Coinbase announced today they are launching an index fund. This can only help increase mass adoption into cryptocurrencies. There are two archetypes of investors: active investors and passive investors. Even the world’s greatest investor Warren Buffett made a $1 million bet against Protégé Partners that hedge funds wouldn’t outperform an S&P index fund. He won that bet handily.
What Is Index Investing?
If you’ve ever made several trades within a day, a month, or even a week then you probably are an active investor. You’re trying to use some skill to beat the market. There are many strategies out there so pick your poison if you will.
Opposite this spectrum are the passive investors. These investors are looking to closely match the market’s overall returns. Instead of hand selecting trades the passive investor will try to properly manage R|R (risk and reward) by diversifying their investments into a financial vehicle that will allocate on behalf of the investor.
Here is where the index fund comes. Put simply, the index fund is a mutual fund trying to mimic the market it is a proxy for. In Coinbase’s new fund it will try to track the top overall cryptocurrencies.
Is Active or Passive trading better?
There are several time tested studies that show passive trading beats active trading strategies more often. Retail investors frequently lose ground to the stock market by 4-5%. There are several reasons for this: asymmetric investment information, lack of access to exchanges and liquidity, time to process orders, and the inability to properly time the market.
But what about professional investors? Even with the career traders beating the market is difficult. When they do, the next question to ask whether they can repeat that performance year after year.
Index investing typically has lower fees
Index funds typically do not have a cadre of research staff or a highly paid portfolio manager. They simply reallocate between the market it is a proxy for. The index fund performs well when the overall market is up. With the growth of cryptocurrency you can bet Coinbase’s index fund to track that growing performance.
When it comes to cryptocurrency investing you can expect regular volatility. For the feint of heart and beginners out there, Coinbase is joining the fray in offering an easy alternative to active investing.
Cheers to that!