Coinbase Index Failure Reveals Crypto Index Fund Shortcomings

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Coinbase Index Failure Reveals Crypto Index Fund Shortcomings

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The Coinbase Index, Coinbase’s version of a crypto index fund, is being pulled from the market. Apparently, there wasn’t enough interest in it and it didn’t make enough money to make it worthwhile, so the exchange is redirecting  resources. The Coinbase Index only launched in March 2018 and this failure reveals how crypto index funds may not yet represent an optimal investment.

The ideology behind the Coinbase Index is that institutional investors want a product where they don’t have to actually touch crypto but can invest in it in a safe and regulated way. The Coinbase Index included the five cryptocurrencies on Coinbase: Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ethereum Classic, weighted by market cap. The index would automatically re-adjust the weight every month as the relative market cap of these currencies changed, so investors could essentially invest in the Coinbase Index and track the overall crypto market, much like investors invest in stock indices like the S&P 500 and NASDAQ to track the stock market.

The first downside was probably the requirement that investors be accredited and that they invest at least USD 250,000. This excluded all average investors and many wealthy ones that are not accredited. Accredited investors would be forced to invest a large sum of money to reach the minimum, instead of investing a little to get a taste for the crypto market.

Another problem with the Coinbase Index was that it wasn’t possible for investors to make their own decisions to optimize their portfolio, besides investing more in the index or divesting. Investors with large sums of investment would probably want more control over their portfolio.

Further, more discerning investors would prefer holding their own private keys. Even though the Coinbase Index is backed by crypto, investors cannot use the crypto in the index at will, as they do not truly own any of it.

Indeed, Coinbase has shifted its attention to offering the Coinbase Bundle, where investors can buy a bundle of crypto that they actually hold themselves. A major fix with the Coinbase Bundle is investors don’t have to be accredited and the minimum investment is USD 25. The Coinbase Bundle gives investors the freedom to buy, sell, and send the crypto as they wish. Circle is using a similar strategy, offering a bundle of 11 cryptocurrencies with a minimum investment of USD 10.

The Coinbase Index story shows that investors want to buy actual crypto instead of crypto indexes. Coinbase will be targeting institutional investors with a sales and support team, making custom strategies for each institutional investor, instead of the broad brush of a crypto index fund.


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