Crypto-indices: What do they mean for you?

From Goldman Sachs to PayPal, Apple to MasterCard everybody is opening up to bitcoin and its peers. Corporate celebrities like Elon Musk and Chamath Palihapitiya have also pushed the case on social media.

May 10, 2021 / 09:52 AM IST

Cryptocurrencies got off to a rocky start. Originally, a mode of payment for the dark web, followed by a frenzy that led to a peak in 2017, they seem to have finally gained institutional backing since last year.

Before going any further, here's a disclaimer- this should not be considered as an endorsement of or advice to invest in cryptocurrencies. This is only to highlight the growing acceptance of cryptocurrencies.

The return of cryptocurrencies in the public eye has been as sudden and swift as its first rise and subsequent collapse in 2018.

Unlike its previous surge which left everyone scratching their heads, cryptocurrencies have the backing of the who's who of the corporate world this time around.

From Goldman Sachs to PayPal, Apple to MasterCard everybody is opening up to bitcoin and its peers. Corporate celebrities like Elon Musk and Chamath Palihapitiya have also pushed the case on social media.

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But despite such endorsements, the massive rise in prices and the urge to make a quick buck, some concerns still persist- volatility & transparency.

At a time when the crypto market capitalisation doubled to $2.3 trillion within three months, the S&P Dow Jones has brought cryptocurrencies to Wall Street by creating three crypto indices - the S&P Bitcoin Index (SPBTC), S&P Ethereum Index (SPETH) and the S&P Cryptocurrency MegaCap Index (SPCMC).

Creating an index is the first step to providing legitimacy to an asset class or a theme for large institutions. It creates a benchmark for passive funds to track, for active managers to outperform and for institutional investors to create products linked to the asset class.

The impact was immediately evident as Goldman Sachs offered derivative products tied to the price of bitcoin. The derivatives in question will be non-deliverable forwards.

The move also enables institutions to create Exchanged Traded Funds (ETFs)/Index Funds based on these crypto indices.

The creation of an ETF will not only enable more participation but also ensure that investors who are apprehensive of investing in standalone crypto would attempt at doing so through an ETF.

Many financial institutions are unable to invest in cryptocurrencies directly, as they are only able to invest in equities, bonds and funds. A fund tracking a crypto index is a financial instrument – creating a form of investment for indices.

This is a very significant development for investors in India. The cryptocurrency regime is in flux. An ETF or an Index Fund helps protect the investors.

The key concern of governments and regulators is that cryptocurrencies can be used for money laundering. However, a large number of people want to consider crypto just as any other asset and don’t care to use it as a currency for transactions.

The possibility of money laundering is vastly reduced by formalising a financial instrument.

As of January 2021, there are over 4,000 cryptocurrencies in existence. Legitimising 2 currencies reduces adverse selection and speculation risk. This reduces some risk to a novice investor.

As more businesses adopt crypto their legitimacy will only increase amongst retail investors. For investors, this has given them a route to do their own due diligence, have greater access and transparency and narrowing down on pink-collared cryptocurrencies in order to invest.

The S&P indices are a watershed event for legitimising crypto, even as many other concerns stay afloat. However, as with any asset allocation decision, your capital is at risk, including a complete wipeout.

I’ll eagerly look forward to the ETFs and funds created around these indices.

Disclaimer: The views and investment tips expressed by the investment experts on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Swastik Nigam
first published: May 10, 2021 09:52 am

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