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Coinbase opens its crypto index fund to accredited U.S. investors (techcrunch.com)
110 points by raiyu 3 months ago | hide | past | web | favorite | 84 comments



> Investing in Coinbase Index Fund is the easiest way to get exposure to a broad range get of crypto assets. Much cheaper than 2 and 20% charged by most crypto hedge funds, and you get new assets automatically added to the fund as they become available on Coinbase. No rebalancing. [0]

From their actual site [1], the fees are 2% a year so barely better than those hedge funds and absolutely atrocious compared to normal index funds. You are effectively being charged 2% fees for them running some scripts every once in a while to re-balance the fund compared to stock market index funds which charge on average around 0.05%. To make matters even worse, their "index" comprises of only 4 coins! That's hardly an index at all.

[0]: https://twitter.com/brian_armstrong/status/10066914902721945...

[1]: https://am.coinbase.com/


>To make matters even worse, their "index" comprises of only 4 coins!

Not to mention that coins are highly correlated, so buying some tiny amount of eg. BTC is enough diversification already.


I'm not as sure. The 2% fee is a management fee. There's no performance fee. Stock index funds have low management fees because stocks are very liquid and they have people who do the trade executions for them to not move the market very much. Plus, you get lots of investors so you can charge a lower fee and still cover your fixed costs. Given all that, a 2% fee does not seem like it's fleecing investors, but it does seem possible someone else could do it for less.


Hey guys,

Last time this came up, I shared an algo I made to automatically index across the top 20 coins. Since then I made a hosted version so anyone can use.

It works on top of Binance. Plus you can automatically rebalance daily, weekly or monthly.

I’ll drop a link here if anyone wants to check it out. Right now, it is free.

https://www.hodlbot.io


I noticed this on your site:

> We encrypt all user data on our end with cryptographically secure hash functions.

Can you please tell me if you _actually_ encrypt anything? A hashing function is not encryption...


I think the fact that XRP is missing from their platform is another reason for accredited investors to pass this time. With the number of financial institutions who are already using Ripple's products, or at least have heard of Ripple or what XRP is for, you would assume that a significant number of accredited investors are interested in XRP too. I think most of these accredited investors don't particularly care whether XRP is a "true" cryptocurrency, either.


"Coinbase's trading volumes fell 78% from December to April" [1]. Moreover, it appears trading volume fell for each of those months (on a month-to-month basis). If this trend doesn't reverse, they may soon be in a desperate position.

[1] https://www.wsj.com/articles/can-the-biggest-u-s-bitcoin-exc...


That's a cherry-picked stat if I've ever seen one. There was a huge bubble in December that clearly couldn't continue forever. Look a little further back; they've grown 30x from two years ago. They are unlikely to be in a desperate position anytime soon. Their revenue from the recent bubble alone ought to carry them for years.


> There was a huge bubble in December that clearly couldn't continue forever

Which is why I mention the continuous month-on-month declines. January trading lower than December is expected. But February lower than January? March than February? April than March? That trend line implies more than just a bubble popping.


No it doesn't. It takes more than a couple of months for these bubbles to pop all the way, just look at prior ones. Extrapolating the last few months' rate of decline from the bubble popping would be just as silly as extrapolating the rate of increase from the last months of the bubble.


> It takes more than a couple of months for these bubbles to pop all the way, just look at prior ones

The study of bubbles commonly features exchange failures. A bubble popping doesn't make declining volumes any more comfortable for Coinbase.


> A bubble popping doesn't make declining volumes any more comfortable for Coinbase.

Actually it does, since it gave them a cushion of $1 billion in revenue that should last a good while.


Coinbase and other platforms have existed and been in viable state a long time before the huge December 2017 bubble


We're in a crypto bear market. There have been crypto bear markets before. The May 2011 Bitcoin bubble involved a 20x increase over 1 month, and then a 90% decrease over the following 6 months. The March 2013 bubble involved a 7x increase over 2 months, and then a 50% decline over the next 3 months. The September 2013 bubble involved a 10x increase over 2 months, and then an 85% decline over the next 2 years.

In contrast to the stock market, where bull markets are long and gradual but bears are short and steep, crypto bull markets tend to be short and steep and the bears long and gradual. This is because crypto market penetration, in the grand scheme of things, is tiny. I've heard it quoted at 1% before. So when there is new news, lots of people crowd in and bump the price up rapidly, and then once the news cycle dies down, they gradually forget about Bitcoin and eventually give up on it.

