Cryptocurrency exchange giant Coinbase made waves this week when it announced that it was launching a cryptocurrency index fund. But though lauded as a way to attract new investors to the industry, there are several reasons why investors should think twice before adding this product to their portfolio.
1) It’s Expensive for a Passively-Managed Fund
Though structured as an index fund, this product charges an annual management fee — two percent — that most investors would deem excessive even for an actively-managed mutual fund or ETF.
That’s a lot for a fund that primarily exercises a buy-and-hold strategy.
Unlike cryptoasset hedge funds, which are actively-managed and give investors exposure to assets in which the fund managers have high conviction, Coinbase’s product is a passive fund designed to track the market cap-weighted performance of the cryptocurrencies listed on GDAX.
While it’s true that the Coinbase Index Fund is cheaper than Grayscale Investments’ similar Digital Large Cap Fund, which charges three percent per annum, it’s still a steep cost for a fund that users can easily replicate on their own.
2) You Can Easily Replicate It — For Free
The high cost of this cryptocurrency index fund is even more unjustifiable given how simple it will be for individual investors to replicate it in their own portfolios — for free.
It’s nigh impossible for the average investor to assemble and maintain a portfolio that tracks the performance of a traditional index fund — the S&P500, for instance — but Coinbase’s fund currently only includes four assets: bitcoin, bitcoin cash, ethereum, and litecoin. Moreover, these asset allocations are publicly available and only rebalanced once per year.
Investors can use this information to easily replicate the Coinbase Index Fund in their personal brokerage accounts and then transfer the assets into Coinbase Vault — the company’s free, long-term storage solution — for added security and to segregate them from your other holdings.
In other words, fund investors more or less paying for the “index fund” wrapper — and that wrapper does not come cheap.
3) It Violates the Ethos of Cryptocurrency
Finally, the fact that the Coinbase’s cryptocurrency index fund is restricted to accredited — e.g. wealthy — investors violates the ethos of cryptocurrency.
Bitcoin was conceived as a way to democratize the financial system by taking power away from Wall Street and distributing it to everyone, irrespective of net worth.
However, as has become the case with most initial coin offerings (ICOs), the regulators have determined that ordinary investors should not be allowed to purchase products like the Coinbase Index Fund — for their own protection, of course.
To its credit, Coinbase said that it is working with regulators to achieve the ability to make its asset management products available to retail investors.
However, investors who truly view cryptocurrency as a tool to democratize the financial system should consider whether they want to allocate their assets into a product that reinforces the institutionalization of the industry.