Case Study - Galaxy Crypto Index Fund

Once the domain of tech geeks and speculators, cryptocurrencies are increasingly being accepted as an asset class in their own right. Here, Galaxy Fund Management portfolio manager, Paul Capelli, answers some common questions about their Galaxy Crypto Index Fund.

What is the fund?

The Galaxy Crypto Index Fund is a passively managed fund designed to track the performance of the Bloomberg Galaxy Crypto Index (BGCI) - an index developed by Bloomberg and co-branded with Galaxy Digital Capital Management. The investment thesis is to capture the overall market cap growth of the asset class via exposures to the largest (US$ market caps), most liquid portion of the cryptocurrency market.

What is cryptocurrency?

A cryptocurrency is a form of non-sovereign money built using cryptography rather than trust between institutions. Cryptocurrencies are generated by "miners" who receive income for providing computational power to the network, which helps to maintain an associated blockchain. Miners of bitcoin and other cryptocurrencies expend computing power to validate and secure transactions recorded on their respective blockchains. As more users join or interact with a given blockchain, demand for that blockchain's cryptocurrency grows.(A blockchain is a technological protocol-a ruleset-that combines cryptography and economic incentives to enforce collective agreement on information in computer networks.)

Can any cryptocurrency be included in the index/fund?

Index constituents are selected based on qualified exchange and daily liquidity qualifications set forth by index rules. All exchanges recognized by the fund must be qualified by Bloomberg and each constituent must have 30-day median daily value traded (only USD pairs) of at least $2 million, aggregated across at least two eligible pricing sources.

The fund also possesses the ability to hold 20 per cent of its overall value in an ex-index member or members if necessary, as determined by market conditions and risk/investment committees.

Are larger investors taking an interest in cryptocurrency?

Major university endowments were some of the first institutions to make signficant investments in cryptocurrency. In 2018, Harvard and Yale were reported to have invested in cryptocurrency funds, and in 2019, the University of Michigan followed suit. In a survey of 150 endowments in 2018, 94% said they had invested in crypto-related initiatives.

In a pre-pandemic survey of 800 U.S. and European institutional investors, 36% said they were already invested in digital assets, and six out of 10 agreed that they have a place in their portfolio.

What place does bitcoin serve in a portfolio?

Bitcoin has a 12-year history of generally positive returns and low or negative correlations to established assets. It is the largest market cap by a factor of ~ 5x and is recognized as a store of value - 'digital gold'. Despite its volatility, adding a small portfolio allocation to bitcoin generally increases overall expected return when adjusted for risk. It also potentially diversifies some of the inherent systemic risk in the financial system that exists in most investors' portfolios.

A Galaxy Digital Research analysis using Modern Portfolio Theory (MPT) finds that the hypothetical risk-return (or Sharpe) ratio is optimized with a 7% allocation to bitcoin. However, the strongest marginal improvement occurs in the 0.5% to 2.5% range. This demonstrates that even a small allocation to bitcoin can have a major impact on a portfolio's total returns.

Who can invest in the fund?

Galaxy funds provide exposure to cryptocurrency at low and predictable management fees, and with no transaction or performance fees. Pricing, tax reporting, and auditing are handled by the most familiar names in finance. The benchmark index the fund is designed to track is maintained by Bloomberg, custody is by Kingdom Trust, auditing is by KPMG, and tax is handled by Deloitte.

The fund is open to accredited investors (who must reach predetermined wealth thresholds) with a $25,000 minimum investment via a Cayman feeder fund.

Can you explain the pricing of the fund?

The fund has a management fee of 2 per cent per annum with no performance fee. Redemptions can be made quarterly with a 30-day notice period.