However, among the speculators are a small minority of people who are actually building things with cryptocurrency. When their projects launch and find an audience, they end up kicking off the next crypto bubble. That's why each bubble has been larger and more broad-based than the previous one, and why they seemingly happen at 2-4 year intervals (2-4 years being the time it takes to build a real product and find customers for it). Coinbase itself was founded in 2012 in the midst of the bear market following the 2011 bubble. Ethereum (which kicked off the ICO craze) was founded in the 2014 bear market following the 2013 bubble. Somewhere among the 1900 ICOs funded in the 2017 bubble will be the seeds of the 2019-2020 bubble, which will likely be the bubble to end all bubbles.

A very similar pattern happened with the dot-com bubble, which people remember today as the period in 2000 where everybody was going public on zero revenues. But people who didn't live through it often forget that there were mini-bubbles before then: there was a run-up in '98 (which, incidentally, is when Paul Graham sold ViaWeb and got the money to fund this site), and there was the initial boom that kicked it off with Netscape's IPO in '95.


yup, and 10000x from 10 years ago :)


Coinbase can release a bunch of fancy features: index funds, faster trade times, heck even 0 fees. But I only care about 1 killer feature when it comes to a crypto trading platform.

And that is ridiculously high returns and a bull market.


A bull market isn't worth much if you can't trade or sell your coins at some point, no?

The infrastructure needs to be there to 1) support a high amount of buying and selling transactions, and 2) bring money into the system.

This fund will bring money into the system.


Ask any crypo trader what they'd prefer:

1) The bull run of 2017, with the same GDAX platform, even with some technical hiccups.

2) The bear run of 2018, with an "improved" GDAX platform with many more "features".

It's a no-brainer to me.


The graph looks fairly different if you scale it to the price of bitcoin


Interesting to think that the private keys for these funds will most likely be split across several pieces of paper (https://en.wikipedia.org/wiki/Shamir%27s_Secret_Sharing) and stored in geographically distributed safes.

That's the only way I can think of doing it offline.

Combining the pieces of paper together to generate the key would need to be done via a signing ceremony. I think coinbase have a patent for this.


There is an older post [1] describing how they do this, curious how much it changed since then.

[1] https://engineering.coinbase.com/how-coinbase-builds-secure-...


Is this not basically what the DNS root signing ceremony is?


DNSSEC signing ceremony is significantly more transparent and public :-) https://www.iana.org/dnssec/ceremonies


I can’t imagine a world where commerce moves from government backed cash to hundreds of different crypto currencies.

Even if <pick your favorite> wins, won’t the majority of these coins go to zero in the long run?

That’s a far different proposition than say the S&P 500, where it’s expected that the majority of companies will be worth more 20 years from now than they are today.


That is the entire point of an index. If you think that cryptocurrency is likely to do well in the future, but you don't know which ones will survive, if you buy them all (market-cap weighted), you'll get an average cryptocurrency return.

For the S&P, the index has performed well for decades, but many of the individual components have not. Roughly half of the constituents have been replaced since 1999: http://www.businessinsider.com/sp-500-index-constituent-turn...

And 87% of the companies present at the inception of the index have left the index: https://www.fool.com/investing/general/2015/11/22/3-things-y...

If you believe that crypto is doomed, buying an index is a bad idea. If you believe that the future is bright, buying an index might be interesting. As you cautioned, implicitly, though, unlike companies, a held coin doesn't actually make nor sell anything. It's more like buying a forex index than a stock market index.


I think there are some interesting use cases that probably aren't even considered by a lot of people. But I'm not sure how they'll play out.

For example; there could be a time in the future where smaller companies decide to go public through a token (i.e. an ICO, but with a company, not a utility token) at a fraction of the cost it currently takes to do an IPO. I'm not talking about scammy pump and dumps, but an actual company with employees, assets and a business model.

Underwriter banks generally 1) sell IPO shares below value to their investors to cause a first day trading pop, meaning less money into the pockets of the company; and 2) take between 3 to 10% of the raised capital as fees for their efforts. On tens, hundreds of millions or billions of dollars.

I could see crypto being a more efficient way of doing that, cutting out the middleman, and where a token represents a share.


Jay Clayton (Chairman of the SEC) was talking about this last week.

He was saying that the cost / overhead difference between ICO and IPO is so large that they either need to make IPO'ing easier or perhaps integrate into crypto in future -- otherwise companies will just ICO instead.

So it could be that crypto helps traditional systems, while reducing costs for both parties.


