Index Investing Comes To Cryptocurrencies

December 14, 2017

Hunter HorsleyHunter Horsley is co-founder of Bitwise Asset Management, a San Francisco-based startup that aims to bring passive investing to the cryptocurrency space. In October, the firm announced the creation of the HOLD 10 Index―a market-cap-weighted index that tracks the largest cryptocurrencies, including bitcoin, ethereum, litecoin, ripple and others―covering 85% of the cryptocurrency market.

On Tuesday, the firm launched the Bitwise HOLD 10 Private Index Fund based on the aforementioned index. Bitwise says that it is the world’s first cryptocurrency index fund. recently spoke with Horsley, the firm’s CEO, to discuss the index, the fund and the outlook for cryptocurrencies in general. Tell me about your new HOLD 10 Index.

Hunter Horsley: It selects the top 10 cryptocurrencies by market capitalization and weights them according to their size, similar to the S&P 500. But cryptocurrencies are different than equities, so while analogies to concepts from other asset classes often get you 80% of the way there, they weren't designed for crypto.

For example, market cap is a useful way of thinking about the value of a cryptocurrency protocol, but there are issues. In equities, the supply of shares of a public company is not always changing. When it changes―if there's a new issuance or a buyback or a split―there are rules about how widely the company has to publicize it, and it all happens on a specific date, at a specific time and the whole market knows.

However, most cryptocurrencies have their supply changing constantly. The rate at which they issue new supply―if it's logarithmic, or it's linear, or it's exponential, or if they have a deflationary regime for supply—is usually one of the most important characteristics of a cryptocurrency.

If you're looking simply at the current price times the current outstanding supply, while that works really well for equities, for cryptocurrency it doesn't work so well, because you're ignoring the fact the supply is going to be changing.

That’s why we take what we call an inflation-adjusted market cap, where we add in some of the future of supply. Specifically, we add in what we call five-year inflation-adjusted supply, or the next five years of publicly known and scheduled supply changes.

We also rebalance and reconstitute monthly, which is more frequent than the S&P 500, which rebalances quarterly. We want to avoid rebalancing so frequently that the index gets caught up in temporary price action, but on the other hand, we don't want to do it so infrequently that the index becomes not current. Things can change so rapidly in the cryptocurrency market, so you can’t wait a year. If you look at the top 10 cryptocurrencies from a year ago, it's a very different set than it is currently.

The back-tested turnover on the index is about 20% a year. For context, the iShares Core S&P 500 ETF (IVV) has turnover of 4% annually. The iShares Russell 2000 Small-Cap Index Fund has turnover of 39% annually. Your newly launched cryptocurrency index fund will track the HOLD 10 Index. Tell us about the fund. There have been some regulatory hurdles that have prevented a bitcoin ETF from coming to market. How does your fund get around those?

Horsley: This first vehicle is a private fund, so it is limited to accredited investors. We want to make investing in cryptocurrency possible for anyone and easier for anyone, so we don't want to have that limitation, but that’s the case until we can introduce a public version of the fund. What type of fee structure is the fund going to have?

Horsley: A lot of actively managed crypto funds are charging 2/20, but we’re only charging a flat 2.5% management fee.


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