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Comment by justinalanbass | Hacker News Reader

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.

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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!

> The bot requires users to have a Binance account ... (trade only, no withdrawal access)

> 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!

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.

That's awesome. I definitely want to move to decentralized exchanges ASAP to minimize the trust required for these kinds of transactions.

Does that mean you also have to pay transaction fees for every trade, and wait for confirmations, etc.?

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.

What are the tax implications of owning your own coins when trading, compared to someone else owning the coins but giving you rights to it?

Identical

This sounds like a pretty interesting application of crypto20, when are you planning to go live & do you have any early access?

Looks cool, can't wait for the early access!

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.

Would be great to see Purchasing Power Parity [0] more often in web applications which offer services and product for people around the world :)

- [0] https://github.com/rwieruch/purchasing-power-parity

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 concept is quite interesting and I like what I see so far! Signed up and attempted to share with friends. The referral link does not seem to work.

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.

is this list of crypto Index Funds complete? https://en.bitcoinwiki.org/wiki/Index_Fund

DigiCor.io is also a well established crypto index Fund

DigiCor Asset Managment is also a well-established crypto index fund.

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 fixed it! Yes I will add it in the e-mail. Thanks for the heads up :)

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.

I've found that IRS requirement is really difficult to comply with. Does anyone have any tips for tracking trades?

I own no cryptocurrencies, and I have no idea why it is any more challenging to track than trading stocks, you buy at one price and sell at another.

What am I missing?

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.

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...

Is mining income taxed before conversion to USD? What price would you be expected to use?

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.

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.

taxes? lol...it's crypto so YOLO

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?

If you want to buy this Coinbase index fund, just do this:

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.

Edit: don't do this on coinbase, buy on GDAX instead (same login as coinbase)

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.

Note that I conditioned the advice with "if you want to buy this Coinbase index fund." The fund only has those 4 coins.

Oh. I thought for some reason that their index included the top 25.

Interesting mix hey (theirs). I still wonder why bother with 4% LTC. You'd be better off doing 50, 50, 0, 25 imho.

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.

LTC was just surpassed by BCH in transaction volume. It's creator peaced out two months ago.

Dunno if an unused payment channel means more than stuff like that.

peaced out? Like dead, unconscious, or just left?

(is it just me or is HN becoming more unreadable due to increased usage of slang?)

He (claims that he) sold/divested all of his LTC right around the peak in December because he wanted to be neutral in its development.

He also then donated the proceeds to Litecoin development.

(I have been here 4 more years, so your aside doesn't withstand basic reasoning. I would also caution you that it walks the line of HN policy)

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?)

That's neat but you would have to pay 4 separate transaction fees each time you buy or sell.

Not if limit orders are placed on Coinbase's GDAX exchange

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.

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.

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?

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.

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.

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.

> Coinbase is charging a 2% fee for what amounts to automating a max of 4 transactions a year.

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

> 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.

* Secure the shit out of those private keys

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.

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?

coinbase's handling of Bitcoin cash was far from sane. in fact it was generally understood to be a shitshow.

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.

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.

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.

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 Bitwise HOLD10 (where I work) handles a lot of the hard work around rebalancing and taxes.

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.

If you want to learn more about indexing methodologies for cryptocurrencies, you should check out our website: https://www.bitwiseinvestments.com/index

>Coinbase Index Fund will invest in assets in proportion to their relative market capitalizations and rebalance annually on January 1st.

This thing is rebalanced only once a year. Would take 5 minutes to actually duplicate this fund since it's only 4 coins....

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.

For many people that is worth 2%

2% is a massive fee. That is almost reaching hedge fund levels.

For what is pretty much a passively managed fund it seems hard to justify such a high fee.

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.

The Bitwise HOLD10 (run by Bitwise, where I work) rebalances every month.

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.

It’s easier than that. Just buy the 4 coins in their current market cap proportions and revisit once/year.

>since they [Coinbase] are not a neutral player

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?

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).

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?

> ... On the blockchain?

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

[2] https://en.wikipedia.org/wiki/Libor_scandal

The greatest gains are not long since gone or we'd already have perfectly working dApps.

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."

Here is the link to the whitepaper for those interested: https://static.crypto20.com/pdf/c20-whitepaper.pdf

his transparent is this 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.

Why don’t you like that it trades at a premium? It is a close-ended fund.

There's also the Dutch https://triaconta.com which offers the Combicoin as an ERC20 token on the Ethereum network.

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.

Is simply buying the top 25 cryptocurrencies duplicating an index fund?

I didn't know an index fund was just a bundle of stocks.

Binance lets you get NEO under 1 unit. and they workout the math so you a proper share of the gas as well.

even on cryptopia you can buy a fraction of NEO

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.

There are also great disadvantages from owning coins yourself, like physical security.

What made it not worth it? No real overall gain in value? Not worth your time?

How's $6700 relevant?

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.

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