Yes, absolutely. ICOs are the wild west right now, but I think most developed countries will eventually introduce IPO-light regulation for token issuers so that this becomes a completely legal and viable way to raise capital. Mind: this is longer term, not for tomorrow.

Legal and other costs should come down a lot as well, as these things will end up being more standardised. You won't need to pay millions in legal fees, perhaps tens or (at most) hundreds of thousands.

In general I think the value in crypto will come from offering liquidity in certain situations by tokenising (perhaps smaller) assets (e.g. make it easy to sell a property ownership share with rental income in a SF office building through some token to an investor in Germany), and generally making a lot of "expensive" things more efficient by cutting out the middleman.


Do you have a link for this discussion? This is interesting.


I can find a shortened version of the full interview: https://youtu.be/wFr1ooaVPjY?t=8m59s

IPO stuff is from 9 mins, but the whole video is crypto related / fairly interesting.


So if you lose your private keys you're out all your shares? Or maybe you get hacked and lose your retirement savings?

The reason IPOs cost money is because the solutions to problems like the above cost money, and crypto-tokens don't change that simple fact.


One goal is to automate most of the work of a transfer agent, not to eliminate them completely. And that’s the open question: how many roles in the process can be simplified and to what degree?

https://www.sec.gov/fast-answers/answerstransferagenthtm.htm...


> So if you lose your private keys you're out all your shares? Or maybe you get hacked and lose your retirement savings?

You act as if identity and account theft aren't things. A private key sounds a lot better than a 9 digit number with predictabilities and a bit of social engineering.


The investment bank syndicate often takes on some or all of the risk of a failure to sell a new issue. Also, in the equity markets, there is a legal and regulated way for the syndicate to prop up the initial price to maintain the target sale price. So, even with an ICO, the role of an investment bank syndicate may be necessary.

Also all of the equivalent safeguards against insider trading, self-dealing, and restricted transfer protections would need to be created.


In strict fairness this also happens in ICOs, it's just that the underwriter banks are replaced to an extent by presale investors who buy at a discount.


This is a good point, however the volatility is primarily that the space / projects are so new.

The economic structure of each project varies, however most are designed so that if they are used for the utility they offer then they will have a price > zero.

Due to the fixed number of coins in circulation the value should rise in some relationship with increased adoption & time (time due to deflation)

Probably only a handful of coins will be used for B2C commerce. Notable other utility includes:

> Decentralised storage (currently much cheaper than any company can offer)

> Supply chain tracking

> Website monetisation systems (without needing ads)

> Smart Contracts

> Create your own blockchain (backed by existing decentralisation)

In summary: if it's used then a project should succeed.


What if share of the S&P 500 were traded in a crypto currency rather than say dollars as they are today? Wouldn't that crypto currency have more intrinsic value than the dollar?

Not being tied to gold, the dollar only has value because "we say so".

I could see a world where stock exchanges trade in crypto currency <a> and other cryto currencies are pegged to <a> in some way.


The dollar has (disproportionate) value because it's the currency for global commerce (i.e. oil and other commodities).

Gold however only has value because we believe it is a store of wealth, and we believe it has value.


> The dollar has (disproportionate) value because it's the currency for global commerce

Right... and when OPEC says they'll only trade in OilyBoyCoins?

> Gold however only has value because we believe it is a store of wealth, and we believe it has value.

That use to be true but now it's used heavily in various industries like consumer electronics and demand has been pushing the value upward.


On the second, do you have numbers on how much value comes from demand in consumer electronics? Afaik it is minimal, but I could be wrong.


I don't but I understand that it is minimal but has been growing steadily year-on-year.

This seems to indicate that global demand out paces supply: https://www.gold.org/research/gold-demand-trends/gold-demand...


Whats the ticker for OilyBoyCoins?


Instead, think of it this way. If a coin wins, it must necessarily be 100-10000x larger to "hold" the value of the monetary supply. If there's a 20% chance of "some coin winning" and you have 10 equally probable suspects, each of those suspects has a value of 1/10 of some portion of M1 * 0.20 probability.


Isn't that the point of indexing them?

If your thesis is 'I think one of these will win, I'm just not sure which one'

and you hope whichever wins, covers the losers

Expecting the final distribution of the coins to follow a Power Law distribution isn't incompatible with the index being profitable.

(the returns of YC are mostly Power Law based, right?)


I'm surprised they actually moved forward with this idea. From the time this index was announced and tracked on March 6th until the sales began the GDAX index has fallen by ~50% in a bit less than a few months.


