The First “Smart Beta” Crypto Index Debuts

IDX Insights, a financial research and development firm, released a cryptocurrency index that it has described as the first "Smart Beta" crypto index. For context, Fidelity defines "Smart Beta" as "an enhanced indexing strategy that seeks to exploit certain performance factors in an attempt to outperform a benchmark index."^[1]

By leveraging this index, investors can harness factor-based strategies to potentially generate compelling risk-adjusted returns.^[2] The index seeks to take advantage of market conditions by making allocations to either cryptocurrency or fixed-income exchange-traded funds (ETFs).

When it announced this index in 2019, IDX Insights stated that amid widespread uncertainty, many investors were looking for investment strategies that would provide compelling returns uncorrelated to equity markets.^[2]

IDX Crypto Opportunity Index

The IDX Crypto Opportunity Index (COIN) was designed to provide exposure to digital currency by investing in the Grayscale Bitcoin Trust (GBTC) when the risk-reward ratio is particularly favourable.^[3] In other words, not only must Bitcoin be appreciating, it must be rising at an increasing rate.

COIN leverages figures from data provider CoinMarketCap to evaluate whether conditions are appropriate for investing in GBTC or alternatively, putting money into a basket of fixed-income ETFs known as the IDX Tactical Fixed Income Index.^[3]

The rationale behind putting money into the aforementioned fixed-income index, which is designed to generate higher returns (and lower duration) than long-only fixed-income benchmarks, is generating yield during times when it is not clearly advantageous to invest in Bitcoin.^[3]

Filling A Key Role

Ben McMillan, chief investment officer (CIO) of IDX Insights, weighed in on how this new index has helped fill a need in the market.^[2] "While several long-only crypto-currency indexes exist, there were none that took a tactical approach to deploying risk-capital when the risk/return profiles look most favorable," he said.

"Nascent asset classes often provide an opportunity for substantial returns but come with elevated volatility and considerable drawdowns; and bitcoin (and the other cryptocurrencies) have been no different," McMillan added.^[2] "We've seen increased investor interest in the space but believe that a long-only approach simply doesn't make sense for most investors."

Investment Options

Currently, COIN is only available to professional investors who can access the index through IDX Insight's SMArtX Advisory Solutions managed accounts platform.^[3] Retail investors interested in leveraging this particular index may consider reaching out to a professional investor in order to do so.

Summary

The crypto index that IDX Insights created was designed to capitalise on Bitcoin's gains while defending investors from its downside. By using a factor-based model that leverages signals (in the form of price data), the index was created to gain exposure to Bitcoin (through GBTC) while eliminating this exposure during unfavourable market conditions.