Index Investing Comes To Cryptocurrencies

December 14, 2017 What do you say to the typical index fund investor who looks at that fee and considers it high?
Compared an S&P 500 or a Vanguard Total Market fund, 2.5% is high. But I think an important reality is that cryptocurrencies are not U.S. equities. It's still developing and costly to operate it. Cryptocurrency was a $15 billion asset class at the beginning of this year. It's still only $400 billion today.

U.S. equities is a $25 trillion asset class. It's been around for over 100 years.

With cryptocurrency, we're still figuring out who the service providers are going to be. A lot of the underlying components, like custody, are very expensive and going through the formative development stages. The space, the protocols themselves, as well as the different intermediaries are still developing and standardizing.

We want to play a role similar to Vanguard for cryptocurrency. Our model is low cost, inclusive, high volume. We want to provide market access vehicles, not hedge funds. Are you looking into launching an ETF?

Horsley: Definitely. A lot of people are being excluded today by the practical complexity of having to decide which coins to buy, managing a portfolio, and also because crypto hasn't been securitized. You can't buy it through your broker and you can't buy it through your wealth manager, which are the two channels that most people use to participate in asset classes.

You can talk to your financial advisor about investing in the Bitwise HOLD 10 Index fund. But a public fund is something that we want to do. What’s your price outlook on bitcoin and cryptocurrencies in general?

Horsley: We're optimistic about the long-term potential of cryptocurrency, but don't have a short-term price target to share. There’s currently no agreement or consensus around how the industry’s going to do fundamental analysis on cryptocurrencies. Any price targets you hear are coming from people who’re using different logic or rationales for arriving at those targets.

It’s also very important to understand if the person who’s giving a price target has a financial incentive. So often in cryptocurrency, people who’re speculating about the future have an incentive that may or may not be disclosed.

Our view is that we’re optimistic about the long-term potential of cryptocurrency. We think it could be one of the most important developments of the coming decades. It’s by no means guaranteed to be that.

This year, prices have appreciated by over 2000% and trading volumes are up over 5000%, but I wouldn't expect that to continue indefinitely. That being said, cryptocurrency isn’t just a U.S. phenomenon; it's a global phenomenon, so the opportunity is larger.

Another thing worth mentioning is that cryptocurrencies are software. Typically, new software technologies are developed and brought to market by private companies. Those companies are often private for a decade. Airbnb, for example, is still a private company.

Cryptocurrency is a fascinating phenomenon, because it’s still software that's in the early stages of being developed and brought to market. But it's being publicly traded from day one. Can you imagine if Airbnb stock were traded from its first month of existence, how volatile and crazy that would be?

That’s the way I think about how things are playing out with cryptocurrencies, which is that these are very young, nascent, developing software. It's just that they're publicly trading far earlier than new software projects typically are. How much of an investor’s portfolio should they have in cryptocurrencies?

Horsley: Everyone has to consider for themselves what makes sense given their risk tolerance, their goals for their portfolio, their time horizons for liquidity, etc.

I’ve heard a wide range. A number of financial advisors caution people against investing in crypto at all. If they do recommend investing in cryptocurrency, they generally caution them not to go above 1-2% of their portfolio. Although there are, of course, some people who go way above that.

What you often hear from financial advisors right now is, be very cautious and expect to lose your money. But if you’re going to do it, make sure it's a small allocation.

Sumit Roy can be reached at [email protected]

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