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How To Invest Passively in Digital Finance, and Why You Should

If you’ve read any financial advice in the last decade about investing, it more likely than not suggested putting a significant portion of your funds into a passively managed index fund, instead of picking regular stocks.

This is great advice for most people – passive funds outperform both individual stocks and actively managed funds – for a very low cost. It’s become the dominant way most people save for retirement and participate in public markets.

Passive is Hard in Digital Finance Right Now

So what if you wanted to do the same thing in digital finance? After all, there are new projects launching on a near daily basis. Some are destined to be the future JP Morgans and Schwabs of digital finance. Far more are likely to be sucked into a black hole in the coming years.

Digital finance is perhaps the perfect use case for a passive index funds. If you believe digital finance is the future, that it will be more valuable in the future than it is now, you would want to own such an asset. The problem arises when you have no idea which projects will be the ones that make it – no one does.

Up until recently, if you wanted to make a bet on the long term growth of digital finance, you would need to purchase tokens for each project (the equivalent of buying their shares) you think might have a shot at reaching orbit in the long term.

This would mean constantly tracking new launches, buying the tokens, incurring gas fees to buy those tokens, dumping tokens for projects that end up not working out. It would be exhausting, and you wouldn’t be able to keep up with all the innovation going on.

The first digital finance index fund

Enter TokenSets, who recently introduced the first passive index fund tracking digital finance projects. Why is this amazing? Let’s dig in to what it is:

Introducing The DeFi Pulse Index - DeFi Pulse

As a passive fund the DeFi Pulse Index ($DPI) has no opinion on which projects will succeed and which will fail. It holds a basket of the 10 largest market cap weighted tokens. This means large, highly valued projects have more representation in the fund, smaller ones less so. Ok what does that mean?

Currently the DeFi Pulse Index holds 10 tokens: Index includes 10 tokens: $YFI, $LEND, $COMP, $SNX, $MKR, $REN, $KNC, $LRC, $BAL, $REPv2. Importantly the Index also screens for common security and organizational practices that will keep out some of the projects more likely to be burnouts than long lasting contenders.

The magic of rebalancing

That’s all well and good – but what really makes this fund special is it’s monthly rebalancing. What does that mean?

Well every month, the ratio of each token (again, think of these of the shares of the projects tracked by the index) inside the fund is adjusted based on how much each project increased or decreased in value. This is how $DPI keeps pace with, and continues to accurately represent, the performance of the overall digital finance market. This is why, even though certain projects rise and fall, if the overall industry grows in value, this one fund will keep tracking it and continue to offer returns.

So by using a tool like $DPI, you’ll always own the ten (and they plan to expand that number to better track the complete index) most popular projects in the digital finance space. It’s always up to date, and always tracks the performance of the market. This is so powerful.

It’s no wonder passive investing has taken over the traditional stock market, I fully expect it to happen in digital finance as well.

What it costs

As with any managed financial product, there is a cost associated with the service they’re providing you. In $DPI’s case it’s 0.95% per year. TokenSets calls this a “Streaming Fee.” This is a different name than you might be used to, but in practice is the same as the expense ratios you’re used to looking at.

0.95% is pretty steep when compared to passive funds in traditional markets. While still a lot less than many Mutual Funds, the reality is there isn’t much competition in the digital finance space to drive this fee down – yet. It will come, and fast.

But for the value provided (not to mention the incredible gas fees you’re being saved from all the transaction it would take to do this yourself, not to mention time), it’s well worth the price.

Risks

Sounds pretty great, no? It is. But of course with any investment there are risks to think of.

First, and per usual, are the smart contract risks associated with using any digital finance product. Bugs happen. And unfortunately bugs in this world can result in the loss of funds. TokenSets does audit all their contracts before pushing them live (something, surprisingly, not all that common in the Wild West world of digital finance). TokenSets has published a full set of risks here.

Second is the risk of this overall market. There is absolutely no guarantee that digital finance takes off. Or that if it does, the underlying tokens belonging to those projects increase in value. I wholeheartedly believe that both those things will happen, but that’s just like, my opinion man.

yeah, well, that's just like your opinion, man - The Dude - quickmeme

Third, and I could see a world where this happens, is the risk that a new project launches and gets yugeee before it’s able to be included in the index. Or that a project spikes in value in between rebalancing. While it would be a major bummer to miss out on this kind of incredible performance

How to get it

There are two ways you can look into buying into $DPI. First is directly on their site. This is, by far, the easy way. If you’re just getting started in digital finance do it this way, just trust me.

But there’s a harder way that I’ve found gives slightly better trade pricing. If you’re going to be doing this on the regular (ever heard of dollar cost averaging?) then you might want to get comfortable.

Uniswap Trading Pool

Uniswap has a fairly healthy liquidity pool that when I’ve transacted with $DPI has given me slightly better quoted prices than buying directly on TokenSet’s site.

You can purchase $DPI this way right here. If you’re using Unswap’s default list of tokens it won’t appear, so make sure to use that link to get the right, genuine article.

You can see you’re saving a very small amount of ETH in these estimates by using Uniswap.

As always, make sure you’re taking into account current gas fees, as well as the slippage caused by your transaction size. If you’re planning on making a small purchase (less than $10,000 worth) you should be pretty safe to use this method.

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