Has the time arrived to invest in an index fund that holds a basket of cryptocurrencies, including bitcoin?
The quick answer is: It depends. The usual reasons for gauging your own risk tolerance — and ability to handle losses — should be your first concern. If you aren’t in a position to lose money, then read no further.
On the other side of the equation, if you can easily handle the risk of a potential loss, the news is getting better for cryptocurrency investors.
A company called Bitwise Asset Management, has launched an index fund of cryptos called the HOLD 10 Private Index Fund, which is open to certain qualified investors for self-directed IRAs. Here’s the skinny on the fund:
— The Fund is a market-cap-weighted fund of the 10 largest cryptocurrencies, rebalanced monthly.
— Assets are kept in 100% cold storage and are audited annually.
— The fund launched in late 2017 and is available to accredited investors, which include individuals with more than $200,000 in annual income ($300,000 for couples) or more than $1 million in net assets.
— The fund charges a 2.5% annual management fee, with no hidden costs or performance fees.
The upside of this fund is that it’s somewhat diversified. It invests in the 10-most popular cryptos in one fund. When I say “somewhat” diversified, keep in mind there are thousands of cryptos out there with more being created daily.
Diversification, of course, has its benefits. If the fund doesn’t move in lockstep with stocks or bonds, that could be a useful hedge. But the jury’s still out since we don’t have a lot of data to show if that’s true long term.
“As the cryptocurrency market matures, the data increasingly support the idea that cryptoassets may offer the possibility of strong returns while providing low correlations to traditional asset classes, including equities, bonds, and commodities,” said Matt Hougan, global head of research for Bitwise. “That’s a relatively rare combination.”
The downside is the cost of the fund and the restrictions. You need sufficient income and assets to invest. And despite the claims of “no hidden costs or performance fees,” mostly charged by hedge funds, it’s no bargain.
At 2.5% for annual management expenses, the Bitwise fund is still a costly way to index just 10 cryptos. A broader pool at a lower cost would be more desirable.
For comparison purposes, you can invest in most of the largest U.S. stocks for as little as 0.03% annually (the Schwab U.S. Broad Market ETF).
At the very least, you should be diversified in global stocks and bonds before you take the dive into cryptos. Do a portfolio check-up before pulling the trigger on digital currencies.