Building indices as a way to reduce risk or beat the market has been part of the investment world for decades.
Teams of quantitative analysts rake over thousands of portfolio permutations to come up with an equity or bond index that will deliver a fractional reduction in risk or outperform a chosen benchmark.
It was inevitable that the same statistical rigour would find its way into the crypto space.
BitFund is a cryptocurrency investment platform that started out as something of a hobby, where the founders wanted a way to buy, sell and rebalance their cryptocurrency holdings.
They started building indices to see if there was a way to soften the enormous volatility of crypto coins like bitcoin and ether, or whether an investment spread over a basket of cryptos would outperform bitcoin.
The results were fascinating.
History shows that there are periods when other cryptocurrencies outperform bitcoin, and that was certainly true earlier this year before bitcoin surged on news that PayPal would allow its customers to buy, hold, and sell cryptocurrencies, including bitcoin, directly from their PayPal accounts.
Bitcoin has doubled in price since the start of the year, and that’s a hard act to follow. Bitcoin accounts for about three quarters of the total crypto market value, so it remains hugely dominant in the sector.
An investment spread over the 20 largest cryptocurrencies, weighted by market cap (with a maximum weighting of 15%) shows it seldom underperforms bitcoin, but frequently outperforms it.
This is shown in the graph below. Since January, an investment in bitcoin would have yielded a return of 109%, against 88% for the Capped 20 index. Bitcoin’s recent outperformance of the Capped 20 index is a rarity, and history suggests it is something of an anomaly that may not last. These figures are net of the 2.4% annual rebalancing, storage and transaction fees.
Investors would have done slightly better choosing an investment equally weighted across the 10 largest cryptocurrencies (all with an equal 10% weighting). This is shown in the following graph, where the results since January again give bitcoin the edge, with a return of 109% against 92.2% for the Equal 10 Portfolio.
Other than these off-the-shelf portfolios which are rebalanced weekly, BitFund lets you customise your own crypto portfolio. Clients have access to a reporting dashboard for keeping track of their investments in real time and making any further deposits or withdrawals.
Portfolios such as these are often preferred for first-time crypto investors, says BitFund co-founder Joshua Miltz.
“Most people making their first foray into cryptos can find it confusing, so choosing a unit trust-type portfolio which gives them exposure to a basket of cryptos is a relatively easy way to go.”
BitFund is three years old, but the growth in customers and investment flows since January this year has been one for the record books.
Interest in cryptos spiked during the Covid crisis, amid fears of steadily depreciating fiat currencies such as the rand and the US dollar.
It seemed for a time that cryptos may have been a passing fad, particularly after the bitcoin crash in 2018. All that has changed in the last 18 months. “People are scared of what will happen to their wealth when measured in traditional currencies such as the rand, so they are looking for some way to hedge against currency depreciation,” says Miltz.
BitFund was founded by Dean Joffe, Joshua Miltz, Bradley Goldman and Jonathon Ferrer, combining the skills of a lawyer, software engineer, chartered accountant and actuarial analyst.
They spent the best part of a year building the BitFund platform and created a rebalancing engine to automate many of the back-end processes. Heavy investment in security ensures customer funds are buried away in virtual vaults, away from the internet (known as cold storage).
BitFund portfolio fees are inclusive of trading costs. Annual management fees are charged at the rate of 2.4% on the total value of cryptocurrencies under management, plus an exit fee of 1% to make up for any cost incurred in liquidating the portfolio. Institutions pay lower fees based on the size of investment.
Miltz says a high proportion of new customers is looking to create their own portfolios to either reduce volatility and risk, or to outperform a predetermined benchmark (such as bitcoin).
Portfolios are rebalanced weekly to keep investors’ desired exposure stable, and to adjust portfolios based on market performance. This is the only time that a portion of the funds in the various portfolios resides on well-vetted international exchanges.
“Our corporate accounts with these institutions enable much lower costs of regular rebalancing,” says Miltz.
What lies in the future?
“We see investors looking for a more customised exposure to cryptos, which allows them to build portfolios that are consistent with their investment objectives.
“There’s no question that cryptos are volatile. One way to reduce volatility is by building portfolios that spread your investment.
“Diversification is always sound investment advice,” says Miltz. “Our products allow you to do that while remaining exclusively in the crypto space.”