I can’t pick cryptocurrencies and neither can you. Here is the smart passive index investing way to gain exposure to the cryptocurrency market with diversification, simplicity, lower costs and fewer taxes. Best of all, it’s on the blockchain.
My explorations as a blockchain user came with expenses. I call them school fees. Blockchain is certainly the next global information network. It is a distributed ledger without a central trust authority. it is also an ideal platform upon which to re-imagine most of our services and flows of trust.
Greed beckoned me into the world of cryptocurrencies in late 2017. It was a whirlwind of discovery. So many challenges had to be overcome:
- How do I get fiat currency into the crypto currency world?
- How do I purchase cryptocurrency?
- Which cryptocurrency should I buy?
- Why I should not keep my crypto currency on an exchange?
- What is a wallet?
- What is the Ethereum network?
Whoa! There’s a whole crypto universe out there! A wise person once said: “Only invest in things you understand.” This is called due diligence or DYOR – do your own research! This is how I became blockchain literate. By making mistakes. I learned about trading, exchanges, wallets, initial coin offerings and blockchain networks.
Benefits of Cryptocurrency Index Investing
I already understood the benefits of diversification and had selected my own basket of cryptocurrencies. This was based on a mix of research, hype, belief and greed. The cryptocurrency market “lead-ballooned” in early 2018. No, I did not sell at the top. I can’t pick the top.
I also can’t pick cryptocurrencies. Ethereum appealed to me from the beginning and my enthusiasm has grown as I’ve used Ethereum and smart contracts. Still, I can’t pick cryptocurrencies. I prefer diversification through index investing, or a more passive tracking of a cryptocurrency index. This way, I don’t have to pick the winners. I just own the top 20 cryptocurrencies in proportion to their market weighting by capitalisation. You can get 80% coverage of the whole market with just the top 10 cryptocurrencies.
I reviewed the cryptocurrency index fund market and was impressed by some of the options available right now. There has been ongoing talk about a cryptocurrency ETF which will bring in the big institutional funds. However, there are compelling cryptocurrency index fund options available right now.
Time and Maintenance
Let’s be honest. Have you ever juggled and traded multiple crypto currencies across multiple exchanges and wallets? It’s a nightmare!
- You have to keep track of every login and 2-factor authentication.
- Has one of your exchanges been hacked recently?
- Will your exchange wallet accept airdrops?
- What will happen when a cryptocurrency forks?
I sold most of my individual cryptocurrencies recently. It was slow and laborious. It took the best part of two days to consolidate everything off the various exchanges into my own wallet.
Cost and Tax
Every transaction cost me in fees, both to trade and to move cryptocurrencies. Furthermore, every trade is a potentially taxable event. Traders pay income tax, investors pay capital gains tax. An index fund exposes you to fixed costs known in advance. There are no tax implications when the underlying assets are rebalanced.
I recommend Invictus Capital Funds
Two funds from Invictus Capital can replace my own basket of cryptocurrencies. I picked their funds as suitable for my needs from a recent review of the cryptocurrency index fund market.
USD $21.3 million assets under management at the time of writing.
Their Crypto20 product is a passive index tracker, replicating, in one token, the capitalisations of each of the top 20 biggest cryptocurrencies. The product is rebalanced weekly. No crypto can take more than 10% of the product. This ensures diversification and down weights the big Bitcoin beast.
I really like the diversification into the dominant altcoins this product gives me. Appropriate cryptocurrencies are staked and thereby produce a return, which is returned to the fund. The fund has very competitive 0.5% annual expense fees.
The product is an ERC20 token running on the Ethereum network. The token can be traded on various exchanges where the price is the net asset value plus any market force factors. Owners can use the smart contract to liquidate directly with Invictus. This means you can always sell and obtain at least the net asset value.
Their whitepaper is a refreshingly readable and even enjoyable document. They tested a number of different re-balance frequencies, total coins and cap ceilings to develop optimal fund parameters. I felt smarter after reading it.
Since inception in October 2017, the C20 fund has performed better than the whole market. The gap from C20 to total market cap shows the effect of shedding sh!tcoins!
Invictus Capital discuss the growth of decentralised finance applications in the latest C20 quarterly report. The fund outperformed the market on 75% of Q1 days.
Crypto10 Hedged Fund
USD $0.7 million assets under management at the time of writing.
Crypto10 Hedged is the newest product fresh out of initial offering stage in April. The product is similar to the C20 fund and is also an ERC20 token. It tracks the top 10 cryptocurrencies. Weekly rebalances ensure no cryptocurrency takes more than 15% of holdings.
The key difference is a cash (USD) hedge. The product’s algorithm allocates holdings to cash as the market drops. This provides immense downside risk protection. It also means I remove my greed from the investing. Profits are locked in with an automatic cash stop loss.
Have a look below at fund back-tested performance over the last bull cycle. See also the C10 Hedged factsheet. The fund was mostly in cash while the market went down.
The C10 Hedged litepaper is again very readable. You will learn from reading it. They also explain Pareto efficiency and open-ended nature of the fund. I think the higher 1.7% annual expense fees may well be justified. The fund “sweats” the cryptoassets to generate a return which offsets the annual expense fees.
Investing in Invictus Capital Funds
Investing in Invictus Captial’s funds requires interaction with the Ethereum blockchain. To me, this is an important positive of investing in the cryptocurrency space. By investing, you ensure you pay your school fees and learn how to trade, hold and store cryptocurrency.
The C20 and C10 Hedged tokens are ideal index tokens to give broad exposure to the whole cryptocurrency market. Hold the tokens offline in a cold wallet. At the least, hold the tokens in a software or paper wallet where you own the private keys.
Crypto20 tokens can be purchased at the following markets:
Invictus have good information on their website and real-time support from their passionate staff on their Discord channel. Their investor portal provides a funky dashboard to track performance and holdings. Invictus Capital are living and breathing their work and innovating in this space. Have a look at their Udemy course on Crypto Asset Investment Management.
I sold most of my individual cryptocurrency holdings. Instead, I purchased Crypto20 and Crypto10 Hedged tokens. The Crypto20 fund gives me the altcoin volatility I seem to crave along and greater potential upside in a bull market. The Crypto10 Hedged fund gives me main market exposure. The cash hedge protects against downside risk during bear markets.
Want to know my allocations? Leave a comment below.
I believe in the future of blockchain. These cryptocurrency index funds are my choice to invest for greatest simplicity and benefit.