Recently Coinbase released an article on Medium with an announcement of their brand new CoinBase Index Fund. So, what is the fund all about? What exactly is it? In this article, I’ll briefly summarize what the fund is and whether or not you should consider putting your money into the fund.
What is the CoinBase Index Fund?
Coinbase Index tracks the overall performance of the digital assets listed on Coinbase’s Exchange, GDAX.
The assets are weighted by market capitalization. The index level takes into account the ongoing increases in supply of each asset, not just changes in price.
In other words, it’s an Index fund similar to traditional ETFs for stocks, except the Coinbase Index Fund only tracks cryptocurrencies.
What’s the allocation of the different cryptocurrencies in the fund?
The constituents of Coinbase Index are all the assets listed on GDAX. The criteria for assets to be listed on GDAX can be found in the GDAX Digital Asset Framework.
The index level is calculated by dividing the current combined USD market capitalization of all constituent assets by the market capitalization as at January 1, 2015, the starting date for the Index.
Coinbase Index is reconstituted each time that a new asset is listed on GDAX.
- – Bitcoin
- – Ethereum
- – Bitcoin Cash
- – Litecoin
How is this different than investing in cryptocurrencies individually?
When you invest in an index fund, you’re investing in a group of assets. For example, instead of buying stock in Apple, you might choose to invest in Standard & Poor’s 500, an index fund based on the value of Microsoft and 499 other large companies. When the collective value of these companies increases, so does the value of your investment.
When an investor puts money into the Coinbase Index Fund, they are betting on the long term success of the crypto market as a whole, rather than a single cryptocurrency. Specifically, the value of the fund will be tied to that of four of the best performing cryptos in ratios that reflect their market capitalization that is, their total market value. Bitcoin represents the largest share of the market, so it represents the largest share of the index fund 62 percent followed by 27 percent ether, 7 percent bitcoin cash, and 4 percent litecoin. Refer to the allocation mentioned above.
The problem with the CoinBase Index Fund
Unlike other index funds for stocks, there is a problem that might stop you from being able to invest in the fund. The only type of person that can invest in the Coinbase Index Fund are accredited investors.
An accredited investor can be a person or a group, but they must meet certain financial requirements, according to rules from the SEC.
An individual must have a liquid net worth of at least $1 million (not counting the value of the home in which they live) or an earned income of at least $200,000 per year for the last two years ($300,000 together with their spouse). They also have to expect that their income won’t drop below that threshold in the next year.
Also, unlike other index funds, there is a current minimum investment for Coinbase’s index fund, which is $10,000
Coinbase says it plans to launch additional index funds that aren’t limited to just accredited investors, and these could have much lower minimums in the near future.
If you can meet the minimum requirements to invest in the Coinbase Index Fund, then the fund itself is a great way to diversify your portfolio. Unlike other cryptocurrencies that can go away overnight, this index fund by Coinbase is highly regulated and will most likely be a safe investment.
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