Even as the SEC hesitates in approving bitcoin ETFs, an index fund for accredited investors has outperformed cryptocurrency markets.
Bitwise Asset Management’s Bitwise HOLD 10 Index was launched in November 2017 and consists of the world’s top 10 largest cryptoassets. It delivered returns of 45% during the first two full months of its operation versus a 1.7% return for a concentrated investment in bitcoin during the same time period. (See also: Why Buy This Expensive Bitcoin Trust Instead Of Actual Bitcoin?)
The last three months have been an especially volatile period in bitcoin’s price trajectory. In December, the original cryptocurrency rapidly climbed its way to almost $20,000. January brought bad news, however, and its price fell into a funk, dropping by more than 50 percent at one time. As of this writing, a single bitcoin is worth $9,890.
Bitwise Asset Management’s index fund beat bitcoin’s returns during both bull and bear markets. It delivered returns of 78% versus bitcoin’s 39% in December. In January, the fund’s value fell by only 18% versus 27% for bitcoin.
How Did Bitwise Beat Crypto Markets?
To beat cryptocurrency markets, the index exploited the lack of correlations among cryptocurrencies. According to Hunter Horsley, CEO of Bitwise, this ensures that many large cryptoassets don’t move “in the same direction at the same time historically.”
As an example, Horsley says Dash’s price has a 1% correlation with that of bitcoin while NEO and Ethereum have a correlation of 20% and 38%, respectively, in their prices with bitcoin. Bloomberg conducted similar analysis recently and found that cryptocurrency prices had less synchronicity during periods of trader bullishness and moved in tandem during bearish behavior. (See also: Are Bitcoin Price And Equity Markets Correlated?)
“For a diversified portfolio like the Bitwise HOLD 10, this has meant better performance than Bitcoin,” said Horsley. That performance has ensured that the fund’s investors have not run away during a reversal of fortunes in cryptocurrency markets.
Horsley says his investors, who span a broad spectrum from individuals to trusts and billionaires, have not requested redemptions. “In fact, some actually increased their investment during the window and we continued to receive investment from new clients,” he said, adding that there is a “continued shift” in new allocations for cryptocurrencies.
Bitwise may also have new products planned for the future. It made a splash recently after news that ETF industry veteran Matthew Hougan was joining it as vice president of research & development. “It’s (the possibility of an ETF) absolutely of interest,” said Horsley. “An ETF, or other public fund, can provide access through traditional channels to a broader set of constituents and I think it will be a great thing for investors.”
In an interview with Bloomberg, Hougan himself alluded to the possibility of a differently-structured ETF. He said he was working on “defining index methodology for the digital-asset market, saying that criteria such as market capitalization and weightings should be structured differently from traditional asset classes.”
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns small amounts of bitcoin.