As multiple digital currencies beyond Bitcoin and Ethereum have taken off, many crypto enthusiasts have proposed diversified portfolios of blockchain-based assets. Hence the proliferation of crypto hedge funds seen this past summer.
But not everyone who wants to invest in a basket of crypto assets can afford the minimums or fees of a hedge fund, and nor do all such investors want to hold anything more daring than a basket of the top coins.
Enter Bitwise Asset Management, which is launching the HOLD 10, a new passively managed index fund of the top 10 cryptocurrencies by inflation-adjusted market capitalization.
“It’s too hard to conveniently and securely own a portfolio of cryptocurrency,” says cofounder Hunter Horsley. “We felt [what] needed to exist was a robust index that tracks the large cap cryptocurrencies and the market as a whole.”
Hunter Horsley and Hong Kim, cofounders of Bitwise Asset Management
Courtesy of BitwiseThe HOLD 10, named for a common saying in crypto (and Bitcoin in particular) to hold one’s coins rather than sell, will be sold as a traditional security to accredited investors who must meet income or net worth minimums ($200,000 a year in income or $1 million net worth). In that respect, it will be less similar to an ETF and more like the Bitcoin Investment Trust (GBTC), a private placement investment also sold to accredited investors that enables one to have exposure to Bitcoin in traditional financial accounts. The HOLD 10 will only have a management fee of 2-3%, and not the 20-30% performance fees of a hedge fund. It will also be available in some tax-advantaged (non-ERISA) accounts such as IRAs.
Though Horsley and his cofounder Hong Kim do not have backgrounds in either crypto or traditional finance, they have secured some big names as investors/advisors, including Naval Ravikant, cofounder of AngelList, crypto hedge fund MetaStable Capital and CoinList, a sort of AngelList for early-stage tokens.
“One thing I feel bad about with Metastable is it’s million-dollar minimums, we can’t take many investors, we’re basically full,” says Ravikant, adding that a lot of hedge funds charge high fees but only purchase top coins anyway. “I think a low-cost index solution makes sense where an investor can buy in with $50K or $25K and have an index that they wouldn’t have to worry about. It would hopefully be low-cost and constantly rebalanced. It also takes case of the custody problem.”
As for the 26-year-old Horsley, who worked at Facebook and Instagram, and Kim, also 26, who worked on security software in the Korean military and interned at Google, Ravikant says, “I think they’re top-notch entrepreneurs. I’ve been circling them as a team for a while. As an early stage investor, I bet on teams that are unproven. That’s literally how I make a living. If a bunch of stodgy guys from JPMorgan were to walk in and say they were doing this, I probably wouldn’t invest in them.”
Other investors and advisors include Elad Gil, cofounder of Color Genomics and a former Twitter vice president; Avichal Garg, part-time partner at Y Combinator; and Diogo Monica, security lead at Docker.
The index will hold and weight the top 10 cryptocurrencies by inflation-adjusted market capitalization, taking into account the supply inflation schedules for the next five years, in contrast to the more common ranking by current circulating supply on sites such as Coinmarketcap.com.
Eligibility requirements include that a coin needs to trade on multiple exchanges, its monthly trading volumes must exceed 30% of circulating supply for the last three months, and it must have a free-floating price, not one pegged to another asset.
As of September 26, the 10 coins the HOLD 10 contained based on the eligibility requirements and selection criteria, were Bitcoin, Ether, Ripple, Bitcoin Cash, Litecoin, Dash, NEO, Zcash, Monero and Ether Classic. Prices will be pulled from Bitfinex,Bitstamp, GDAX,Gemini,Kraken,Poloniex and Bittrex and weighted by volume.
Because it uses an inflation-adjusted market cap rather than one based on circulating supply, the main way it differs from the Coinmarketcap ranking is by the inclusion of Zcash (of which Ravikant serves on the foundation board), and the elimination of NEM and IOTA, whose trading volumes don’t meet the eligibility cutoff.
The fund will be rebalanced monthly. By press time, Bitwise had notfinalizeditscustodian for the 10 assets.
“It’s an underserved area, and there’s a tremendous amount of demand for that type of product,” says Brian Kelly, CEO and founder of digital asset management firm BKCM, of the HOLD 10.
“Having an option like this that charges 2% with plain vanilla exposure to the top 10 makes a lot of sense,” says Spencer Bogart, head of research at blockchain startup and token venture firm Blockchain Capital, who was previously an analyst at ETF.com. However, he cautioned that the industry from mutual funds, which the HOLD 10 approximates, is “hyper, hyper competitive … so it’s not just that people try to undercut each other’s fees the whole time, but it’s very much a game of scale. You need the same back office for one fund as you do for 100 funds, so you’re way more efficient at providing it for 100 funds than with one, so that will be a challenge for them. … If we start to see ETFs really emerge, this fund would struggle.” However, he acknowledges, it’s not clear if or when that would happen.
And since Bitwise sees this as the first product in a line of investment vehicles, it may already be positioning itself to address that. Plus, as Horsley noted via email, "In constructing portfolios many investors care about the specifics of the funds they hold, and so there's demand for lots of different products with nuanced differences."
Monday, October 2, 2017, 12:15am EST:This story has been updated to correct a typo misspellingNaval Ravikant's first name.