I'm surprised you think the price matters. It doesn't. It's an index fund. Crypto traders will trade it regardless if it's low or high. In fact it's probably even better to launch it now (low price = buying opportunity.)


> I'm surprised you think the price matters. It doesn't. It's an index fund.

Volatility increases tracking error; this benefits traders but hurts investors.

Furthermore, AUM is not delta neutral. When an asset goes up its ETF attracts capital; when it goes down the ETF tends to lose capital. Since ETF economics are a measure on assets under management (AUM), ETF sponsors generally want their ETF to go up.


I know you said "generally", but there are some significant exceptions (like VXX): https://finance.yahoo.com/chart/VXX#eyJpbnRlcnZhbCI6IndlZWsi...

Even the prospectus says "The long term expected value of your ETNs is zero": http://www.ipathetn.com/US/16/en/details.app?instrumentId=25...


What is an "accredited investor" anyway? And why does this index fund need to only be available to them?


> What is an "accredited investor" anyway?

"Accredited investor" is defined in Rule 501 of Regulation D [1]. For natural persons, it means someone with more than $1 million in net worth (excluding one's primary residence) or $200,000 in annual income [2].

> why does this index fund need to only be available to them? reply

Accredited investors can afford lawyers, to do diligence as well as enforce their claims. They are also better placed to lose money. This combination means people marketing securities exclusively to accredited investors have lower disclosure and other requirements than e.g. someone taking a company public.

[1] https://www.sec.gov/fast-answers/answers-accredhtm.html

[2] https://www.ecfr.gov/cgi-bin/retrieveECFR?gp=&SID=8edfd12967...

Disclaimer: I am not a lawyer. This is not legal advice. Talk to a lawyer if you are seriously considering this question.


You absolutely never need to put that disclaimer on a forum post. You could outright claim to be a lawyer providing legal advice and there would be no worries.


I don't think anyone believes its a legal issue, more one of intellectual honesty.


No, there are actually a number of people on this forum who believe they need to make that disclaimer because someone said so a decade ago.

The disclaimer has absolutely no legal value, as what creates the attorney-client relationship isn't simply the offering of legal advice, but the offering of legal advice under the color of being in a position of legal authority to do so (i.e., claiming to be a lawyer). Just commenting on a forum post doesn't do that.

But people saw a warning a decade ago and so they keep doing it.


Exactly, I could literally give terrible legal advice and outright claim to be a lawyer in a post and there would be zero repercussions. "I read it on the internet written by someone I don't know" is going to be a tough sell in court.


Government regulations. The SEC defines an accredited investor as a millionaire, or someone with income > $200k. Millionaires have access to investment opportunities like this that are illegal to offer to non-millionaires. The logic is that millionaires are less likely to go broke because of a bad investment, but it does have a "rich get richer" effect.


A slightly more optimistic take is that it's legal to offer this investment opportunity to non-millionaires. You have two choices:

1) Don't solicit publicly (i.e. don't make a business out of convincing non-affiliated retail investors to invest in Bitcoin; you can still band along with friends, family, and fools in a non-scalable fashion)

2) Do solicit publicly, but go through the disclosures-and-compliance process that society has decided should gate scalable access to retail investors' life savings

The cryptocurrency economy is largely unwilling to do #2, which is onerous, expensive, and (ahem) exceedingly difficult to get through if you have produced nothing of economic substance.


No, it's not legal to offer this investment opportunity to non-millionaires, as the SEC has closed off your option #2. There have been several very serious efforts at regulatory compliance, involving big players in traditional finance, that have been rebuffed. Bitcoin index funds are not allowed to do public offerings right now, no matter how much compliance and disclosure they do.

Not that I think it would be a great idea for anyone to sink their life savings into Bitcoin right now, but I think the SEC could do their job protecting investors without literally creating a 2-class system of rich privileged people and restricted poor people. For example, they could set limits on the percentage of your income or net worth you could invest in risky opportunities. That would allow people of all income levels to participate.


> it's not legal to offer this investment opportunity to non-millionaires right now

Bitcoin futures are legal. The principal issue ETF sponsors are running into is constructing an index. The SEC isn't thrilled with indices referencing trades on e.g. Bitfinex.


We're not talking about Bitcoin futures. The investment opportunity under discussion here is an index fund.


A slightly more pessimistic view is that the rich part of society have engaged in regulatory capture to control the most profitable genesis events for their own mutual self interests. Looks a lot like class warfare on the poor/middle class and intelligent.


