Today we conclude our discussion on crypto investing through theme based index products with Mike Taormina from Index Coop. You can catch the first part of discussion from last week here.
SW: Mike, from a financial advisory perspective, what benefits do you see in leveraging indexed products?
MT: Financial advisors have the same challenges that an individual investor has in that it’s hard to pick winners. I'd argue, advisors are more adept at picking stories and rallying behind a narrative. The narrative is everything and that's exactly what our products give you exposure to. I couldn't tell you off the top of my head every single asset that's in our metaverse index, but I'm super bullish on that theme. I don't want to have to research all the underlying components in the index. Instead I can put my trust in a well thought out methodology that looks across the desired universe, identifying products based on criteria such as liquidity levels, longevity, and market sentiment to give me thoughtful exposure to that theme.
Another factor to consider is accessibility. Some of the off-chain solutions like the futures ETF and trust products are purchased via traditional exchanges, so you’re subject to trading windows during normal business hours. Or if it’s a fund, you might only be able to get in or out once or twice a week at best. Our products are 24/7 so you can get in and out at any time. If news comes out about China on a Saturday night related to crypto markets you can take action immediately on the next block.
But what's really interesting for traditional finance folks and advisors is that you are effectively the authorized issuer with our products. You can exchange our tokens for the underlying positions at sites like TokenSets and vice versa if you hold the various components. You can also put the tokens to productive use at sites like Aave, where $DPI is listed as one of the acceptable collateral and actually use it to either earn yield or create a leveraged position. It would be much more difficult, if not impossible, to accomplish the same with the traditional financial products that aim to get exposure to crypto.
SW: Gaining access to the underlying assets is an incredible feature. I could see at some point an investor saying, “OK. now I want to actually hold these assets directly” because one of them has taken off in value or perhaps another has become a currency of particular importance in a certain jurisdiction. You actually have access to them which is a huge advantage over the off chain products.
MT: Exactly. One other item to consider is cost, both in terms of fees and pricing. Our products have a streaming fee, which is essentially an expense ratio. For example, the streaming fee for $DPI is 95bps, and that is split between Index Cooperative and DeFi Pulse, the product methodologist. Compare that to more traditional off-chain solutions like LP funds, which charge around 250bps. Or to trust products, which often trade at a premium or discount, depending on which position you’re taking and which way the market is going. The NAV of our products are kept in-line with the market value because any discrepancies are arbitraged away almost immediately on the blockchain. So it trades in lockstep with the market price of the underlying components.
SW: The pricing discrepancies are a huge challenge right now. You see the same circumstance with the futures ETF where you’re essentially paying a premium to get exposure to Bitcoin, which can be tough to justify as an investor.
MT: It’s difficult to come out ahead in that situation. For example, at the time of the initial product launches, the bitcoin futures-based ETFs were trading with a 10-15% implied negative roll yield, annualized. That means you need to beat that hurdle just to break even in a given year. You might get lucky over a shorter period of time and still win, but it's hard to keep doing that if your goal is to have a long-term passive position in that asset.
SW: As we wrap up I had just one last question, what major developments do you foresee in this space in the next 12 months?
MT: In the next 6 to 12 months a lot of activity will shift to Layer 2. With Uniswap deploying on Polygon, for example, I would expect to see a lot of funds flow over there as well as to other scaling solutions. You can get a low gas experience right now on Polygon, but due to the lack of liquidity for many tokens you can get hurt with slippage. This transition of funds will create a low gas environment with strong liquidity that will help retail investors. And as it relates to our products, anticipating that trend, we will be there. We already are on Polygon, and will have pools on the Uniswap deployment there soon.
On the other end of the spectrum with institutional investors and high net worths, you're going to see more Avae Arc type services where there are ring-fenced sandboxes with built-in KYC and AML procedures. That's going to give comfort to institutional investors to come to the space in bigger size. Regardless of whether you are a big or small investor, these two trends will benefit everyone by bringing more funds into the market.
The third thing I'd say is the near-term market outlook. I think we'll continue to see volatility, but not a sustained bear market like in 2018-2019. The last bear market happened not just because of crazy speculation, but also because there weren't really any use cases yet. Now we're seeing the emergence of use cases like DeFi and NFTs. We'll have volatility for sure, but the trend will ultimately be up.
SW: And there's also a lot more liquidity. Support levels are much more well established now than they were in the previous cycle which should help to keep the markets relatively stable over the longer term.
MT: Right. My final thought is the wild card of what could happen from a regulatory standpoint. The initial reaction to regulation could be a pullback and consternation. But I think the medium- or long-term effect will be positive in that regulation will provide more clarity around the rules. Even if that happens in the next 12 months, that's still a long-term bullish outlook.
SW: Well this has been extremely informative Mike. Thank you for taking the time to speak with us about thematic based, crypto investing as well as providing some valuable market insight. We wish you and Index Coop continued success with your index investment products.
Mike Taormina is an NYC-based entrepreneur with a diversity of experience across financial services: asset management, fintech/insuretech, and decentralized finance (DeFi), with a functional focus on business development, strategy, and finance. He is currently the Co-Lead of Institutional Business at Index Coop.
Index Coop is a collective of finance professionals, engineers, DeFi experts, meme-makers, content marketers and crypto enthusiasts focused on making crypto investing simple for individuals and institutions through a broad variety of investment vehicles from token baskets to leveraging.
Please note, this article is intended for informational purposes only and should not be considered investment, tax or legal advice. Consult your investment, tax and legal teams for definitive guidance on any digital asset.
