Crypto investing made simple
As Napoleon pointed out, luck is everything. Almost; especially in matters of money and war. Specifically with respect to money management and investment returns, some of the greatest financial thinkers and philosophers of our current times concur. Burton Malkiel, in his book A Random Walk Down Wall Street, was among the earliest to question active managers’ abilities to outperform their indexes over time. The irascible but brilliant Nassem Taleb talks at length about the role of chance in his seminal book, Fooled by Randomness.
As multiple empirical studies have shown, passive management outperforms active management after fees, more often than not. Warren Buffet proved this with his now famous bet that the S&P 500 index would outperform a clutch of top hedge fund managers over a ten-year horizon starting 2008. John Bogle and the Vanguard experiment, and the subsequent ETF revolution firmly demonstrate the overall superiority of passive, index driven strategies over actively managed strategies, over the long run. We are witnessing a consistent outflow of funds from active to passive managers, in the US and increasingly around the world.
About a year ago, when a number of folks were busy deploying capital through actively managed crypto strategies (which in 2017, was an asset class you carded under-par if you returned anything under 1500%, roughly) an internal debate kicked off; fundamentally, if passive outperforms active in the traditional world, would that also be true in the case of the emerging Crypto asset class, especially as the crypto markets continue to mature and information asymmetry starts to disappear ?
Our initial hypothesis was that in the Crypto space, given the early nature of the asset class, active management would definitely trump passive management. Surely, the leaders in this space, especially if we factor in ‘early’ or ‘privileged’ access to highly coveted ICOs that have performed phenomenally well (purely from a returns perspective, which is the relevant context here, rightly or wrongly) ought to be managers with active strategies.
(On a different note, the whole hoopla around ‘early access’ to select investors itself is pretty sad and hypocritical considering that the whole premise of Crypto is decentralization.)
However for a true apples-to-apples comparison, we needed to do a study where we weeded out pre-ICO positions, and limited our sample portfolio to only those tokens that were traded, with reasonable volumes, in some of the more popular exchanges around the world. Something akin to constructing a ‘public market’ index for Cryptos.
And that is exactly what we did — we ran back tests involving a series of portfolios — the two key variables were the number of constituents and the frequency of rebalancing. We adjusted for the market cap, to make sure that supply schedules are normalized for vintage, and we also introduced the slightest bit of active bias, to ensure that scams like bitconnect were kept out. (Arguably, with frequent rebalancing, we do not even need to filter for such potential scam coins, but for the moment, as we road-test the process, it made sense to do this)
The 108 Index
So after all that number crunching and analyzing, we finally came up with an index portfolio that made the most sense basis available back-testing data. The 108 index tracks the top 15 cryptocurrencies, on a supply-adjusted basis, and rebalances the constituents on a monthly basis. The 108 token is an ERC-20 token that can eventually be traded on centralized and decentralized exchange platforms.
Why is it attractive? It is easy, ETF-style access, with transparent 24x7 tracking. A potential investor does not need to deep dive into the intricacies of a complex asset class, unless you wish to. There is easy liquidity, which is extremely valuable. The fee structure is also aligned towards long term performance. Unlike traditional vehicles, there is no carry, there is just a quarterly index administration fees, and even this we believe can be continuously reduced and ironed out, as automated, secure smart contracts eventually take over the rebalancing completely.. There are no intermediaries adding additional friction costs, and very low minimums, unlike a lot of traditional fund structures.
108 Token outperformed BTC by almost 6X
With the 108 index, all you need to do is to log in to www.108token.com, get through the KYC documentation, and you are in!
How big can indices become in the crypto asset class?
Crypto is an increasingly relevant, important asset class. At the moment, however the reality is that the non-stop media coverage not withstanding, the vast majority of investors, even among the Institutional investor crowd and professional money managers, are hesitant to dive in, given the complexity of the asset class and the evolving nature of regulation. 108 token, and surely many others that will follow are a great way for such investors to dip their toes into the Crypto universe. Similar to the revolution that ETFs have been in traditional investing over the past decade or so, we expect Crypto-based or Crypto-enabled ETFs to gather significant volume and momentum over the next few months and years, and Crypto index funds are clearly the first wave of such ETFs. At the moment, our estimate is that around USD 500m to 1 b is focused on index-style, passive strategies, and this will likely double by end of 2018, based on current anecdotal analysis.
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