This is what dismays me. The notion of a crypto index fund seems horrible, in that cryptocurrencies are already such an abstraction of capital: first time it's been literally possible to turn energy into capital without benefiting any human in any way. That is very efficient and will drive out less efficient ways of generating capital. An index fund reduces the volatility of this and makes it even more of a given.

If we must do this can we just make a rule that all ultra-rich people and only ultra-rich people automatically get 20% more riches a month, or week, or day, and NOT burn the impossibly huge amounts of energy that expanding cryptocurrency will incur? I am not at all sure it's possible to stop capital concentrating this way, but I do think it is peculiarly horrible to have it doing so by a mechanism that intentionally and pointlessly burns energy in an ever-increasing fashion, when we're already in serious trouble through our collective eagerness to burn energy.



Proect people who cant afford to lose everything.


Let me Google that for you......


The set of people who can dump $250k in crypto assets is a tiny subset of accredited investors, one would think


There are 15 million HNWIs in the world (net worth >$1m, excluding main residence). There are also 180,000 UHNWIs in the world (net worth of at least $30m).


This product is almost certainly targeting RIAs.


That's an interesting thought.

To expand on it: there exists an ecosystem of regulated RIAs, which are largely sales agents for investment opportunities who have some advisory and custodial functions. (Most would not describe themselves that way but...)

You can find one in your local office park. They exist at a wide range of firm sizes, but suffice it to say that one value of typical might be "100 clients, $50 million total assets under management, 2 advisors + 3~6 support staff." The prototypical customer is a mid-career dentist or middle-class retiree.

For that firm, some of their clients are accredited investors and some aren't, but the offering to them is, basically, "You've had people tell you in meetings for the last year I-want-to-be-in-on-Bitcoin. You've had to say no, because clearly you have no business doing Bitcoin custody and your lawyer/accountant would have a fit. We would happily let you buy ~$1 million of our basically-runs-itself Bitcoin product, which you'll move $15k here and $50k there to some of your client base. Your business model continues to be charging 1% of assets under management per year. Client need: satisfied. Impact to your firm: minimal. Future asset outflow to cryptocurrency: zero."


Had to look up what an RIA is, so for others: https://riabiz.com/a/2011/10/4/what-exactly-is-an-ria


Which, according to the link, is a "registered financial advisor"...


Sadly they've added crap like ETC which greatly reduces the appeal of investing in such an index.


I know. Isn't ETC's most prominent miner suspected to be connected to the theft that spawned the coin's creation?


ETC isn't the coin that was created to fix a perceived theft — ETH is.


In a strict technical view, that's correct. ETH is the continuation of the original coin, however, which most of the community (including the most important members/developers) decided to support.


No, ETH is the token of the original chain which we agreed by social consensus to fork because of an attacker. A public blockchain is a network of people, and the vast majority of the community is in Ethereum. That's what legitimises it.

Another example is BTC vs BCH. BCH is the original bitcoin code, but BTC is the original Bitcoin community.


>Another example is BTC vs BCH. BCH is the original bitcoin code, but BTC is the original Bitcoin community.

I think that's a rather disingenuous if not patently misleading statement.

BCH is factually and unequivocally a fork of bitcoin code and blockchain.


At the time of the segwit implementation, BCH kept the old protocol version.

edit: I think you may have a point but I don't see it and you don't make it clear in your comment either. My point is clear and factual and doesn't need your approval.


ETC is the original blockchain data. Whether that means it’s the original coin depends on the definition of “coin”, I guess.


ETH and ETC both have the original blockchain data, but one corrected a criminal act by social consensus because we are normal people and we can discuss and reach agreements just like anybody else.


Was a police report ever made about the theft? What was the result of the police investigation?


I'm not sure if a report was made because it was possible to make reparations. I can ask around at Europol next time I'm there.


Sounds like the value of the stolen property was $0 if it can be recovered by simply saying "We'll just give our money back to ourselves". I imagine the police wouldn't be very interested in such a case.

Maybe the crime was hacking into a computer system? But the perpetrator was using the system's public interfaces exactly as intended. Is it criminal to call a method on a smart contract on a public distributed ledger?

There's no criminal act. The Ethereum community just wants to see themselves as victims instead of accepting that they were hoisted with their own Turing-complete petard.


Wake me when they have an ETF for the lay investor.


Coinbase is actually considering ETC enclusion is also a big news




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