If you find yourself reading this post, you probably have already convinced yourself to varying degrees that you need to invest in crypto currency/decentralized finance/NFTs or at least want to learn about how you could invest if you wanted to. However, you probably find yourself in the conundrum that many people find themselves in when they decide to even dabble in this space or just about any industry: “How do I jump in? There are so many options and even the easiest options require a lot of research on my end. I just want to jump in some way and ride the wave.”
You should be rest assured that decentralized finance, cryptocurrency, gaming, NFTs — “DeFi” for short in this article — is in a sense a mirror of the traditional finance world, but uses unique technology to do the same things traditional finance does while lowering the barrier of entry. In traditional finance, in order to jump in and take control of your investments one generally needs to have a relationship with a broker who can maneuver around the various equities markets on your behalf. These brokers would have various degrees, licenses, and access to various trading platforms that the normal everyday investor simply would not have. The trade off for this relationship would be that the broker would extract fees at various points. They would get an asset under management fee for the gross amount of your money they are actively managing. Furthermore, there are points when you would get a tip or have an interest in a certain business or industrial sector and you approach your broker to have him or her make trades on your behalf besides the typical management of the assets under management. This, in turn, would generate transaction fees as well. This could be a drain on the gains you will have made depending on how active a trader you are of your own money. Now, to be clear, there is nothing wrong with a broker getting paid for their work on your behalf. They provide a valuable service and any valued service should be compensated. However, what if there were industries or segments that you knew you could invest on your own without that middleman? Well, the question then is:
How do I track an industry or market without the need for a middleman?
One way to go about this in traditional finance is to simply buy an index fund. An index fund, simply, is a mutual fund with a portfolio put together to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index fund’s purpose is to provide broad market exposure, low operating expenses, and low portfolio turnover. At bottom, they exist to track whatever the identified market is. For example, an index of the S&P 500 is set up to track the 500 largest U.S. companies. Therefore, if a person has confidence that the top 500 companies identified by Standard and Poor’s will perform well, but they either don’t have the knowledge or time to invest in all of them, then they are best served in buying into an index fund that does the work for them. There are all types of different index funds that track all different types of lists, geographic regions (such as the DAX 30 for the 30 largest German companies), or industry specific (NASDAQ 100 for top 100 NASDAQ companies in technology).
Why would I buy into a crypto index fund when I already have money in my retirement plan, 401k, or pension fund?
This is actually one of the easiest questions to answer. The best way to think of investing in an index based on DeFi is simple: it doesn’t replace your other plans, it supplements them. It is important to recognize that DeFi is still very young. Borrowing analogies from sports, it is the first inning of the baseball game or the first minutes of the soccer match. The game just started. And many of the investment vehicles you use for your retirement are encumbered by internal mechanisms that slow adoption of new industries. It will take some time for those companies to jump in and offer products that index DeFi. To be clear, these mechanisms are good and protect the investors in these funds. However, they do not allow them to be quick on their feet to adapt to a rapidly growing new industry such as DeFi. They will come to the game, but it will likely already be in the third inning or late in the first half of the match.
The thesis is not to supplant your retirement plan, but to allow you the ability to add to it on your own.
Is there a DeFi index that I can use?
Yes, one is coming very soon and it is called Phuture Finance. They are building out an app that allows you to not only 1) invest in pre-existing indexes, but also 2) create your own index fund. The first aspect is pretty ground breaking already as we saw the success of the Bitcoin Futures ETF that made 984 million in volume on its first day of availability on the marketplace. It is obvious that the demand is there by both institutional investors and, by extension, everyone else from toll collectors, to truck drivers, to retired grandmothers. The Bitcoin Futures ETF was based on demand for just one of an array of assets that can be found in the marketplace and it wasn’t even based on the actual price, but the future price of it. People obviously feel strongly about Bitcoin and the overwhelming success of the ETF, in turn, is a vote of confidence on the crypto marketplace generally by both retail investors (the regular people like you and me) and the institutional sector.
