet, so I may just be niave about how 2018 taxes will go!
Wow, that doesn't seem wise (at the first glance). These market caps are really easy to manipulate, especially when you only have to do it annually and the exact time is specified. Huuge shorts. Bonus points for doing something like BCH before that to force your coin onto Coinbase (because otherwise people are gonna complain Coinbase is stealing their coins from the forked chain).
As a few others here seem to have hinted at. Although this seems to be not only an interesting idea and also a natural space for Coinbase it appears to be limited in a number of different ways. Has anyone had any other experience with other crypto style index funds such as Crypto20? If so any thoughts, advice or recommendations would be most welcome.
Coinbase also confirmed on CNBC that their transaction volumes are lower compared to the peak in Dec/Jan - matches up well with lower transaction volumes in Bitcoin and Ethereum (despite transaction costs going down), fewer new wallets created daily, and fewer searches (Google Trends).
Warning: you may want to read up on all the major problems Coinbase have had & are having with locking people’s funds up and going unresponsive before giving them actual money.
Frustrating that they’re still launching new products instead of fixing what’s broken.
The index level for CBI is calculated by dividing
the sum of the current USD market capitalizations
of all constituent assets by the Divisor
I don't see how anything is weighted, it's just the sum of capitalizations expressed in USD divided by a weird divisor they control to keep the index smooth
I work at Bitwise Investments (venture backed by Avichal Garg - a YC partner), and some people know us as "the first cryptocurrency index". We think Coinbase releasing an index is great for the space - diversification is super important for a crypto portfolio and it is good to see other people working on the problem. We offer a different basket (Coinbase only offers the coins available on Coinbase), have different business model incentives, and different focuses.
If investing in a diversifed portfolio seems intriguing to you, and Coinbase's offering doesn't fit your needs, you should check us out: bitwiseinvestments.com
This just strikes me as really shady - not because I have any reason to believe that you're not going to get what they're selling you, but that a lot of non-experts in financial products are familiar with the idea of an index fund as a (relatively) safe and responsible long-term investment, when this is clearly neither of those things.
Coinbase even describe this as an investment in their description.
This has more in common with buying a bunch of lottery tickets in a syndicate for a draw that might not even happen. I wish we'd be more responsible than to call buying cryptocurrency investing. We know what it is. It is not this.
If cryptocurrencies are the currencies of the future and they're not just an investment product for people who want to get rich on hype, prove it to me very simply; spend your cryptocurrency.
Really, it's that simple; use all of them to buy something disposable, or even invest them if you want, but if you can't bear the thought of being separated from them for something else then I just don't see how their deflationary model is offset by their ease of transaction. They're supposed to be the medium of exchange between valuable goods and services, they're not supposed to be the valuable good itself.
You are right to be suspicious, but there are a wide variety of cryptocurrencies, some of which are designed to be a medium of exchange between valuable goods and services and some of which are designed for very different purposes. Not all are deflationary. Some are supposed to be the valuable good itself (as a proxy for some physical asset).
Reminder people. Crypto exchange tokens held tokens means counterparty risk.
You don't hold the crypto. They owe you it and they may not pay out due to court orders, bankruptcy, hackings, they think you are laundering money, a terrorist etc.
When Coinbase adds a new coin, will they buy the coins for the fund before or after the announcement? If before, then this fund would actually be useful as a way to front run the market. But I'm guessing it would be after.
The potential for this fund to motivation market manipulation is large: Given that the fund rebalances annually, all market manipulators need to do is 'paint the close' on the year, Coinbase is dictated by their terms to go in and buy up a bunch of the coins rebalance on that 'market cap' that had their close painted, and then the painted coins are dumped.
I.e. eating up ask liquidity close to year end forces Coinbase to buy up that removed liquidity at a premium.
This looks pretty similar to Crypto20, https://crypto20.com/en/. However, Crypto20 is explicit about your token giving you proxy ownership of the underlying assets. I am not an expert so i'm not sure if it's a scam or not, but so far it seems reasonable. Much less stressful than maintaining one's own portfolio, too.
There are many people ("traditional" hedge fund managers) outside of the crypto world that want "exposure" without having to figure out which ones to pick.
This seems like a perfect product for them.
But from what I understand.. If $100 in invested into the index fund, $67 of bitcoin is bought, $27 of Ethereum, $7 of Bitcoin Cash, and $4 of Litecoin.
Yes, by design! The most traditional way of deciding index weights is by market capitalization: if the world has thus far allocated more to Bitcoin than Ethereum, the index will too. Besides concurring with past "wisdom", this method minimizes management overhead. If Ethereum doubles in price tomorrow, so that by market capitalization it should have similar weight to Bitcoin, the index will already be "in position" because the value of it's eth holdings will have doubled alongside.
Price is one of two inputs driving market capitalization - the other being available supply. Since many cryptocurrencies continuously issue new supply, relative supply can change over time. The Coinbase Index rebalances once a year to track this change.
The other cause of rebalance will be if they add members to the index, which would also upset all the ratios.
Most cryptocurrencies (especially the few that Coinbase trades) are still so pegged to the Bitcoin price that it's hard to see any value in this, especially considering the management fee.
Click between any of the currency graphs on their main page - they all move together, just with different base values.
The entire point of cryptocurrency is to control it yourself, by owning the private keys. Instead of investing in ethereum with coinbase, why not invest in a centralized smart contract platform (much easier and even safer as long as you trust the person who runs it)?
Bitwise has better diversification across top 10 currencies based on market cap. Coinbase has lower entry point of $10k minimum v/s $25k minimum required by Bitwise.
Anyone reading this, please spend at least a few minutes considering an alternative investment approach: In my opinion, most HN readers are technical enough that if they read up on the top 10 coins they would find that quite a few of those coins have extremely unconvincing future prospects- I won't name names, but several of the top 10 coins are (in my estimation) based on EXTREMELY UNCONVINCING ideas.
Before jumping on an index fund, a person on HN should at least consider the possibility that they may be better off doing some homework and reading up on the top 10 coins and then only investing in those that have a convincing technological basis- Index funds are not always a sensible strategy for markets that are as new as the cryptocurrency market, since proper price discovery in asset markets is a slow process that requires time.
This design will allow Coinbase for adding some tokens they like and profit immensely from large retail base of investors investing passively in anything that Coinbase will list - becoming de-facto token curation network
Does anyone really think this is a good idea when the crypto market is obviously being heavily manipulated? Specifically by Tether but by others as well.
The behavior during the last crash showed obvious pumping and fake buy walls, and was only halted when Tether started printing EURT en masse.
I wish that I could choose my own percentage weighting (rather than a market cap based weight) and have it rebalance to whatever that is. Seems like a good service for users who couldn't write it themselves.
Oy. I appreciate that the grandparent commenter expresses an idiotic and reckless sentiment, but as a reasonable retail investor myself (primarily in sane index funds like VTI and VXUS), I don't exactly want to cede control of my investments to either a private pension manager nor the government.
However, I would not buy this fund from Coinbase since they are not a neutral player, and the market is not regulated yet. There are still great advantages in owning coins yourself - I expect that, as an average investor, I will certainly be prone to manipulation in some way. Alas, the greatest gains are probably long-since gone. No risk, no reward.