3 Reasons why Coinbase is pulling the plug on its index fund

When the fund was announced in March, it was one of the first to bring passive index investing to cryptocurrency, offering U.S-based accredited investors the chance to capitalise on crypto growth with no performance fee and a small annual charge. The fund tracks Coinbase’s proprietary Index, matching returns against the market-cap weighted movements of Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, and 0x.

1. A bear market cooling institutional interest

The fund was announced in March, which means it was probably being conceptualised and planned during the crypto bull run of late 2017 — and the all time highs for altcoins in January 2018. By the time it was officially launched in June, however, the crypto market was firmly bearish — and especially so for altcoins. Nonetheless, Coinbase Product manager Reuben Bramanathan claimed at the time that the firm had seen "overwhelming interest from investors."

Over its short lifetime, however, several measures have been taken to make the fund more attractive, suggesting that institutional players haven’t been so eager to commit. In August, Coinbase announced it would be continuing to explore the addition of new assets, and also reducing the annual management fee from two percent to one percent for all new and existing investors. It’s worth noting that
$90.31 billion worth of assets were on Coinbase at the end of 2020.

It appears that low fees and the promise of additional assets were not enough to insulate it from a bear market, however, and the unfortunate timing of the launch has seen the fund fall victim to the same turmoil as many actively managed crypto hedge funds.
In fact, investors would have been better off by simply holding Bitcoin — from 15th June 2018 to 15th October 2018, an investment in Bitcoin alone would have lost 1.2 percent, while the same investment in the Coinbase Index would have seen a 26.6 percent loss (excluding fees and charges).

Bitcoin price 15 June 2018 — 15 October 2018

2. The ‘Bakkt effect’

The recent departure of Adam White — the head of Coinbase’s institutional platform — likely also had a big effect.

As a Coinbase vice president and its fifth employee ever, White helped the company garner over 25 million customers and an $8 billion valuation but left with no comment in early October. Shortly after, it was revealed that he had switched sides — joining Intercontinental Exchange’s (ICE) Bakkt, a crypto "on-ramp for institutions, merchants, and consumers," scheduled to launch this November.

Seen in this light, the closure of the Index Fund seems like an admission of defeat. In essence an acknowledgement that institutional investors are far more likely to work with a firm like Bakkt — with extensive experience in traditional markets — than Coinbase, which made its mark serving retail investors.

Not only can Bakkt offer credibility, but they can also offer secure custody — a uniquely professional solution that other existing institutional index offerings like Mike Novogratz’s Blockchain Index and Abra’s Index fund token might also find difficult to compete with.

3. Returning to its retail roots

A recent survey of U.S adults found that only 8 percent had actually purchased a cryptocurrency — the obvious correlation being that 92 percent have not. Viewed from this perspective, Coinbase clearly has plenty of opportunity to grow its ‘retail’ customer base. This is the market segment that has powered the growth of the business to date, and yet it was effectively locked out of the index fund, given its US$250,000 minimum buy in.

It makes sense then, that Coinbase should decide to put its Asset Management Division on the backburner, and return to its roots in serving retail investors. This was confirmed by a spokesperson at the recent launch of Coinbase Bundle — an investment product aimed at retail investors:

"We will focus on providing diversified exposure to all investors through Coinbase Bundle. Coinbase Bundle is an easy-to-use, low-cost tool provided through the Coinbase Consumer platform. [….] We’ve decided to refocus the resources devoted to managing the Coinbase Index Fund to other parts of the business."

Coinbase has long had the retail market cornered, and has built its success on making the process of buying cryptocurrency as straightforward as possible for new investors. This same demographic are now being targeted with the Bundle, which is effectively an index fund equivalent but aimed at the everyday investor — having a minimum buy-in of just $25.

Where to from here?

Although it has been widely publicized that Coinbase planned to add over 100 new staff to its New York office, that initiative was driven by the now-departed White and current listings on Coinbase’s careers portal show only three positions available in New York — and none for roles that could be characterized as being in the ‘institutional investment’ sphere.

While retail investors might be easier to target in the short-term, institutional money will inevitably remain a long-term goal, and as CFTC chairman J. Christopher Giancarlo said on Friday, it is one that could be crucial to helping the space grow.
"like all things, it takes time to mature, and with the movement of more institutional investors into the space, I think we’ll see that [maturation]."