The second aspect — being able to create your own index — is the one that can get lost in the shuffle, but likely is the most innovative aspect of the Phuture Finance index app. This will allow you to really put some work into finding what assets you want to invest in and then after doing your research, you can set it and forget it. Invest in your own fund, invite your friends, and family to look at your index and possibly invest in it themselves. This is really a value that this app will allow that is groundbreaking. You do not have to rely on an out of the box index fund that doesn’t meet your research needs or the specific area you want to get invested into. Of course, there will be an array of “out of the box” choices so you need not do that research, but for someone who is a little more hands on, but doesn’t want to go through the hassle of going across different exchanges, wallets and the like, this is an ideal solution. Also, Phuture does a lot of the initial groundwork in only selecting blue chip projects with a track record, reputable teams. Over time this list will include hundreds of assets, but to start out with they are using a whitelist of the best of the best.
You should research Phuture Finance yourself on their webpage linked above including their whitepaper which goes into the nuts and bolts of who they are and what they are doing. You can follow them on youtube and I highly recommend an introduction video they did laying out the value proposition of Phuture Finance. They also have a presence on a variety of social media such as Twitter, Discord, and Telegram. I very highly recommend reaching out to them in the social media outlets I listed. They are a very responsive team who will answer your questions about the project in all facets. Transparency is really a key tool in their development.
I am already a pretty sophisticated crypto trader and investor, how can this tool help me?
For those who can be called “crypto natives” meaning they are already very familiar with it, buy and trade actively, if not daily, there is still a use for an index. There are simply some companies and coins that you feel as if they are a sure bet, but you don’t want to actively manage them. Why not use an index to keep your exposure there passively while you actively chase gains on the latest projects? Ultimately, it’s about time efficiency for you since filtering between different wallets and protocols to continually invest on coins you know are already sure things is a waste of your energy.
I always hear about how volatile crypto is and how many of the projects have no value at all. How do I get protected from these?
The truth of the matter is that all investing involves some level of risk. And a whole new industry will have increased volatility as a rule. Many of us remember the dot com boom and the graveyard of many internet companies that upon a cursory look “under the hood” people could see were basically unfulfilled promises and vaporware. We could look at Tharanos, a currently infamous biotech company, that made a lot of promises about blood testing that never materialized with a product at the end.
At the end of the day, the answer to this question is to do your research, but know you can not avoid all risks. That simply is not how business and investing works. However, with that said, indexing helps to mitigate that risk because of the nature of how risk is spread. So, for example, you purchase a token of a Phuture index fund, you already are in a bargain with not only yourself, but the indexer themselves. They want their investments to appreciate alongside the market as well. In turn, they will naturally avoid assets that look shaky or do not have a clear use case. And as mentioned above, they already have a vetting process in place to ensure that what they are providing is already blue chip quality. To be sure, some indexes will lean on more speculative underlying assets, but on the whole these assets are all selected for their staying power. Ultimately, it is your money and your future we are talking about so it’s wise to do your own research on the underlying assets in the index and the spread of them within that index. I would not advise just jumping in with no thought. It is important to reiterate the earlier point: this can be viewed as a supplement to your retirement savings. Anyone who is telling you to replace your current savings strategy wholesale with a crypto index may either be too exuberant or maybe not thinking clearly. An index is not a “get rich quick” solution. Instead, this needs to be put in the perspective of thinking in long term gains that peg to the marketplace in a similar fashion to your other retirement investment strategies.
There are, however, advantages to Phuture indexes that I believe are superior when compared to traditional financial indexing tools. You have clear visibility to the underlying assets. You will know not only what assets are in the fund you are investing in, but you will know the allocation percentage of the fund throughout those underlying assets. This is a bit more transparent than some other indexes both in traditional finance and in DeFi simply because that would require a level of research beyond the grasp of the retail investor. At the end of the day, we are all retail investors. Secondly, there is ease of withdrawal. If you want to get out of your position in the Phuture index, you can easily get out and take your share and move on without penalties. This penalty free access to your money and, in turn, your gains provides a liberty you cannot find in the traditional finance space with index products which are encumbered with a variety of rules. I am sure many of you have tried to take money out of your retirement plans for unexpected emergencies and found that it is not easy to get access to your own money. You end up having to read the Summary Plan Document of your retirement plan and realize you may have access to SOME of your own money, but some of it hasn’t vested yet or they will take 20% from you for tax purposes and tax penalties. By the way, a word of advice: if you have not already, get a copy of your retirement plan’s Summary Plan Document and familiarize yourself with it. This applies to American investors, but there are similar types of documents in other jurisdictions as well.
