Coinbase Index And Coinbase Index Fund
First a disclosure for all the disclosure enthusiasts who hound me here and on Twitter to disclose things that are well known to most readers in hopes of turning this blog into a legal document: USV is a large investor in Coinbase and I am on the Board of Coinbase.
Ok, now that we have done that part, here’s the news that came out yesterday and I want to talk about today.
Coinbase launched an index and an index fund yesterday:
Announcing Coinbase Index Fundhttps://t.co/ca98IKrzUv
— Coinbase (@coinbase) March 6, 2018
The Coinbase Index is a measure of the financial performance of all assets listed on Coinbase’s GDAX exchange, weighted by their market capitalization.
And the Coinbase Index Fund is a way to buy that index without having to buy the individual assets that make up the index.
This blog post has more details on both.
To start, the Coinbase Index Fund will only be available to US-resident, accredited investors. Coinbase is actively working on launching more funds which will be available to all investors and cover a broader range of digital assets.
To me, this is all about broadening the appeal of crypto tokens to a wider range of investors than are currently in the market. Making it simple for the average investor to get exposure to this emerging sector is a good thing and I am pleased that Coinbase is broadening its offerings to reach people it is currently not serving.
2% management fee for a market cap weighted index fund that rebalances annually…..smh…..well, i guess if you can get away with it you might as well. fees on this should be under 0.5%, at 2% a lot of folks will be better off doing it themselves.
True, but “a lot of folks” find this investing space obtuse and won’t bother. What you’re saying is logical–and it’s what I’d do–but the average investor would balance that 2% against the “crazy wild increases in bitcoin and I want in on that” stuff.
yes, i agree they can get away with it. i do regard this behavior as more akin to exploiting customers rather than serving them in good faith.
To their credit, they have far less scale than Vanguard doing an S&P Index, and have to deal with a more complicated and riskier custody issue.
aren’t they going to be taking a bid/ask market making spread on top of the 2% fee? and i agree that the nuances of the crypto market, and the fact that almost everyone is miniscule compared to vanguard, mean that transaction costs in aggregate will be higher (though i expect they will get that through other channels, most notably the aformentioned spread, but perhaps also things like selling order flow data). and remember, vanguard is charging something ridiculously low like .08%. coinbase honestly needs to charge 25X what vanguard charges? lastly, is a market cap weighted index fund really a good idea for crypto, or is crypto more akin to venture capital in which there will be very few winners with very high returns while everyone else loses — and thus an index fund is the completely wrong approach?
This is an index only on coins listed on GDAX which have been approved, so it’s an index only on the winners and it means Coinbase is actively deciding what gets added to the index. They have outlined that framework on their website.
they’re only trading high market cap coins, probably because of the execution risk in illiquid coins. so they’re market weighting within a set that is already determined by market cap. 2% is a premium fee, and they are providing extremely rudimentary management for this fee.
I’m guessing they’ll sell 0.5% – 1% immediately – or maybe they’re taking USD directly…
If you are right, pricing over the value will simply invite everyone and their uncle to compete under the assumption (correct or not) that ‘hey we can do that for less’. And importantly: Sooner rather than later.  Nothing attracts competition faster than napkin calculations that spur people on for a piece of the pie. Only exception is generally if you have a monopoly, luxury good or some unique advantage that you can exploit. To echo Chris Farley in Tommie Boy ‘If I’ve seen it once I’ve seen it a thousand times’.
i agree, i think this move is penny wise, pound foolish. since they’re making money on the spread, and since this is not an active fund (i.e. no real discretion involved, just diversification using generic rules) this should be very close to free. instead they want to charge 2% for what amounts to automating a few clicks….
“Greed, for lack of a better word, is good. Greed is good” – Gordon Gekko.
Yep and he was exploiting information that he had that others did not. Other principle that people today don’t keep in mind is to not brag or educate your competition other than misinformation. That has been entirely lost by a generation raised on the internet. The idea that you now let employees openly talk about what they do and how they do it so that your competitors can get a head start is quite ridiculous by yesterday’s way of operating.
