Indexing Crypto: A Fireside on Coinbase 50, Market Structure and What's Next

Transcript

Okay, and we are back on schedule. Please help me welcome to the stage Martin Lime line, I can say that, excuse me, of Market Vector Index Indexes, uh, who's going to host this fireside chat, indexing crypto, a fireside on Coinbase 50, market structure, and what's next. Please help me welcome him to the stage. Thank you. Is it is it working? I think so. I think so. Yeah. Yeah. Good afternoon. Um, I see you're afraid of indexing. Yeah, it's normally a nerdy topic, but uh I can promise you it's it's it's packed with information today. Um, together we want to explore the question about uh what could be the S&P 500 in crypto and why is it important? Um, you know, in Fred 5, we have all established

standards. We know how to measure performance, how to construct portfolios. Yet in crypto we have no standard. Yeah, we have a fragmented market. uh we have fragmented liquidity and uh especially investors don't know how to diversify. Um I'm glad that I don't have to do that alone today. So I have two experts with me. So um maybe you introduce yourself and then we do the dive deep dive into the topic. Absolutely. Happy to start. Thank you for having me. Really thrilled to be here. Uh my name is Lucy Taylor and I'm from Coinbase uh based in London. My role is I have a dual role actually. So I look after institutional sales for the Swiss market but I also am leading on

introducing broker clients which we call crypto as a service. Um short background on me have been with Coinbase for um almost four years. joined at the peak of the last bull market in November 2021. And before that I um was in investment banking, 10 years at UBS in Opicon here in here in uh Zurich and um around five years at HSBC in London, mostly in FX. Thanks for having me. Hi, very happy to be here. My name is Christopher and I'm the co-founder and CEO on Virtue. Virgin is a Swedishbased regulated digital asset manager and an issuer of exchange traded products that are listed on stock exchanges across Europe which is NASDAQ

stock, NASDAQ Helsinki, Urinx, Amsterdam and Paris and also DOA bersa. Uh we've been in the market for approximately two years now and we manage around $360 million in assets under management and have more than 140,000 uh investors into our products and we are on a mission to push the crypto adoption forward in the European financial markets especially in the form of crypto as an asset class to integrate into traditional portfolios. Yeah, maybe just two words to market vector. So we are an index administrator. We doing digital asset indexes coming from the treadfi side. Yeah. Thematic thematic equity indexes but uh we're doing digital asset indexes since eight years

now. And uh we are also the administrator of the Coinbase 15. I think all three of us have a very different perspective on on this thing today. Um Lucy, when we when we start your your journey or the Coinbase journey of entering the index business, um why did you do that? And and maybe you can shed some light on on why the coin 50. Absolutely. So um I think if we're all aware of the evolving developments and adoption in the crypto economy and um it was really uh sort of like investor demand to have a transparent and reliable index, right?

So um allowing investors to get access uh to crypto exposure via an index. Maybe they can't actually physically hold the crypto. So they can actually um invest into an ETP kind of index product and get that exposure. So we saw um that definitely there was an opportunity for that kind of product and we're thrilled to be partnering with market vector and also virt on on the coin 50 product. So Christopher um I mean you bring the index to life in a certain sense in in in the ETP and I know you have a lot of uh single token ETPs and you're already familiar with with basket solutions.

What was your argument to to start this super broad index? Yeah. And we we we're very happy to finally be live with with the first Coinbase 50 ETP uh in in the world. And I would say that to answer that questions I I would say that we should go back and look at the trady where we have where we were established indices like S&P 500 and NASDAQ 100 that are well known as global and trusted benchmarks and I think as you touched base on that is something that we don't have in the crypto market yet and what we're seeing is that the crypto market continues to evolve and all different emerging areas such as tokenizations blockchains that are huge with and stable coins and other areas where there

are lots of movements that the investment demand and interest within these areas are growing. So we certainly see that there is that the direction we need to go is that there will in the future be very established indices that can be seen as the corresponding index to the S&P 500 for example and we believe that the coin 50 index certainly has the possibility to become that type of index for the for the crypto industry in its whole and I would say what what differs the coin 50 because there are many crypto indices already both in Europe but also globally but the most of the indices across of Europe are usually capped to five or 10 crypto assets. So I think one very important important