Are indexes risky? Is this industry even worth investing in?
As a general rule, they are not risky or, better stated, they are as risky as the market they are indexing. It is important to realize that in traditional finance the biggest players in indexing are names you will recognize. Vanguard, who under John C. Bogle invented the index fund, BlackRock, Fidelity, and an array of other investment companies built upon the foundation of index funds. The chances are rather high that you already are a customer of one of these types of companies, if not the Vanguards and Fidelitys specifically in your deferred compensation plans for your current or past employment. So the index itself as a historical product has a strong track record.
An interesting anecdote: Warren Buffet, CEO of Berkshire Hathaway and a famous voice in investing known as the Oracle of Omaha, made a bet that an S&P index fund would beat a hedge fund year over year in returns and won. This merely highlights what has become a general rule of thumb regarding index funds: index funds generally beat actively managed funds. As a matter of fact, over a 20 year period index funds beat actively managed funds at a rate of 90%. It is important to note that index funds follow the trend of the market they are indexing as a whole. Therefore, if a marketplace or sector grows, that index will grow at generally the same pace. On the other hand, if that market place dips, then the index will dip with it. However, over time the trend is towards growth.
So then, an index is essentially a decision on the health and possible growth of a marketplace, industry, geographic region, or any other intersection that index means to track. So it begs the question: what is the future of the crypto marketplace? Is this a market worth following with my hard earned money? A most bullish answer can be found by Raoul Pal, a former Goldman Sachs executive, who anticipates that the space grows to about a 100x market cap within a decade. It is important to put this into perspective. Most of us are regular folks who get a print quarterly statement from our retirement plans know that you come to expect returns like a 3% growth quarter or a 1% loss, etc. Those are the regular types of numbers one sees. There is basically no situation in our lifetimes that I can say one opens up their quarterly statement and sees a 30%, 40% or higher growth quarter. That is unheard of. A 100x growth within this decade would be phenomenal growth that could only be measured in “x”, and “%” would look preposterous. In net effect, if Mr. Pal’s assessment is correct, you would be looking at numbers that make what you gain in your quarterly statements seem paltry even if they are great all things considered. The possible growth in the DeFi space would have a fun house mirror effect on how one looks at their traditional investments. I can speak personally from experience, my last quarterly statement from my retirement plan reported .8% growth. POINT. 8. PERCENT. The large potential upside of DeFi simply insists on some involvement in the space for the regular person. Raoul Pal goes a bit more in-depth in a long form discussion of his thoughts in a video entitled Introduction to The Exponential Age that, while a bit long, I think is worth your time. Serial entrepreneur, owner of the Dallas Mavericks of the NBA and the OpenSea NFT platform Mark Cuban is also rather bullish on DeFi.
At the end of the day, it is extremely rare that a whole new industry rises up in your or any one else’s lifetime that allows you to get in on the ground floor without being an insider. One of the great benefits of this era, this industry, and this technology is ease by which the average Joe or Jane can jump in and invest.
Here is a thought experiment: imagine yourself on December 31, 2029 and it’s 11:58pm and you are getting ready to celebrate the new year. Do you want one of your regrets at that time to be “damn, I wish I had put in even $5,000 into DeFi in 2022. What would it be now? Would it have doubled? Tripled? More? Would it be a half a million dollars now?” Maybe it is less. Maybe it is more. But you don’t want it to pass you by either way. At worst, it is a regular investment and you make some money on it and it helps to support your retirement. But…maybe it is what some of the thought leaders think it is. Maybe DeFi will become a 100x asset class in a decade. Or, even being conservative, even a quarter of that and it is a 25x asset class. That 5,000 of your own money that ends up looking close to 125,000. You would kick yourself for not trying and even if it is not remotely close to that, you still would be tracking a growing industry that will benefit you in the long run. This is not to mention that we are all trying to outpace inflation which is becoming increasingly difficult. It is wise to diversify around inflation and DeFi is likely the answer. Will it be 10x, 20x or 100x? Maybe, maybe not. Will DeFi likely outpace inflation? Almost assuredly by the amount of capital moving into it at such a rapid pace. The main example being the success of the Bitcoin Futures EFT referenced above which happened in a day.
