Index investing in the stock market has become extremely popular thanks to the proliferation of exchange-traded funds, or ETFs, which often track popular market indices like the S&P 500 or the Nasdaq-100.
Investing in the entire market can be a simple but effective strategy. Instead of spending energy and time in trying to beat it — often unsuccessfully — investors are guaranteed average returns, which in the past 10 years have been more than respectable both in stocks and in crypto.
The rise of decentralized finance in the summer of 2020 seems to have reinvigorated the concept of passive investment in crypto. In addition to creating a new well-defined category of crypto assets, it has boosted the infrastructure required to create something analogous to a crypto-native ETF.
Several projects and platforms launched their own DeFi indices in 2020. Some, such as the FTX DeFi perpetual contract or Synthetix’s sDEFI, are derivative products based on synthetic contracts. They simply track the price of a basket of assets, without owning the underlying tokens.
But DeFi grants the possibility of creating something much closer to an ETF. These types of funds always own the underlying basket of assets that they are supposed to track. At the end of each trading day, some large institutions have the privilege of creating or redeeming shares of the ETF for its net asset value. They create new shares and sell them if the ETF is more expensive than the assets it holds, and they redeem existing shares if it’s worth less.
A DeFi-based index allows for the same exact type of arbitrage mechanism, but it doesn’t need to be limited to a privileged set of maintainers.
Currently, there are three major ETF-like DeFi products: the DeFi Pulse Index, two different indices by PieDAO, and Power Index by PowerPool.
The indices differ primarily by the assets they consist of and how each token is weighted. DeFi Pulse and PieDAO use market-capitalization weighting, while PowerPool has a fixed quota for each token. The PieDAO and PowerPool indices can be changed by governance voting with Dough and CVP, respectively.
While DeFi Pulse and PieDAO closely emulate the features of a traditional ETF, PowerPool’s index construction highlights that DeFi indices may eventually grow beyond the possibilities offered by stock markets.
The index allows holders to vote in governance proposals for the underlying protocols without exiting from the index. This is part of the team’s vision of smart indices that maintain the utility offered by direct ownership of the underlying tokens. While this is likely dictated by the project’s strong focus on meta-governance, it suggests that the possibilities offered by DeFi composability are yet to be fully explored.
The DeFi Pulse index is currently the most popular, with a market capitalization of $36 million. The combined value of PieDAO’s two indices is valued at $3.7 million, while the Power Index maxed out its current cap of $500,000 in value.
While still small, these indices were launched relatively recently and are likely to be in the early stages of their growth cycle. However, some experts see strong limits to their maximum size.
A crypto product for crypto enthusiasts
Meltem Demirors, the chief strategy officer of CoinShares, believes that using the term “ETF” for these redeemable index funds is not entirely correct. The concept of ETF is specific to traditional markets. She told Cointelegraph:
“An ETF is an investment product that combines the benefits of diversification with the ease of trading a single stock via a single ticker. Like many financial products, they rely on a manager, administrator, and a number of intermediaries, and have management costs, commission fees, restrictions on trading, and how easily you can buy or sell them, and differing grades of quality.”
While crypto indices capture many benefits of ETFs, they also “face the same challenges as buyers of traditional ETFs, without the benefit of regulatory oversight or standard documentation,” she added. “I’d call these types of products something very different in order to disambiguate what it is people are buying.”
The differences are crucial in determining crypto index adoption, in her view. “These products will initially attract crypto enthusiasts and proficient crypto users,” Demirors said, mentioning the difficulty of using DeFi interfaces for non-crypto users.
Demand for DeFi indices is likely to come from retail and crypto power users for now, while institutional investors will continue using the security and familiarity of their preferred brokerage accounts, Demirors concluded.
Joey Krug, a co-founder of Augur and co-chief investment officer at Pantera Capital, shared the overall outlook. Though he is more positive about tokenized indices as “what a crypto native ETF would look like,” he said that “retail [will lead] in the beginning, although long term, I could see demand from institutional traders as well.”
Diversification has been problematic
The attractiveness of market index ETFs comes from the broad exposure they provide to holders. While single stocks may rise and fall due to specific and unforeseeable factors, a basket of them can smoothen these individual aberrations to provide a general picture of the market.
In crypto, diversification has been largely ineffective so far. “Historically, most crypto assets have traded with a beta of one to Bitcoin,” Demirors explained. “Beta” is a financial measurement defining how closely an asset tracks another — a beta of one indicates price movements that are correlated both in direction and in magnitude.
This has been a major issue for previous crypto index projects, which often suffered from excessive market capitalization-based allocations to Bitcoin (BTC) and Ether (ETH) that compounded the lack of diversification, Demirors noted.
Liquidity in the underlying assets is the limiting factor for any index fund, as when their holdings become too large, “the tail begins to wag the dog,” she said. Market participants may start to trade against rebalances and overall flows into the fund, potentially distorting the prices of the underlying assets.
