For much of the last decade, bitcoin and the world of cryptocurrency has evolved from a strange digital currency favored by hackers, nerds and shady characters to a mainstay on the global financial system. As the price of bitcoin is many times more than it was years ago and as more and more financial products tied to and backed by cryptocurrencies become available and as more legitimate companies backed by big bucks and important individuals enter the crypto-ecosystem, it has become evident that cryptocurrency is here to stay. The development of cryptocurrency index funds by traditional players in the world of finance is a crucial and important step as the ecosystem continues to build.
Cryptocurrency indexes are important because it could lead to the availability of low cost index funds that make it extremely easy for investors to gain diverse exposure to the cryptocurrency asset class. With major companies like S&P getting into crypto indexes, it will be fascinating to see when major ETF and fund companies like Fidelity, Vanguard, Schwab and others roll out index funds that track such an index. This would vastly increase the ownership and exposure of crypto assets with the general public.
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Just as companies such as Coinbase were extremely important in enabling regular users to buy and own cryptocurrencies such as Bitcoin (whereas before you had to have nearly the skills of a computer programmer to figure out how to acquire and manage Bitcoin assets), having cryptocurrency index funds in the space will be another huge step in the space in terms of normalizing crypto among investable assets and opening the doors for a new batch of crypto enthusiasts.
Cryptocurrency index funds
Bitwise has a series of cryptocurrency indexes and index funds which follow said indexes. For instance, the Bitwise 10 Crypto Index Fund. This fund trades on the OTC markets under the ticker BITW. Because it trades on the OTC markets, some investors might be nervous about buying shares. Lack of trading volume can lead to more volatility.
Coinbase rolled out a Coinbase Index product in 2018 along with an index fund for investors to consider, but quickly shuttered the product after just months of operation. It’s a bit surprising considering Coinbase’s huge role in the world of cryptocurrency for regular people. But, for whatever reason, Coinbase decided its future was not in index funds.
What other cryptocurrency funds are available?
Grayscale Bitcoin Trust
Launched in early 2020, the Grayscale Bitcoin Trust (GBTC) has become a widely followed fund in the world of crypto. The fund seeks to follow the price of bitcoin similar to how the GLD ETF attempts to track the price of gold. The fund has a pretty brutal 2% annual fee – not shocking since this space is so new. But the high fee indicates how important it can be for the development of low cost cryptocurrency index funds and/or Bitcoin index funds. Still, GBTC has become an important fund and opened the door for many investors seeking bitcoin exposure but not really looking to open a Coinbase account or have a crypto wallet.
The latest news on cryptocurrency index funds
December 3, 2020 – S&P Global announces cryptocurrency indexes to launch in 2021
When it comes to indexes in the investing world, S&P Dow Jones is probably the biggest and most well known player. Of course, we are all familiar with indexes such as the S&P 500 and the Dow Jones Industrial Average. S&P Dow Jones has now announced that they plan to launch cryptocurrency indexes in 2021. This is a huge step for the cryptocurrency world as more and more financial assets become available for regular investors that are tied to the crypto world. From the Reuters piece:
“With digital assets such as cryptocurrencies becoming a rapidly emerging asset class, the time is right for independent, reliable and user-friendly benchmarks,” said Peter Roffman, global head of innovation and strategy at S&P Dow Jones Indices.
The price of Bitcoin is hugely important not just for individuals that own Bitcoin, but it’s a bit of a proxy that indicates the overall health of the crypto space. It communicates the increasing role that Bitcoin is playing in the financial world.
After seeing a huge spike in price and renewed interest in crypto in 2017, the asset had a few years of finding its footing. In mid and late 2020, Bitcoin has seen a renewed spike once again and the price has started to climb. As of the end of November 2020, Bitcoin had regained the highs of 2017. Higher highs seem inevitable, but Bitcoin can be quite volatile. We shall see.
Understanding indexing & index funds
As we show in our guide to index funds, indexing and index funds are a very important part of the financial and investing universe.
Understanding what an index is and how they work is extremely important. An index is a method for tracking the performance of a group of assets or securities. Indexes can be extremely broad in that they track many assets across a range of types, sizes, and industries, or they can be more narrow and more specialized. A cryptocurrency index would likely track hundreds of cryptocurrencies as a “basket” of cryptocurrencies. It’s likely that future cryptocurrency indexes would be market-cap weighted, so Bitcoin would make up a much larger percentage of the index compared to a more obscure cryptocurrency.
Indexes are useful in multiple ways, but there are two key uses. One key use is as a benchmark. Indexes are key benchmarks in which investors can measure performance of a portfolio, a financial advisor or portfolio manager. For instance, a portfolio manager selecting stocks for a portfolio might have his performance measured against the S&P 500. Benchmark indexes are extremely important in the world of investment management.
Secondly, indexes are quite important because they lead to index funds. While you can’t invest in an index – an index is simply a tool, or statistical measure – you can invest in funds that track such indexes. These are called index funds. For instance, while the S&P has a very important index called the S&P 500 which tracks the 500 largest US companies, you can invest in this index by owning an S&P 500 index fund such as SPY.