By Marvin Dumont

Small Investors, Get Ready for Crypto Index Funds

  • This past week, Bitcoin soared to approach $10,000 in what has been a record-setting year. But there are over a thousand cryptocurrencies, and with the current bull market it can be hard for potential investors to keep watching from the sidelines.

    Early investors in cryptos focused on speculation: They bought into specific coins without understanding the value proposition or technology. Secondly, volatility has always been a concern in this new Wild West of alternative investing. So if the crypto market is to attract traditional investors, there'd have to be mechanisms in place to diversify and manage risk.

    Options from the world of traditional finance are a welcome mechanism for adding liquidity and choices in the new frontier of digital coins. Investment group CME announced in November 2017 that it would start developing a crypto futures market. Another group, Aggregated Coin (AGRE), is launching an initial coin offering (ICO) on December 1st to give investors an index fund type of portfolio by allocating capital in the top six currencies, namely Bitcoin, Ethereum, Bitcoin Cash, Ripple, Litecoin and Dash.

    By diversifying one's holdings, when any of the aforementioned coins lose value, the losses can be offset by gains in any of the other currencies. Similarly, the same team is launching a second ICO, also on December 1st, called Upstart1k (UP1K). This second portfolio lets investors bet on a bullish crypto market by focusing on small coins. The UP1K team researches and invests in 130 coins, 130 tokens and various ICOs — like an index fund for promising cryptos.

    Will the concept work. Since October 2016, the top six cryptos have gained over 800 percent.

    These two tokens cater to investors who see the value of the cryptocurrency market as a whole but don’t want to assume the risk of any individual coin. While major cryptocurrenies such as Bitcoin and Ethereum are performing well, one study found that 59 percent of all ICOs failed to reach their goal.

    The total cryptocurrency market value is more than $250 billion. But there is more room to grow in this space. Expect to see more crypto index funds. Along with other ICOs looking to create a portfolio of coins, CME group said in November it would extend beyond Bitcoin futures to an Exchange-Traded Fund.

    These index fund products are seeking to attract investors of a wider age range. Most investment capital are held by investors age 60 or older, and they have a bias towards preserving wealth and managing risk. But one CoinDesk report found that 60 percent of Bitcoin buyers are between the ages of 25-44. By offering products that resemble old finance, cryptos can gain wider adoption.

    Another study from the Financial Industry Regulatory Authority found the mean age for investors with taxable accounts is 51. That same report found their overall risk tolerance for financial investments was "fairly low." Diversification appeals to a conservative crowd that wants to actually invest, not gamble or speculate.

    Could these aggregated coins and investment vehicles contribute to older investors looking for new ways to strengthen their portfolios? While they might be seen among the early Bitcoin community as less exciting options, they could expose millions of new investors to digital cash.