These market limitations pose severe restrictions on the viability of index funds, with Demirors noting that “it would be difficult to see crypto indices growing beyond the natural limits of these markets.”
DeFi or governance-centric funds may nevertheless help with diversification issues. Krug highlighted that DeFi tokens have recently moved independently or against BTC, suggesting that “correlations are coming off a bit.” Over the long term, the presence of protocol revenue and cash flows may further help to break the correlation, he added.
Overall, thematic index funds like the DeFi baskets offered today are useful for certain niches of traders, both Demirors and Krug agreed. For example, they can be used to construct complex hedging strategies, Krug said.
But the prospects of mass adoption are somewhat cloudy, as these types of products will need to mature in lock-step with the wider crypto and DeFi markets to remain useful.
Ethereum Maintains Bullish Market Structure Despite Selloff; Rebound Imminent?
- Ethereum has seen an intense selloff ever since its price reached highs of $1,450 just a few days ago
- The selling pressure here was rather intense and came about right as BTC started reversing its uptrend
- This caused the aggregated market to see some intense selling pressure that has yet to alleviate
- The crypto is now down nearly 20% from these highs, with bears continually placing massive selling pressure on its price
- Where ETH trends will generally depend on Bitcoin, as the benchmark crypto has been guiding Ethereum’s general trend over the past few weeks
- Any continued weakness could lead to a further breakdown, as many analysts are looking towards a test of the support at $1,100 and $1,000
Ethereum has erased almost all of the gains that came about due to the recent push higher, with bears taking full control of its price action as BTC also slides lower.
The cryptocurrency’s weakness shows no signs of ending for now, which may be due to Bitcoin’s inability to see any significant strength.
One analyst is noting that ETH is still looking technically poised to see further upside from a macro perspective, as the cryptocurrency’s long-term technical structure actually remains quite bullish.
Ethereum Struggles to Gain Momentum as Bitcoin Plunges
Bitcoin has caused the entire crypto market to nuke lower today. At the time of writing, Ethereum is trading down over 13% at its current price of $1,190, which marks a notable decline from its recent highs of $1,450 set just a couple of days ago.
The selling pressure seen at these highs was intense and, coupled with BTC’s bearishness, created an intense stream of selling pressure that has yet to subside.
It is currently trading above a strong support zone, but it remains unclear how long this will hold.
Analyst: ETH Shows Some Signs of Strength Despite Capitulatory Selloff
One analyst explained that Ethereum is still flashing some signs of strength today despite the intense selloff seen throughout the past two days.
He notes that ETH’s overall market structure is still looking strong despite the severity of this latest pullback.
“Ethereum: it is still by far the best looking » Read more
” href=”https://www.newsbtc.com/dictionary/altcoin/” data-wpel-link=”internal”>altcoin in terms of price structure. – Above the cloud – Just tested all time high – Rejection but still above the previous low.”
Image Courtesy of Teddy. Source: ETHUSD on TradingView.
Unless Bitcoin continues plunging lower, there’s a strong possibility that Ethereum will begin bottoming out and revert its momentum into bulls’ control.
Featured image from Unsplash. Charts from TradingView.
Genesis Mining head forecasts importance of layer-two Bitcoin solutions
Would Bitcoin and its blockchain be able to handle mainstream adoption as a store of value without requiring second-layer solutions? Genesis Mining’s head of mining operations, Philip Salter, holds a mixed view.
“I think Bitcoin is a good store of value regardless of transaction fees,” Salter told Cointelegraph. “The issue is — the higher the fees are the larger is also the minimum value that can be efficiently transferred.”
Bitcoin (BTC) has stood the test of time up to this point, with BTC maintaining its place as the crypto industry’s highest market cap asset for the past 12 years. Bitcoin is seen as more of a store of value than digital cash these days, however, and Salter thinks complications may still arise from this shift in perceptions:
“Some years ago it was possible to store and transmit $1 efficiently, since tx fees were effectively zero. Currently, sending a transaction can easily cost $15, so it is not sensible to transmit $1 any more. If this trend continues due to more use of BTC and higher BTC prices, it will become prohibitive to transfer value in common amounts and it will be only an effective store of value for very large amounts.”
“That’s why I think that 2nd Layer solutions are a necessity not only for the use of BTC as a currency but also for the long term feasibility of BTC as a store of value,” Salter added. Industry players have worked on layer-two scaling solutions, such as Lightning Network, in an effort to facilitate small transaction capabilities.
Salter himself uses Lightning Network solutions for his own Bitcoin endeavors. “I personally upgraded my personal phone wallet to a lightning-only wallet (Phoenix), so that I can even in these crazy times pay with coins quickly and cheaply,” he said. “To anyone who tried to use lightning two years ago and found it confusing, I strongly suggest that you give it another try now that it’s far more established and user friendly to use.”
