Source: Forbes Finance Council from Forbes
Digital currencies are getting a lot of attention as a new asset class. Bitcoin, for example, recently reached an all-time high of $2,900 on June 7, 2017, representing a year-to-date (YTD) return of 200%. With these wild price increases, digital currencies are gaining more attention and demand from traditional investors. Many people don't know that there are many different digital currencies. According to CoinMarketCap.com, there are currently well over 800. As a matter of fact, on June 6, 2017, the collective market capitalization of all digital currencies crossed $100 billion for the first time. Getting involved in digital currency investing can be very challenging for the regular investor. Getting involved in more than one digital currency at a time is even more complex. As with most asset classes, diversification is a recommended approach for new investors to mitigate risk.
Stock market investors generally diversify through mutual funds or index funds. These types of investment vehicles are not yet on the market for digital currencies, but I believe there will be strong demand for these types of products in the future.
Getting A Holistic View Of The Market
With this in mind, my company has created its own digital currency index to serve as a market indicator: the FAAST5 index. It aims to follow the price increase of the 5 largest mined digital currencies. Digital currencies come in different flavors: some have a fixed supply, while others are "mined," and new digital coins are minted on a regular schedule. This index currently includes: Bitcoin (62%), Ethereum (33%), Litecoin (2%), DASH (1%) and Monero (1%), with these digital currencies weighted based on their market capitalizations. The performance since inception is +1200%, and the YTD performance is +330%. Comparing this to Bitcoin, which has seen similarly impressive returns of +200% YTD, shows that there may be value in diversification in this new investment class.
Moe Adham Historical chart of FAAST5 Index
The goal of these indexes is to give a more holistic view of the digital currency market and, eventually, to make it easier for end users to buy and hold more than one digital currency. Many new market entrants are interested in investing in digital currency, and picking one currency is difficult. This is very similar to the stock market, where it is difficult to pick winning stocks; therefore, many investors rely on indexes for market diversification.
Comparisons To Traditional Indexes
Traditional indexes follow different markets and have become an incredibly popular form of passive investing in the past decade. One of the most popular indexes, for example, is the S&P 500, which follows the 500 most traded U.S.-based companies. There are indexes to track just about any asset or commodity one can think of. For example, the S&P GSCI Precious Metals index tracks precious metals such as gold and silver, while the S&P Information Technology index follows major information technology companies.
When comparing digital currency indexes to traditional indexes on a year-to-date basis (YTD), the returns from through June 7, 2017 are as follows:
- FAAST5: +353.75% (Top 5 Digital Currencies)
- S&P 500: +8.68% (Largest U.S. Stocks)
- S&P GSCI: -7.39% (Commodities)
- S&P 500 Information Technology: +22.30% (IT Stocks)
- Bitcoin: +182.83% (Largest Digital Currency)
There are some major differences between digital currency indexes and the traditional indexes listed. For starters, the S&P 500 follows the price of 500 assets, while our FAAST5 only tracks five digital currencies. As more digital currencies gain market share, we will likely see digital currency indexes follow an increasing number of assets, but these are still early days in the market.
Keep An Eye On The Market
While there are no digital currency indexes currently available to retail investors through regular brokerages, many firms are working towards making these types of products available. The Bitcoin ETF was recently denied approval by the SEC, but that decision is under appeal. Indexes and ETFs will make diversification, security and taxation of digital currency investments vastly easier for regular investors. If you find this subject too complex, you are not alone. Things are certain to get better as regulations and products emerge to meet the increasing market demand.
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