Investing in Cryptocurrency
Some say that cryptocurrency is the most disruptive financial instrument to hit the capital markets in the last decade. Not since the mortgage-backed securities derivatives of a decade ago has anything caused so much conversation, controversy, and hype, or created so many financial winners and losers. Despite the latest downturn, many savvy investment experts suggest that there’s a strong case for adding an allocation of cryptocurrency to a traditional investment portfolio.
Research has shown that cryptocurrency has no correlation with stock and bond markets, so it offers an extra layer of diversification to an otherwise well-balanced portfolio strategy. A recent study by Yale suggests that up to 6% of one’s portfolio should be invested in cryptocurrency because it has no exposure to the factors that affect most common stock market, macroeconomic, currency, or commodity values. Another study suggested that a 5% allocation of Bitcoin in a traditional portfolio mix of 60% stocks and 40% bonds more than doubled the returns of the portfolio over a four-year period, while reducing the maximum drawdown of the portfolio in the same period, with only a minor impact on total volatility.
However, while the merits of cryptocurrency investing are positive, for retail investors looking to get exposure to the cryptocurrency and blockchain market, the investment options are extremely limited. In addition, the burden of formulating the proper investment strategy rests solely on the back of the individual investor. When changing just a single variable, such as cryptocurrency selection, can have a staggering impact on the gain or loss of the portfolio, the expertise of the investor is crucial, and few retail investors are likely to have it.
Cryptocurrency investing is not for the faint of heart. This year alone, from the peak of the market in January through the first week of September, the industry has shed nearly 80% of its market capitalization. In addition, crypto investing can also be quite an ordeal. Though over the course of the last year there have been over 1,000 new and promising cryptocurrency projects launched and listed on the world’s exchanges, the mechanism for investing remains cumbersome and restrictive. Those who wish to access the crypto markets are left with a single platform for investing–the cryptocurrency exchange. Investors are required to determine by themselves which coins to buy, when they should enter the market, which exchange(s) they use, which kinds of wallets they will need to obtain, and how to configure their stop losses.
Because of this, there exists a massive global market of retail investors (those that invest in stocks, bonds, and mutual funds) who currently have no exposure to cryptocurrency or blockchain markets. Around the world, there is estimated to be a pool of over 1 billion potential investors representing some $69 trillion in equity value that is going largely untapped. They desperately need a simplified approach to “smart” investing–one that is akin to the growing trend toward index investing, but is not limited to only the very wealthy “accredited” investors to whom index investing is currently available.
Snowball is determined to fill this void. By democratizing professional crypto investment knowledge through what it calls its “Smart Crypto Investment Automation (SCIA)” platform, Snowball provides simplified access for everyone to a curated selection of regulatory-compliant cryptocurrency indices.
Why Indices and Not Individual Coins?
Before most investors move into a new market, there’s a warm-up period that involves understanding a particular asset class and how it might fit into your financial picture. With cryptocurrencies and blockchain instruments, there are additional layers of complexity, including the notion of cryptography, miners, blockchains, tokens, hashing and proofs. For the uninitiated, there’s a great degree of unfamiliarity and complexity associated with cryptocurrencies, and yet the everyday investor is expected to jump onto an exchange and start trading, even if they’ve never traded anything in their entire life.
Hand picking cryptocurrency investments is a challenge. Cryptocurrency markets are highly volatile, and even the oldest are still really in their infancy stage. In addition, the selection process for token listings varies widely between exchanges and is currently not well regulated. Selecting winners from losers or trying to time the market has proven to be incredibly difficult. A study by Bitwise spotlighted the value of diversification because of the extreme variability in the returns of even the top ten coins.
Active vs. Passively Managed Indices
There is plenty of evidence that actively-managed portfolios underperform. From a technical feasibility perspective, Snowball’s approach to index investing is relatively straightforward, with a set, hold, and rebalance approach. This eliminates the infrastructure requirements of building a complex set of algorithms and trading strategies. Indices are also very easy to replicate, since the published portfolio composition is not expected to change, allowing Snowball the ability to build its own infrastructure and mirror the top crypto funds within its own platform.
Snowball also sees that actively-managed funds charge fees that are likely detrimental to total performance, and often do not succeed in generating market alpha. In fact, active fund management can actually magnify the value slump seen with certain cryptocurrencies.
Nobel laureate Eugene Fama and Kenneth French performed a study which concluded that a portfolio of low-cost index funds is likely to perform about as well as a portfolio of the top 3% of actively managed funds, and better than the other 97%. Although cryptocurrency markets are thought to be less efficient, less regulated, and may benefit from more active management, so for the results have been contradictory or at least revealed the potential magnifications of the actions of the cryptocurrency markets.
The indices Snowball prefers follow a fixed methodology that involves purchasing a basket of underlying assets without any “active” management or trading other than periodic rebalancing. Most of the work is in creating the initial composition of the index, including the performance of research, analysis, back-testing, and the application of the experience and knowledge of the team.
However, not all indices are created equal, and that’s why Snowball is dedicated to eliminating the confusion and reducing the individual due diligence required to evaluate all the available choices. Snowball uses a powerful portfolio selection methodology and then shows you popular funds based of your investment goals.
Additional Benefits of Passively Managed Indices
Taxes: Because these indices are occasionally rebalanced rather than actively managed, there will likely be fewer taxable events. Snowball will document all trades for simplified and convenient tax reporting.
Fees: By investing in passively managed indices, the overhead of research teams, quantitative analysts, and traders is eliminated, as are the trading fees that result from the buying and selling of positions. We anticipate that this will translate into reduced fees for the investor.
Risk: Indexes are generally comprised of multiple cryptocurrencies, so as we’ve discussed above, a combination of cryptocurrencies provides diversification and should reduce the risks of investing in any individual currency.
Snowball constantly observes the cryptocurrency market, looking for new entrants into the index space. The team performs the necessary fund evaluation and selection process to bring new indices onto its platform. These carefully-made decisions are based on a combination of factors including the fund’s strategy, regulatory compliance, independent certifications, and minimum assets under management.
When recommending possible fund investment choices, Snowball carefully takes into account each investor’s objectives, time horizon, and aversion to risk. Its platform also allows for each investor to screen the various options, enabling a greater level of control and selection for more experienced investors who desire that. It will also feature industry-leading comparison tools, and will provide detailed information on each and every fund.
The Snowball platform then provides investors the ability to use fiat money to fund their portfolio by linking their bank account directly to their Snowball account. US dollar wire transfers are also supported. Lastly, Snowball is very proud of its intuitive, user-friendly interface. While feature rich, it is still simple and straightforward to use and navigate, employing the latest in user experience design. So don’t miss out on this incredible opportunity to join the fast-growing community of Smart Crypto Investment Automation (SCIA) users!