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Read time: ~7 minutes
The game of investing is to grow the amount of money we have. We all play in different ways, based on factors like what we know, how much risk we’re willing to take, and how quickly we want to generate returns. Some may be happy earning a little bit of interest on the savings in their bank account, while others are trading in and out of assets multiple times in a day.
There’s no right or ideal way to invest. Instead, there’s a seemingly endless number of options you can take to build your portfolio of investments. This is great because our portfolios can be totally personalised. But it also makes investing hard. There’s so much choice & complexity to navigate.
Morgan Housel: Personal finance is deeply personal, and one of the hardest parts is learning from others while realizing that their goals and actions might be miles removed from what’s relevant to your own life. (source: The Psychology of Money)
One product that’s helped is the index fund. The idea is that rather than constructing your own investment portfolio, asset by asset, you can instead invest in one asset which tracks the value of a basket of assets. For example, an index fund may track the value of the largest 500 companies in the US. They’ve become a popular means of investing, since they take away a lot of complexity and let investors avoid actively managing their portfolio.
Robin Wigglesworth: Broadly speaking, on a scale of 1 to 10 of importance, I’d easily put index funds and passive investing at a 10. This is one of the first products that really at its core was supposed to be cheap and simple in an industry that tends towards complexity and expense. (source: How index funds humbled the financial masters of the universe)
This problem of complexity exists in the world of crypto too, though it’s arguably worse given the space moves so overwhelmingly fast, and the applications of crypto are so broad. To give more people the option to invest in crypto, things need to get much easier.
That’s where Index Coop comes in.
What is Index Coop?
Index Coop is a community which makes crypto investing simpler, by creating index funds for crypto assets.
Index Coop: We’re a community of finance professionals, engineers, DeFi experts, meme-makers, content marketers and crypto enthusiasts focused on making crypto investing simple. Together we launch, grow, and maintain the most trustworthy crypto indices on the market (source: Index Coop Community Handbook)
Simplicity comes in many forms, and with Index Coop’s current set products, investors can easily:
invest broadly against a thesis; or
use leverage
Let’s break that down.
1) Invest broadly against a thesis
One of the key benefits of index funds is that they take away the need to correctly pick winners. We talked about how they can track the value of the largest 500 companies in the US, but they can be so much more specific than that. For example, an index fund could focus on a particular sector or belief in the types of products/services that’ll be valuable in the future.
Here are a few examples:
Thesis #1: the use of decentralised finance applications will increase
For context, decentralised finance (DeFi) lets us do everything we’d do with our traditional banks and other financial institutions. The one big difference is that it’s all automated through code. With DeFi, we can save, borrow and invest online without needing to interact with other people.
There are some key benefits of this, like:
earning higher interest on savings, as more automation in DeFi means lower costs and less interest being taken away
accessing a global pool of capital for borrowing, which creates a more open and inclusive financial system
instantly exchanging funds, without the usual friction and delays of global payments
If you believe that the value of DeFi will increase over time and see a future where more and more people are using DeFi, then you can invest in the DeFi Pulse Index (DPI). It tracks the performance of some of the largest DeFi applications, like Uniswap and AAVE so instead of picking the winners yourself, you can simply invest broadly in DeFi.
Thesis #2: entertainment, sports and business will shift to virtual worlds
Alternatively, you may believe that individuals and businesses will increasingly spend their time immersed in virtual worlds. This could mean interacting with others in virtual spaces, playing blockchain-based games which let you own & sell in-game assets, or purchasing more digital assets like music or art.
If you believe in this version of the future, you can simply invest in the Metaverse Index (MVI), which tracks the performance of companies like Sandbox, Illuvium and Rarible. Again, you don’t need to pick the winners yourself. With Index Coop, you’ll have exposure to a diversified portfolio of businesses bringing this vision to life.
2) Use leverage
Note: this part gets a little more complicated, but as you’ll see, the beauty of Index Coop is in making the complexity disappear.
It’s possible to borrow money for investments, also referred to as using leverage. Investors may choose to do this as a way of taking a larger position on their assets to amplify their returns. However, as you can imagine, the potential for higher rewards brings higher risk.
One of the key risks that comes with leverage is liquidation risk. To break that down:
whenever you borrow anything from someone else (the lender), you’re expected to return it later on
lenders take on risk because there’s a chance that you don’t, or can’t, return the asset you’re borrowing
one way lenders get comfortable with the risk is by asking for collateral. These are assets lenders can take from you if you're unable to return what you borrowed. It protects them as they're able to use or sell the collateral.
liquidations happen when collateral needs to be sold to cover debts. An important number to pay attention to is the value of your collateral. If the value falls so low that it’s no longer helpful in covering your loan, your loan will be liquidated, meaning your collateral is taken from you and sold off by the lender
Scary, right?
For those who still choose to take on leveraged positions, Index Coop has a range of products which take away the pain and complexity of managing debt positions. They essentially give anyone the option of leverage, but without needing the know-how or time to manage liquidation risks.
For example, you may want to double down on your belief in the potential for the price of ETH or BTC to rise:
ETH 2x Flexible Leverage Index (ETH-2xFLI) is an index fund which tracks the price of ETH, while giving you a 2x leveraged position. Conceptually, this means that when the ETH price goes up by 1%, ETH-2xFLI will go up by 2%. However, it’s risky, because when the ETH price falls by 2%, ETH-2xFLI will fall by 4%
BTC 2x Flexible Leverage Index (BTC-2xFLI) lets you take a 2x leveraged position on the price of BTC, just like the ETH-2xFLI
Closing Thoughts
While the examples I’ve shared are only a subset of the products Index Coop have available, we can already see how they’re simplifying the complex & expensive tasks of building a diversified portfolio and using leverage. Ultimately, Index Coop is hiding complexity and creating a simple & accessible pathway for individuals to begin investing in crypto.
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