So I watched the interview the CEO had on CNBC and I have some concerns with this structure. I originally thought it would be balanced the way a 60/40 equity/bond fund is where the goal is to keep the fund in the same ratio. If equities rally and get to 65% you sell stocks and buy bonds to re-balance. This coinbase fund is doing the opposite. It's weighting the coins based on market cap. So as one coin does well and increases in market cap, the fund will adjust accordingly and buy more of that coin. In other words, it will chase prices and buy high and sell low. With markets as volatile as these coins are, that could be a recipe for disaster. I would much rather see them hold these coins in balance so let's say litecoin rips and doubles in value. Rather then buy more litecoin, they should sell some to keep the balance even with the others. If BCH takes a 30% hit while the others are flat, I would rather them re-balance by buying BCH to bring it back in line with the others. This is similar to what a 60/40 equity/bond fund does.
That's a very good point and I honestly didn't know about that until your post. My main concern with the Coinbase Index fund is that it doesn't represent the other sectors in the cryptocurrencies universe in the same way an S&P 500 index fund currently does. To be fair, Coinbase will be listing more coins in the future and my concern may get resolved eventually, but it may never be able to address one of the most important sectors (imho) which is the "privacy-centric" cryptocurrencies sphere. It presents a problem for meeting regulations on disclosures and reporting (i.e. Monero). With Circle buying Poloniex and going after the near-monopoly status of Coinbase for the US retail traders, things may get interesting. They are trying to market this as part of a retirement/investment strategy, I think.
Here is a more detailed explanation. It's slightly confusing because it's different then an equity product but perhaps its more intuitive to people who understand the space more.
To maintain a market cap weighting, you don't need to buy more of a component as it goes up. Suppose components A and B initially have equal market cap and you buy $100 of each. If A doubles to $200 and B remains at $100, then A has double the market cap of B and also has double the weight in your portfolio.
Yes, I know, but what I'm saying is that if A doubles relative to B and C, I would A to be re-balanced. Otherwise you get the same damn effect we have in the S&P 500 where the top 10 companies make up 80% of the index and where the bottom 100 companies make up less then 5% total. Where they do buy more is when there is new supply issued. They show that in the formula where they will make adjustments for the added supply. I would rather see an equally weighted balanced fund. Otherwise all this really amounts to is a bitcoin fund, not a crypto fund.
Litecoin creator Charlie Lee sold all of his holdings in December last year. He’s now regretful about his decision but thinks this was the right long-term move as he tried to make Litecoin a truly decentralized cryptocurrency. What a creator!! I think Litecoin will reach new highs.