Coinbase recently announced they are launching an index fund. Long term, this is very good for the industry and t he Coinbase Index fund is a great first step. There are concerns, however, and before launching Coinbase should address some of the minor mistakes and major flaws noted below. Done well, history has shown that retail investors will benefit far more from an index fund vs trading individual assets the bulk of bitwisdom coinbase bitcoin Coinbase bitwisdom coinbase bitcoin.
If blockchains are a major revolution, one wants to have efficient exposure beyond just one or two digital currencies or assets. But for an Index fund to deliver this for investors, it has to do the job right.
Coinbase should be applauded for launching a retail index fund. Before they deploy customer capital, Coinbase needs to fix some of these issues and hire an index or factor-based portfolio manager to research and re-design the index rules. Consulting with indexing experts such as the Bletchley folks and getting it right before launch will go a long way towards ensuring that investors will not get hurt.
Some of the concerns with the index fall under the category of quibbles; a couple others we believe are major flaws. Coinbase would be wise to wait until they launch 10 major assets to launch the index fund see BitWise Hold Rebalance frequency is once per year on Jan 1.
Supply fixed in the index. There are massive differences in the rates of supply inflation between assets and the index needs to take them into account over time. Asset managers would consider these to be big issues in any Index fund outside of the digital asset industry. Market capitalization is currently easily manipulated and therefore the Coinbase index will overweight the most manipulated, the most overvalued, and the least liquid assets.
Check out the sources of liquidity for Cardano: If Coinbase decides to list Cardano on Bitwisdom coinbase bitcoin and Coinbase, the Coinbase Index fund investors will automatically own Cardano bitwisdom coinbase bitcoin large proportion — this proportion would potentially be much higher than it should be.
Coinbase needs to work on multiple risk factors such as price discovery, liquidity, exchange concentration and a whole host of other risk factors to properly weight assets. But in the interest of simplicity, they are simply using easily-manipulated price in a bitwisdom coinbase bitcoin market cap weighting.
As written, the Coinbase Index is NOT a fund for investors to get proportionate exposure to the digital asset market. Can you imagine Goldman Sachs launching such a bond index just for things it trades? An Index Fund should represent the market, not the activities of one broker. The Cardano example perfectly illustrates the problem. The very reason it may be profitable for Coinbase to list Cardano on GDAX illiquidity, lack of competition and fat spreadsare the reasons it may create problems for index investors unwittingly buying a high market cap asset that has insufficient price bitwisdom coinbase bitcoin.
Decoupling the decision to list on the exchange from the decision to include in the Index is the right answer. An index fund should have one fiduciary responsibility: This is a major flaw that should be changed. We hope the announcement serves as a job requisition and bitwisdom coinbase bitcoin get good people quickly.
Coinbase needs to address these issues before their retail investors get hurt. Like Coinbase, my partners and I are incredibly bitwisdom coinbase bitcoin about the future bitwisdom coinbase bitcoin blockchain projects to enable assets to flow across the globe in a peer-to-peer, permission-less and programmable set of systems.
We are equally excited about the long-term value to accrue to investors and market participants who hold these digital assets. And bitwisdom coinbase bitcoin are excited about ways to make it easier, cheaper, less risky and more efficient to invest in digital assets, and we think Coinbase has an important role to play in both US and globally.
For those who want to see the Coinbase methodology. As the co-CIO of an institutional focused digital asset management firm, the author absolutely has a horse in this race.
Martin Green is a technology and digital asset investor at Cambrian Asset Management.
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