If I am coming across as pitching a hard sell, it is because I am. I am hard selling you on this. One of the problems I found as a regular guy trying to take a handle on my own financial future with a family and a professional history mostly in education and nonprofits was trying to be more of an active investor. I found Robinhood to be great because it allowed me to jump into the stock market. I have a Coinbase account and that helped to give me more exposure. However, to me, it is not enough. To be clear, Coinbase is a wonderful company trailblazing for all of us and their work should be applauded and commended. I personally think Brian Armstrong, their CEO and one of their founders, is a courageous man trying to help bring crypto to the world who is sticking his neck out to the mainstream to make the world a better place for all of us. However, there is space for other people to jump in and do different innovations. And I think Phuture Finance is one of those innovators worth your attention.
Then I found out more and more about crypto and DeFi and I heard about it the same way you likely did: news reports about Bitcoin. And I’m sure many of you had the same response to Bitcoin as I did initially: “this is a stupid fad and all of it goes to 0 and they get their scam exposed.” Over time I realized that this is real, and here to stay, and there is an entire industry growing in its wake.
However, the same problem plagued me that plagues many other people. You hear about something you want to invest in, but it is only available on an exchange you are not in yet. Or requires a swap of this asset to another asset and then going to that exchange to buy it, but then you should put in this wallet versus the one you already have. It can be so dizzying for someone simply trying to put a small investment in. It can be both disorienting and dispiriting. I can imagine there are likely tens of thousands, if not hundreds of thousands of unfinished sign ups for various exchanges and the like by people bewildered by all the hoops needed to accomplish the modest task of buying some coins or tokens of a company they thought was interesting. If only there was a place like a Robinhood or a broker that could make this easy? Coinbase helps a ton, but it doesn’t allow you a broad exposure. You have to go one by one and figure it out as you go. And then I heard about Phuture Finance and what they are putting together and it all clicked. I heard about it and decided right away: “I’m going to learn about this app and try to get involved somehow, even if it is just buying some tokens.” I did just that and here is my article putting out what I think is the value proposition for the regular person, working a 9–5 job (and more), trying to get involved in this industry without all the hassle and hurdles of managing it myself. I thought “I can shop for an index, buy in, set it, and forget it? I need to tell other regular people. Other regular Joes and Janes like me need to hear about this.” In doing my research I learned about Phuture Finance and its DAO organizational structure (seen throughout the crypto space) which is likely another longer article for another day. I truly think that the DAO model will likely be one of the key organizational entities of the future alongside all the other organizational entities you know of such as Corporations, LLCs, and the like.
Can I afford not to try?
Ultimately, there are some who see DeFi as the wave of the future replacing traditional finance. Others feel the exact opposite, that it is fad and will go away. It leaves the regular Jane and Joe with a question: can I afford to not try? I would say no, you can’t. Another way to put it is this is a variant of Pascal’s Wager. At the risk of doing violence to the underlying theory: Blaise Pascal argued that in deciding whether or not God exists, the best bet was to act as if God exists because the reward is paradise if God exists and you acted as if God existed in your life. With time, this thought experiment has been applied to all kinds of scenarios. I think for our purposes it is best applied and answered with: “it is best to act as if DeFi is going to grow and become a permanent part of the world economy?” I’m not here to tell you paradise awaits at the end. However, I do think a strong supporting structure for your retirement is at the tail end of this.
And I think the future is somewhere in the middle of replacing all traditional finance and not going anywhere. DeFi will, in my mind, exist alongside traditional finance providing some things traditional finance cannot while supporting traditional finance and borrowing its tools and vice versa. And one of traditional finance’s best tools, strictly on the facts, is the index fund. And Phuture Finance allows you to use the best of the traditional financial innovations in the DeFi marketplace. Sign up for updates on the Phuture Finance project so you are informed when it goes live and can act when the time comes. In the interim, I would suggest perusing all of it thoroughly and getting a sense of the team, the community being built around Phuture Finance, and you can go in and ask questions. Ultimately, this is your money and your future we are talking about.