component of the coin 50 making it special is the fact that it includes up to 50 crypto assets and what that means is that you ensure that you get gain exposure to of course store of value in the form of bitcoin that represents 50% of the of the index but also to all different emerging areas within crypto such as defy tokenization smart contract platforms etc in the same uh products. And if you compare that to a top 10 index for example that which there are plenty of AC across Europe, you usually uh if you instead of have a coin a top 50 index that is also an opportunity to catch the rising stars in an early phase

because when they enter the top 10 they have usually done a very very good run. So that is a possibility to to gain a better exposure to to that extent and also that the index is being rebalanced every quarter. So the constituents will always change over time along with how the market is developing. Yeah, that's that's true. I think a lot of people underestimate how how large the rotation is within even within the top 10 but even more within top 50. Yeah. So that can't be just a static basket. Um so this this quarter quarterly rebalancing definitely helps. Um what people also don't know is um how restrictive the environment maybe is to an index and so

if you design an index uh infrastructure for example the custodians on all other service providers are pretty important and I think that was also a point for the coin 50 correct absolutely we actually welcomed um the complexity of this product because as you say there's lots of moving parts in terms of trading custody And um we feel that the Coinbased infrastructure is perfectly designed to um facilitate this product in terms of being, you know, the trusted and secured custodian. Um it's um very well known that we're actually um uh the the the major custodian for nine out of the 11 Bitcoin spot ETFs and eight out of the nine ETH uh ETFs. So we have a very strong track record around 13 plus

years of servicing um clients in this way. Um and just you know just to explain a little bit about Coinbase Prime which is the product that is supporting um the coin 50 there are three main pillars. So the first is trading where um clients can access uh our multi- venue execution. We uh act on an agency only basis uh via accessing liquidity via a smart order router. The second is the um the cold storage uh custody which is incredibly important in the crypto space. Um we actually as of our last uh shareholder letter Q424 we had uh we had 220 billion US dollars of assets under custody from

institutions alone. So I think that's quite an important um figure to kind of um mention um and also from a trading perspective in Q4 uh 24 it was around 356 billion of institutional trading volume. So just to kind of give a sense of the size and the scale of assets that we custody for our clients. Yeah, I mean so that's one part which restricts uh the components of an index, right? What can be in the index? I think there's also the the what's interesting these these additional fundamental filters you have where you look at the blockchain architecture. Yeah. Um was there security hack, smart contract hack or I think maybe the most important part is even the token design, right? uh where

for example uh the these lowflat high FTV token are getting filtered out. Yeah. So free float is is also a consideration. So and and I think that's a lifesaver. Um and uh together with with these restrictions Yeah. people are always surprised I I see that on X for example why this token or the other token is not in the index. they look at the coin market top 50 and I have to say that's not just a plain manila coin market cap top 50 index it's really more it's these infrastructure considerations but also these fundamental filters applied on top of that so and I think Christopher for you how important was the the infrastructure

um support I think it's was very important because our ambition and mission with this newly listed ETP is to target all sort of investors So both retail investors whether you're an experienced crypto investor or new in in investing into crypto assets but also financial advisors, fund managers, family offices, etc. So I think the the fundamental criteria and how assets are actually selected to become eligible for the index is very important here where the universe is restricted to the coins that are uh approved by by Coinbase as a global crypto exchange which means that every assets has gone through rigorous due diligence and qualification processes and and on on the top of that

Virgin as an asset manager is also using uh Coinbase of course for the custody and and trading of the underlying assets. come let's come to the regulation because um I think what what people don't know and Switzerland is is of course a different thing but uh when we talk about the EU everybody has in mind one markets yeah it's easy to list but um if you're honest it's that's by far not the case right so etc has different rules than Euron next I mean you're coming from Scandinavia yeah you have NASDAQ stockhol Um then also I think you have uh certain service provider pro provider

restrictions. So maybe you can can tell how difficult it is and also how expensive it is to do that. Uh because people are always comparing that to the US market and wonder why the US market is cheaper. But I have to say with these kind of restrictions uh we we can't be cheaper than the S market. Yeah, absolutely. And I think that's important to to be aware of if you compare to European market. And if I'm not mistaken, if we look at the trady industry, the average ETF in Europe has around double the fee compared to an ETF in the in the US. And that's the problem with the European financial market. For for us as a company have offering regulated exchange traded products that means that we have one foot in the crypto market and one one foot in the

