Back in early 2016, when I was a college student with a bad haircut, I took my first venture in Bitcoin. The online cryptocurrency ecosystem was a lot different than it is today, and although there was a lot of information online to educate yourself, there wasn’t as much beginner orientated, hold-your-hand through the process type guidebooks that you can find today. Looking back on it, I knew very little about cryptocurrencies when I first got into bitcoin which is common with a lot of people. Coinbase was my first go-to stop. The interface was understandable and the process was dumbed down so that a college student with a bad haircut and little knowledge of cryptocurrencies found it fairly straightforward. You pay a premium for this. Coinbase has some of the largest, if not the largest fees in the industry their services.
I have just recently listened to the Animal Spirits podcast #20 which is hosted by Michael Batnick and Ben Carlson. They made the point that Coinbase is bad for the ideology of what people involved in cryptocurrencies stand for, with it becoming the “Wall Street of Crypto”. Coinbase has just recently released their index fund which will track the digital assets listed on GDAX (four at the moment) weighted by market cap. My initial impression on the news of the Coinbase index fund was that this will be a good thing. It will make it easier for accredited investors to get involved with cryptocurrencies, and with more investment, comes more exposure and growth to the industry. However, I heard a different point of view listening to this podcast as Michael and Ben felt this index was a “terrible idea” and “ripe for frontrunning”. The point was made that if there was issues of frontrunning with the Russell 2000, then the idea of a Coinbase index fund was going to be problematic. So it made me do some further digging and thinking about two questions: Is Coinbase bad for what both crypotcurrencies and the people who are involved in the space ideologically represent? Is the Coinbase index fund going to be a good thing or a bad thing for the cryptocurrency world in general?
Cryptocurrencies has it’s ideological roots in cypherpunks and libertarianism. Coinbase definitely contradicts some of the ideological ideas that cryptocurrency stands for but it’s part of the evolutionary process. I am sure the businesses of Google and Facebook contradict some of the ideological principles early internet advocates stood for but they provide a service which is in demand. With the capitalist system, we often may not know what we want, but if an entity can provide us with it, then this entity by right will flourish. We have seen this time and time again in the modern business environment.
“Customers don’t know what they want until we’ve shown them” Steve Jobs
Michael and Ben pointed out that the way Coinbase function at the moment is most likely temporary. They have a certain advantage from being early on the scene and they are capitalising on it. But as the industry develops, more services will develop and build trustworthy images among customers with lower fees. I would not go near Coinbase if I were looking to buy or sell cryptocurrencies now as I have developed substantial experience and I am more comfortable going on to other services and being able to differentiate from what is a scam, and what is not. But in the early days, this was not the case, so Coinbase provided me with a great service. And I believe they will continue to provide newcomers with a similar experience for some time yet until cryptocurrencies become more mainstream. Although, cryptocurrencies has reached mainstream attention, they have yet to reach mainstream adoption or even mainstream experimentation. As a thought experiment, think of what percentage of your colleagues, family, and friends have at least purchased cryptocurrencies. Provided, you are not surrounded by fairly hardcore cryptocurrency enthusiasts, the number is probably somewhere between 1–5%.
In terms of the index fund, the general response I have got from most involved with cryptocurrencies is that they are unsure of whether this is going to be a good or a bad thing. The “ripe for frontrunning” is definitely a valid argument to make. First and foremost, considering that the 333 Billion USD market cap of all cryptocurrencies is dwarfed by the 92.3 Trillion USD market cap of global equities (cryptocurrency figure up to date for 15th March 2018), you would definitely think it feasible that anticipating reshuffles/rebalancing could be a profitable endeavour. This is even more feasible when you consider that the Bitcoin network value represents 42.4% of the entire cryptocurrency market cap (also up to date as of 15th March 2018).
With that being said, if you look into the details of how the index is going to calculated, it could be more difficult than it first appears to profit from the rebalancing. The index will only be rebalanced every time a new asset gets listed on GDAX (GDAX is an exchange which is operated by Coinbase). There is already significant speculation which goes in to assets which may be listed on GDAX in the future and some of this gets priced in prior to assets getting listed, and is still likely to be followed by some significant volatility once an asset does get listed. Recent examples include speculation that Ripple will be added to GDAX which didn’t manifest as of yet, and also the most recent listing of Bitcoin Cash onto GDAX. Current assets listed on GDAX include Bitcoin, Litecoin, Ethereum, and Bitcoin Cash. The rebalancing will occur on the 5th day after each new asset is added to GDAX. According to the Coinbase index fund document, the reason the rebalancing will occur on the 5th day after the new asset is listed is to account for the significant volatility that occurs once an asset is listed. Really, we can’t know what is going to happen until the next asset is listed on GDAX. Potential rebalancing profit strategies may be quickly priced in to the market once an asset lists. The five day period between the listing of an asset and the rebalancing should be an interesting time period in the markets to closely observe.
So, really there are two sides to be taken into consideration with the index fund. The positive side is that it may bring money into cryptocurrency which may not have been coming into it currently otherwise. It may serve to make cryptocurrencies more mainstream and I particularly like that it will only be open to accredited investors initially. On the other side of things, for the moment, it will increase the advantage Coinbase has as the dominant exchange as they will profit from significant fees. With that being said, it is only a matter of time before other similar services build in the industry and offer similar services at lower fees. Myself and a colleague host a fortnightly crypto meetup in Lisbon, and at the most recent we had the CEO of a Coinbase competitor presenting and he revealed to us that he also has plans to implement a passive index fund with much more competitive rates than Coinbase.
Verdict: Coinbase in general is good for cryptocurrencies and although it may contradict some of the central ideological tenets which underly cryptocurrencies, it is only natural for such things to occur in a capitalist system. The Coinbase Index Fund is also good in general as it will most likely serve to bring additional interest and capital into the cryptocurrency industry in the short-term. In the longer-term, it is nearly certain competitors will arise with similar offerings at lowers rates.
(1) https://animalspiritspod.libsyn.com/
(2) https://pt.wikipedia.org/wiki/Cypherpunk
(3)https://en.wikipedia.org/wiki/Libertarianism
(4) https://am.coinbase.com/documents/cbi-methodology.pdf