Agreed. To me, one of the biggest challenges for Coinbase will be to avoid “insider trading”. Since Coinbase can essentially make a market for a crypto token, they have early visibility into what ones are going to take off. Ripple is a great example. Rumors it would trade on Coinbase sent it up and then crashing down again. This is simply too much power centered in one place.
No its not. But its a good movie line.
Just kidding, of course. It is called “maximizing profit” and it leaves room for competition.
Darn. Thought it would be more Vanguard like.
Curious what you mean by that. Are there fees more 0.5% and lower?
Someone will come behind them shortly I’m sure.
I have been a skeptic of cryptocurrency/cryptoassets for years on this blog, and continue to believe that they will eventually collapse. So – the management fee is ridiculous, but to my mind there remain bigger questions about the underlying cryptoassets.If that makes me sound ignorant, so be it :-).
“Ridiculous” is all relative. If the wild swings continue someone is gonna make a lot of money where the fees are inconsequential, while others will likely take a bath. Why anyone would invest in such volatility is beyond me, unless you’re a true gambler. Better odds in Vegas.
is there one collapse scenario, or several possible scenarios? How do you see it happening?n.b. i don’t see it happening, unless someone comes up with the ability to crack key encryption. That’s the black swan.
Things that should make you skeptical about my skepticism:1. The fallacy of consistency bias on my part. And being aware of this fallacy will not protect me from it (knowing about our cognitive biases does not save us from them).2. Dunning-Kruger effect on my end.My disconnect is with the “scale” of the opportunity. Often, the advent of the World Wide Web is compared to this. A few days back, Fred compared blockchain to innovations like the PC, the Web or the mobile.I don’t see the scale. There is no significant legal end-user paying demand for the attributes of anonymity and decentralized trust ( I think decentralized trust is a better descriptor than trustless disintermediation). The hype behind this is being driven by the “supply-side” (investors and entrepreneurs), with the end user “demand-side” noticeably silent.Cryptocurrency/Cryptoassets can certainly survive as investments that are”collectibles” – in this class, I would put alternative investment classes such as art or wine. But the massive over-hype and the existing market values commensurate with that hype imply a large, meaningful scale of adoption / alternative to the existing monetary system.I believe you will soon see overwhelming amount of regulation come to bear in this space, right now is just the beginning of the beginning. This will lead to the collapse of these cryptoassets.I again come back to the point of “scale”. In the future there might well be specific, well targeted applications that are deployed in enterprises using these protocols. I am not clear that this will translate into the current market value of these coins.
Upvoting you, my friend, only for the “so be it” existentialist part.I am in the process of converting into a conservative crypto evangelist and have been practicing this questions on skeptics: ► What do you think or feel the money in your bank account is? ► Where is it “stored”? ► Why is it yours?cheers!
Ha, well played, but the questions are simply too broad Lawrence. Each could be answered in more than one way that may not be relevant to the intent of your question. Can you be more specific ?BTW, if by “conservative” here you meant “cautious”…a conservative evangelist sounds a bit like an index fund with a 2% management fee ..:-)
I think that the questions are very precise. The intent is to initiate a conversation softening the concept of fiat currency and to show the similarities with crypto currencies.Why do we trust some 1’s and 0’s holding our balances over other implementations is based only on trust. We trust the current system, in spite that it has practically any real insurance against a crash, in spite that it is error prone, expensive and constantly abused.Yes, I am using conservative in that sense. Want to invest? Do it only in the top 4. Do we need intermediaries? No, but we do need agile exchanges.I don’t like very much the concept of an crypto exchange closely related with a crypto fund and 2% predates the low operational cost that crypto has or should have.