traditional financial market. And if we look at as you mentioned on all the stock exchanges across Europe for example do bersin Frankfurt London stock exchange Urinx Amsterdam Paris etc all of these exchanges have their own crypto frameworks meaning that they usually have a certain universe of coins that are allowed to serve as the underlying asset. So that means that for a for an index crypto product like the coin 50TP it needs to comply with all the exchanges where the product will be will be listed. that makes it a lot more complicated. On the other side, the European market is also fragmented in the way that each market has their own central securities depository, their own regulator. So there are many things to

take into consideration which also makes it quite more tricky to to expand the distribution for for this kind of product compared to the US market where you can list on New York Stock Exchange and then you get distribution capabilities to the whole US market. And on top of that, another part to to be aware of, if if we look at our co coin 50P that was listed now this week, it actually includes 21 crypto assets and not 50 uh from inception. And the reason for this is because of restrictions from regulators, stock exchanges, but also that the the underlying assets needs to be supported by the market makers that is ensuring daily liquidity uh to to the

products where these market makers such as or participants like Jane Street and flow traders are highly regulated entities and need to do rigorous due diligence on each crypto asset. So, so with that said, we we are uh planning to to expand this product to have it distribution capabilities in as many European markets as possible. But this also means that the number of constituents or assets in the in the product will grow from 21 towards 50 over time and the product is being rebalanced every quarter and that is on these occasions when new crypto assets can can be included into the product.

What what we should also mention when it comes to regulation um we not only have an ETP here on the coin 50 but you also do a perpetual swap right and that's just on the Coinbase international exchange not in the US right so that's that's restricted uh what do you see in terms of your perpetual swap um how accepted is that um and also what I'm interested in how do the market maker react um do they like that or do you still think it's a niche in perpetious swap market. Yeah, absolutely. Um, so as you mentioned, we have the Coinbase International Exchange. It was launched in May 2023. It's um, a Bermuda regulated exchange offering perpetual

futures. And what's interesting to note here is that um, and maybe many of you know this, but the derivatives market accounts for around 75% of of the crypto space. So, it's a huge amount of of volume and and market share. Um, so you're absolutely right. We do offer the coin 50 on the um on the international exchange and that is um available for um uh advanced traders and also institutional uh clients on like you know on a juris eligible basis in terms of the jurisdiction that they they sit in. Um so um it's still an evolving product um but we are definitely seeing uptick and and interest and and appetite from clients there. to answer your question around market makers. Um I

think that this is uh definitely a developing product. Um but there is um continual uh growth in volume and um and definitely appetite uh from those market participants. Do you know who who is trading that? Is it mainly retail or also hedge funds? It's it's a it's a mixture of of both. Okay. Yeah. So there's the retail um element, there's also the buy side um and and market makers as well. Regarding your ETP, what do you think? Uh is that well suited also for the retailer only or is it more for the wealth manager, private banker, family office? What would you say? We are convinced that this this index product the coin 50p will be suitable for more or less all form of investors.

So if we if we look at the retail investor side the the initial reception and feedback we have received if that's where experienced crypto investors will also see this as a suitable product since you gain a wide exposure and a sophisticated methodology that that backs the index uh in one and the same product. But on the same time we we as a company we are on a mission to push the crypto adoption forward and and work towards making crypto as an asset class included into everyone's portfolio uh one day. Uh so I think also that this products this INDP serves as a very good onboard ramp for having new investors invest into crypto the first time. Yeah, absolutely. I was sorry I was going to

say I I I totally agree. The way we view this as well is um it's really about um adoption in the crypto economy and for we don't see it as like just an index for traders. We see this as um you know widely adopted product for all um clients whether it be retail or institutional. Yeah. And if we look at from the more professional portfolio management perspective and and we at Virgin we are out every week meeting with different kind of portfolio managers, banks etc. where in general the the the knowledge around cryptos and asset class of course it's different in different markets but our overall impression is that the general knowledge around crypto assets are still very low for those working in in in trad uh there

might be some basic knowledge around bitcoin but when you move beyond that there are the knowledge level is still very very low so these products can uh handle that in a in a good way and also from a pro professional portfolio manager perspective. They want to see what purpose can this product fit into a portfolio. And if we for example look at the sharp ratio, we can also see that historically the sharp ratio has actually been been higher for the coin 50 compared to to Bitcoin which means that adding the coin 50TP to a at let's say 5% of a total portfolio's um allocation will actually improved have provide a better risk adjusted return compared to adding uh 5% of

Bitcoin and I think that is a a factor that is very important for professional portfolio managers And also that in in general uh if you are a portfolio manager you tend to like diversification and in crypto obviously that doesn't historically has not worked as as in predi because usually you get more volatility the the the smaller the coin is but this is still a way to to diversify and and institutional investors tend to to prefer that in many times. I mean what what helps is that you still have 50% bitcoin in the index and and don't avoid that completely.

