Coinbase Index Fund
blog.coinbase.com
blog.coinbase.com
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.
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.
([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.)
I came up with some more they do for 2%/y:
* Buy more coins when their fund expands
* Secure the shit out of those private keys
Well I hope they are doing that already.
Initial coin buy is part of those 4 / yr.
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.
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.
determination of value for forks should be made by us. the point is that it's free money, that an exchange could well be pocketing for itself.
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.
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.
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.
If you want to learn more about indexing methodologies for cryptocurrencies, you should check out our website: https://www.bitwiseinvestments.com/index
This thing is rebalanced only once a year. Would take 5 minutes to actually duplicate this fund since it's only 4 coins....
For many people that is worth 2%
For what is pretty much a passively managed fund it seems hard to justify such a high fee.
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.
Why do you say this? (The part I added in bracket part is unambiguous in your sentence.)
Coinbase doesn't have its own coin, for example. (That is the main thing that I would think would make someone "not neutral".)
Can you explain your thinking, or tell me what facts I'm missing?
... 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.
[1] https://am.coinbase.com/documents/cbi-methodology.pdf § 2.4
"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."
Here is the link to the whitepaper for those interested: https://static.crypto20.com/pdf/c20-whitepaper.pdf
"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.
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!
> Users will always own their own coins.
To be fair, users do not actually own the coins if Binance owns the coins.
Sounds like a cool bot though, and great looking site! I signed up for the private beta. Looking forward to the open source!
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.
Looking forward to it! If only I wasn't 15k in line :D
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.
What am I missing?
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.
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.
I didn't know an index fund was just a bundle of stocks.
1. Log into Coinbase
2. Buy [BTC, ETH, BCC, LTC] with [62%, 27%, 7%, 4%] weights
3. Check back in one year and rebalance
That's it! As an added bonus, you just avoided 2% fees and can "redeem" anytime.
Dunno if an unused payment channel means more than stuff like that.
(is it just me or is HN becoming more unreadable due to increased usage of slang?)
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.
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.
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.
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.
[1]: Or more likely loss.
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.)
More information on capital gains distributions can be found here: https://www.investopedia.com/terms/c/capitalgainsdistributio...
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.
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.
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.
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.
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.
What we really need is the real consequences for fraud / false financial claims.
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.
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.
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.
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.
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.
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".
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.
* "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.
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 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.
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.
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 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) So what lottery odds are not allowed?
2) Can you name a single lottery with odds in your favor?
Cause with cryptocurrencies, so far, the investors have made money on average.
2.) There's been multiple cases where lotteries were -accidentally- setup such that the odds were in the favor of players if they pursued the right strategy. Here's one: https://www.theatlantic.com/business/archive/2016/02/how-mit...
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.)
Thanks for saying this. So true.
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).
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.
Edit: Apparently they only rebalance once a year? In which case, nvm.
0. Average 52-week premium 56.18% https://www.bloomberg.com/quote/GBTC:US
Also, the minimum investment and management fee found here don't look too appealing:
Minimum Investment: $10,000
2% annual management fee
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.
Also maybe by being one of the first to offer such a thing, they can charge higher management fees.
Well if you own the exchange the effective transaction costs are 0.
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).
For alpha, or the attempted pursuit of it (or a specific risk-return and liquidity profile). The point of index funds is their lower cost.
What would be a normal transaction cost by financial standards?
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.
Using a log scale implies that the growth rate is dependent on scale.
Depending on your opinion of the market, choose whichever you wish
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.
It truly is the era of the pump&dumps
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
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.
https://www.google.com/url?sa=t&source=web&rct=j&url=https:/...
"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?
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.
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.
Germany recently passed a law that excludes small crypto transactions from tax reporting. The U.S. already has this for foreign currencies.
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.
On a yearly basis the only two coins among the top coins that correlate less with the coins listed in the index are Ripple and Stellar.
Source:
http://cryptoport.net/blog/diversification-i.html (my blog, just scroll down to the correlation matrices)
EDIT: "don't correlate closely" -> "correlate less"
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.
For someone unknown definition of “balancing.” (Rebalancing and re-weighting or re-constituting are different things.)
https://am.coinbase.com/documents/cbi-methodology.pdf
Edit: sorry, this came across more aggressive than I meant for it to be!
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.
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.
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.)
This would be reported to the IRS by the UK financial institution under FATCA [1].
[1] https://www.irs.gov/businesses/corporations/foreign-account-...
No, they don't. They're no more "outside it" than gold or silver are.
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."
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).
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. :)
From the Coinbase literature:
"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."
Also Crypto20 does an index of the top 20:
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.
(Edit: I'm not saying it's actually worth 2%, which seems excessive)
[1] https://am.coinbase.com/documents/cbi-methodology.pdf 6.10
https://am.coinbase.com/documents/cbi-methodology.pdf
Edit: Looks like someone found the same info.
"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).
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.
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.
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.
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.
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.
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.
The fees and accredited investor requirement will keep me with what I've got, though :/
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!
On Day 40 the total value is 388.58$.
"We’re working on launching more funds which cover a broader range of digital assets. Stay tuned."[0]
[0] - https://twitter.com/coinbase/status/971156625951145985
Frustrating that they’re still launching new products instead of fixing what’s broken.
Coinbase Index is a measure of the financial
performance of all assets listed on GDAX,
weighted by their market capitalization.
The index level for CBI is calculated by dividing
the sum of the current USD market capitalizations
of all constituent assets by the Divisor
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
Also, we're hiring!
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.
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 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.
I.e. eating up ask liquidity close to year end forces Coinbase to buy up that removed liquidity at a premium.
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.
Bitcoin - 62% Ethereum - 27% Bitcoin Cash - 7% Litecoin - 4%
Doesn't that make it so that the market favors incumbents?
The other cause of rebalance will be if they add members to the index, which would also upset all the ratios.
Click between any of the currency graphs on their main page - they all move together, just with different base values.
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.
A good currency is a bad investmenthttps://www.forbes.com/sites/jessecolombo/2013/12/19/bitcoin...
* Bitcoin 62%
* Ethereum 27%
* Bitcoin Cash 7%
* Litecoin 4%
So don't expect any of the more obscure cryptocurrencies.
The behavior during the last crash showed obvious pumping and fake buy walls, and was only halted when Tether started printing EURT en masse.
The whole thing is insane.