The monetary system was first implemented by Kings of Kingdoms who wanted to create and support/enforce order and efficiency. This was from the barter system to currency system. The biggest problem with this is the King could print money (or anyone with the skill/capability to forge coins etc) – however they could maintain this order and their position if they were directed enough resources/printed money to areas that bettered society; governments now can print money to do the same, unfortunately there are industrial complexes and unskilled thinkers who direct huge amounts of this printed money to counter-productive/damaging/violent activities such as war. This is what every crypto-asset structured as a Ponzi-Pyramid scheme is as well, a way to print money via distributing an unreasonable amount of funds weighted towards early adopters – except crypto-assets structured this way are far more dangerous and powerful (in a bad way) because of their decentralized global nature.Money is stored in 1s and 0s by trusted networks of organizations who depend on being reliable – and are regulated by democratically elected governments differently in different nations, in Canada very well where we only have a small handful of banks – in the U.S. a very different landscape. This works – though there is an evolution to this I have recently been realizing that will support true global collaboration (and not based on incentivizing early adoption via Pyramid-Ponzi scheme).It’s yours because it is what the trusted networks that are reliable and maintained and trusted to do keep a ledger to say it is yours, and they have relationships with other trusted organizations (who can be found to not be trusted and then dealt with) who will update communicate to verify funds, etc; the high costs that banks charge is because of capitalism’s structure, in part because of regulation requiring a certain base costs/fees to operate – which has kept the systems relatively inefficient and allowing banks to be lazy and skim easy profit layers with ridiculous fees that shouldn’t exist to the level they do; certain countries are better than others.
Very interesting answers Matt.The network of trust is the foundation of any currency and that is what crypto tries to automate at a lower cost. In theory the crypto trust network is less prone to manipulation. This poses a problem because central banks rely on having control over money emission and interest rates to manage the economy. How or will these controls will be implemented in crypto are interesting questions.And from your answers, yes, the great missing piece in the crypto puzzle is regulation.
Thank you Fred.This has been a hole and I’ll check it out.
I like this better than the blind top-10 coins by market cap index approach bc there’s still some filtering by Coinbase, which makes sense for retail investors.
An accredited investor requires a net worth (excluding residency) of $1M. Are accredited investors considered “avg” these days? Only approx 10% of US pop can qualify. Plus, I would assume folks with that minimal net worth are perhaps more “sophisticated” than the “avg” investor. Is this a product that accredited investors are interested in? Will be interesting to see how it does.
plus, I would assume folks with that net worth are perhaps more “sophisticated” than the “avg”I don’t think so actually. That is based on an assumption that someone with those assets has gotten there by either earning it (not inheriting it) and/or from previous financial prowess. We know that isn’t the case. I read a story over the weekend in the NYT about a woman, a former exec at Citibank (iirc something like that), who sold stock in the 90’s (iirc) and bought a house in the Hamptons for $7m with that money. The house is now worth (they say) $14 million and the stock, if she kept it, would have tanked. Big real estate investor? Sophisticated? I don’t think that is why she is sitting on a possible 7m gain now. Next she bought BofA stock when she took a job there and lost $500k. Bad at stocks? No. She gambled wrong (reason being she had just taken a job there and wanted to be ‘all in’). That is not sophisticated investing. Is she higher level because she has higher net worth? No, but yes she probably does have access to people with a clue at that bracket. I don’t think that assets of a bit over 1m buys you any of that though.
This is a home run in my opinion. To me Coinbase always had the ability to become the “Dow Jones” of crypto. The “Coinbase 50 went up 200 points today.” .etc. This has been happening in a de-facto sort of way in the media.Of course, this is just the beginning of these types of instruments. However, while I understand the legal need to limit to accredited investors, it does fall into the “tools for the rich to get richer” category. But of course, I want in. ;>)
I hate the space totally, think it is total hype, but like you, have a totes love affair for Coinbase.Great name.Great initial concept.Great initial investors.Great execution on the concept.Index funds worry me in the same way that sub-prime mortgages worry me – no on is at the helm.This is a home run, for as long as crypto is a thing,
“This is a home run, for as long as crypto is a thing,”Which will be how long?
End of next year: it does a Y2K sort of fizzle (although a lot of young techies prefer it and build on it but the currency side is never used)Its key attributes are:- anonymity (never been mainstream, never will be)- elimination of middlemen (no business model)- low cost (it would be the perfect platform for micropayment, but no one ever adopted micropayment b/c no one wants them)To be clear, I am a massively optimistic, top down marketing goober who should get totally swept up in the awesomeness of The Chain.And I would, if I could find a single Normal who told me “That would be awesome.” or “I really could use that.”