Yeah, we we see that also if you look at pure altcoin indexes, they are completely destroyed. So it has definitely have Bitcoin Bitcoin as an anchor. Um Lucy, what do you see in terms of vision you have for Coin 50 or Coinbase has? Um is that the go-to benchmark for every country or do you see more specific differences in indexes? Um I don't know if you can talk about the US because you're covering the the Swiss market, but uh just interested to hear what the strategy is here.

Absolutely. So um as mentioned before um we really see this as um a a product that will be adopted by all types of of clients whether it be retail institutional and we um we definitely see the the further adoption the growth of the um the index as you mentioned Christopher you're going live with 21 but you're targeting to increase that as as time goes on so to get to the to the um the 50 and then um as we discussed as well like you know branching out into um further products such as derivatives depending on if that's an eligible jurisdiction that client is is uh is in.

Um so that's the um I think that the we see this as a global index uh for all clients to um to get exposure to to crypto uh via an index which is which is vital really for for for clients that have that appetite. And what about you? Do you think um this thing will be your flagship product or is it still Bitcoin and then if if they have a more sophisticated client base, yeah, you you offer the coin 50. So how how do you approach that? Yeah, that's that's a very good question. And if we if we look at the statistics year to date in in the European financial markets across all exchange traded products within crypto, we can see that this the trend is still that investors

tend to prefer investing into single asset exchange rate products like a Bitcoin ETP or an Ethereum ETP rather than index products. But we're very confident that this will over time change as the crypto market matures and you want to find sophisticated investment strategies that you can invest into. So to answer your question, we're certainly seeing this new product as our new flagship product and we will be working very intensively with with the regulators, stock exchanges and and market makers among others to push towards making the index expand towards the 50 assets one day. And on top of that we will also be having this product and bring this product in front of

various kind of institution retail investors. We will do various road shows in in several markets in in the upcoming months to to promote this index. And I think it requires also to some extent a lot of education for the for the general investor because we should remember that the the average trady investors that might not invest into crypto before crypto tends to become very complicated quickly as you start talking about uh different kind of segments in the crypto market and all coins etc. So we are on a mission to do this in a in a pedagogic way and have our product as a way to to onboard new investors in into the crypto market and make crypto assets a legit legitimate asset class in across Europe.

Yeah, I agree. So the the temptation to always buy the latest thing in crypto and and then underperforming is pretty high. I just have to look at my own wallet. Yeah. So I also underperformed the coin 50. So, uh just a disclaimer here. Um yeah, we have I think 2 minutes left. Are there any questions? Any any questions on on how to structure a portfolio or um how to add that or we can do a live buy session here? Yeah, it's the criteria. Um it's it's pretty simple. So um it has to fulfill as as Lucy said these these Coinbase

restrictions. Yeah. So as we also target institutional investors. Yeah. It has to be able to be under Coinbase custody traded on a Coinbase exchange. But uh then we have this additional fundamental filter just to give you perspective. So we start with the universe of 250 plus and after implementing everything and uh the token design security blockchain design etc maybe 100 are are left and then out of this 100 we select the the top 50 uh Coinbase universe right so it's as I said don't compare that uh with the crap on coin market cap sorry for saying that but it's it's really not

not very uh welld designed. Yeah. So they don't consider any liquidity considerations or security uh considerations. It's just by market cap. Um and liquidity of course plays also a role. So it's really for um institutions like like ETP issuers that they can do a product on it. Yeah. And just to fill in what one last thing there that I think is important also to to be aware of and why why that is an important benefit of investing in a wide index like the coin 50 is that first of all that you can catch the rising stars in an early phase. Uh but also if you look historically uh the coins that are becoming among the top hundred on a market cap basis historically only 23%

of the coins entering the top 100 has stayed among the top 100. And that just shows ho how hard it is to to pick the right tokens to invest into if you're going to the smaller midcaps and why a dynamic index that is being rebalanced quarterly where the constituenc is changing on a continuous basis what what value that actually brings to to your investments. So time is over. Thank you very much. I hope you found it interesting. Thank you. Thank you. Thank you. Yeah.