Bitcoin’s scaling debate was a focal point of discussion in 2017 and 2018. In September 2020, MicroStrategy said it faced no major issues during one of its BTC accumulations. The firm bought 38,250 BTC using a combination of off-chain and on-chain avenues.
90% of these altcoins outperformed Bitcoin recently
Experts often say the altcoins rally with Bitcoin, and even fall with it. On 21 January, Longhash revealed that in the last seven days, 92% of crypto tokens “outperformed Bitcoin.”
Bitcoin rallied to new ATHs and has remained over the $30,000 range, which still accounted for less volatility compared to previous rallies. However, with increasing prices, and FUD taking over traders, the asset seems to be facing a period of stagnation, at least for now. In the past week, the asset’s price fell 12% against the dollar.
Based on Messari’s price data, Longhash tracked 69 crypto tokens — each of which daily reported trading volume of about $100 million. Among these, 66% of tokens’ prices increased in the past week, and over half of the 46 tokens that gained against the dollar increased more than 10%.
A mere 33% of tokens’ prices went down against the dollar. Specifically, prices of five tokens, including Wrapped BTC, Dash, Bitcoin SC, Zcash, and Maker fell by much more.
Longhash data stated that Bitcoin “has seen one of the most dramatic drops,” among tokens that have been falling over the week. However, experts predict the current dip in BTC prices is a temporary setback before the asset rallies to bigger numbers.
Days after ECB President called for regulating Bitcoin because of its association to illegitimate activities, the asset gained a new critic, which could have fueled FUD. Recently, President Biden’s pick for Treasury secretary, Janet Yellen, believed that cryptocurrencies “are a particular concern.”
Although altcoins seem to perform better than Bitcoin, at the moment, no crypto would be able to replace Bitcoin, given its large market capitalization. For instance, Ethereum was up 22% against Bitcoin in the past week, but as Longhash noted, “Ether’s market cap could quadruple and it would still be behind Bitcoin.”
In the last 24 hours, about $1 billion in crypto was liquidated and Bitcoin has been down by roughly 7%. The asset was trading at $32,043.96 at press time. Further, whales were depositing Bitcoin to exchanges, which could further influence prices, according to CryptoQuant’s Ki Young Ju:
Whales are depositing $BTC to exchanges.
Should keep eyes on Coinbase outflow and Coinbase Premium(will launch by tmr) pic.twitter.com/kotHydfxfM
— Ki Young Ju 주기영 (@ki_young_ju) January 20, 2021
Bitcoin Cash, Zcash, Decred Price Analysis: 17 January
Decred co-founder explains the possible effects of a CBDC takeover
Ethereum, Monero, Algorand Price Analysis: 17 January
Cardano “Working On Something” That Could Solve Twitter’s Decentralization Dilemma
Healthcare Jobs of the Future
Charted: Chainlink (LINK) Remains In Strong Uptrend, Why It Could Test $25
Will Bitcoin see another trend reversal in 2021?
Ethereum Price Can Skyrocket to $10,500 According to Fundstrat
TradingView Launches ‘Bitcoin Timeline’ to Show BTC Price Changes With Events
Top 5 cryptocurrencies to watch this week: BTC, LINK, UNI, XTZ, ATOM
Analyst: Hodlers will be this year’s biggest Bitcoin gainers
DeFi’s death by a thousand cuts
Grayscale’s Bitcoin Trust adds over 5k BTC in 24 hours
China’s Blockchain Attempt BSN to Reportedly Integrate CBDCs This Year
Over 31% of People in Latin America Want to Invest in Bitcoin
Biden Appointed SEC Chair Gary Gensler is not Going to Save Ripple’s XRP Token
Will Bitcoin cross $100000 by August 2021?
Cardano, Cosmos, BAT Price Analysis: 17 January
Tether’s General Counsel: iFinex v. NYAG Case Continues with a Court Meeting in 30 Days
Bitcoin Struggles Below $38K, Why BTC Could Dive To $32K
Blockchain1 week ago
Ethereum Whale Addresses With Over 10,000 ETH Continue to Grow In Numbers, Price Holds Above $1000
Blockchain5 days ago
Will exchanges run out of Ethereum?
Blockchain1 week ago
As Bitcoin Regains Lost Ground, Options Traders Bet on $52K Move By Late January
Blockchain1 week ago
‘Crypto is exactly like dot com bubble; Bitcoin, Ethereum can survive it’
Blockchain1 week ago
Ethereum Price Analysis: 12 January
Blockchain1 week ago
Shanghai Government Invests $5M in Blockchain Startup Conflux
Blockchain1 week ago
Coinbase Custody Lists DeFi Project BarnBridge
Blockchain1 week ago
Brian Brooks, Crypto-Friendly OCC Leader, Steps Down