As a person trying to figure out a possible crypto strategy for my company, i agree 100%. It is worse than web 1.0 when you put a .com on your name and then went public. (With the VCs driving the bus.)What I admire about Coinbase is that they are the “picks and shovels” of the crypto gold rush. So they can make money coming and going. My judgement about them is completely independent from my faith in crypto. Will crypto run out? Possibly. But we still have Levis.
Except for this:If a new asset is listed on the exchange, it will be automatically added to the fund.That is quite different than the DJI
Absolutely. I just meant in theory. This is more of an index fund where they control the basket and the index. If crypto stays, they are clearly in a great position.
Noted https://cointelegraph.com/n… As mentioned in “Pay Attention To The Package” I do like the Patrick Byrne / Overstock team mindset [https://www.crowdfundinside…] where the team have created solid foundations for the near offshore future. For those interested: Bitcoin’s Tokyo Whale Sold $400 Million and He’s Not Done Yethttps://www.bloomberg.com/n…
That was great news. It further validates the direction of the market towards more accessible investment options, also like my index WMX that launched last October. Interestingly, WMX is available in over 160 countries, except for the US and Canada.
For reference, this other source charges 2.5%: https://www.bitwiseinvestme…
.I assume this an SEC registered Reg D “investment fund.”As a Director of an affiliate, you may want to review the rules on “general solicitation” and prohibitions against public solicitation by insiders.If this is a Reg D deal, then it is a “33” parent deal.Inside baseball gibberish, but important.I am assuming there is a redemption fee?JLMwww.themusingsofthebigredca…
More centralization of decentralized technology, pffft…Coinbase is a necessary step in the evolution to truly distributed exchanges (DEX) and the equivalent decentralized smart contract products such as index funds. Lots of progress in the last year and we should see huge progress by years end.Here are a couple of decent articles on the subject.https://media.consensys.net…https://medium.com/@thebloc…
What is the methodology to add or remove constituent assets from the fund?… answering myself reading… https://am.coinbase.com/doc…Any specific reason why Ripple is not in the DAX?I ask this because my experimental portfolio thumb rule is the top 4 by capitalization weighted by cap. Almost the same as the DAX minus Ripple.Purists don’t seem to like Ripple. I think its hybrid nature is an advantage.
When I hear Ripple I can’t help but think of the classic Grateful Dead song or this. A wine of choice among pre-college and the destitute back in the day, says Wiki. I qualified on both fronts. Nasty, but effective. I’ve thankfully evolved to Brunello and Barolo.https://vignette.wikia.noco…
Haha.. been laughing for 3 minutes or so. Talk about branding. https://uploads.disquscdn.c… I found another one!ref: Modern Drunkard Magazine (haha..) https://drunkard.com/55-dea…
There was a time when broker-dealers were packaging and repackaging products in baskets and derivatives that were meant to give investors easier/broader access to new or remote markets. Dealers knew that those investors who need to be facilitated in getting access, are the ones better placed to be ripped off. In fact these products enabled financial institutions to earn disclosed fees on top of undisclosed ones, to unload principal risk and to grow the customer basis among those fools who’d be ready to pay any fees and cost. That was common pre-2008. After the GFC these approaches have mostly been sanctioned in the financial markets. In Europe there have been “detox” regulations to ban the worst practices. And the index you are talking about is quite a junk one. This is in many ways what a good benchmark for an index fund should never be. It’s a manifest to conflicts of interests: -the fund manager, the administrator of the basket, the contributor, the (sole) broker in the underlying …are always the same entity! And they’re earning fees on top of fees at each level of it. Then there’s lack of diversification, lack of transparency, high correlation of components… shouldn’t we expect something more noble from people like you or is the Wolf (of Wall Street) just changing home?Happy to discuss best practices in the field when you are. In any case, pls have a look at the esma benchmark regulation, and take the best out of it.