Hacker News Reader

Disagree with all 4 of these:

1) They are publishing which coins are held by the index, so the choice of coins is being given away for free, not just to investors.

2) Coinbase's main product is a SaaS account that lets you buy the same coins without knowing how to manage a wallet - so you can implement the index and skip the management fee using an account with them.

3) Controlling administrative access to an account with a fund has the same challenges as controlling administrative access to a coinbase account.

4) Funds have to pass through taxable events to customer (other than some structures which must pay the tax themselves) -- the taxation doesn't disappear because it's wrapped by another entity. Plus, the prospectus shows that the Coinbase fund will only need to rebalance once a year when it recalculates available supply on Jan 1.

There's really no excuse for the high fees on this fund. It's 100 times easier to manage than a typical stock index ETF, which must manage many more names plus dividends, splits, etc. And it charges 20x the fees.

> 4) Funds have to pass through taxable events to customer (other than some structures which must pay the tax themselves) -- the taxation doesn't disappear because it's wrapped by another entity. Plus, the prospectus shows that the Coinbase fund will only need to rebalance once a year when it recalculates available supply on Jan 1.

Doesn't that depend on the structure? Mutual Funds pass taxable events but I don't believe Index Funds/ETFs do, since there is an incorporated entity that you own shares in that is making the trades and paying the taxes.

Also, mutual funds can be forced to take fewer taxable distributions since they can use cash inflows to handle things they’d otherwise need to take a distribution for.

1. I'll mostly concede this one. You're right that investors can look at this index and mirror it, but any investor who does this should be thankful that Coinbase created this fund and gave them something to mirror!

2. Coinbase's main product lets you buy the coins, but storing them safely is another matter. Just wait until c0inbase.com sets up a duplicate site and buys Google ads for "coinbase" so it shows up above the real site in search results. Two-factor auth won't help because the fake site will just prompt you for the 2FA and immediately use it to log into your account on the real site. This isn't a hypothetical -- things like this happen all the time and target all of the most popular online bitcoin wallets.

The difference with an index is that there's no "withdraw crypto" button. Even if your account is hacked, the worst they can do is try to force you to sell your position -- and even that could probably be rolled back when you get in touch with Coinbase. The hacker couldn't take your money because adding a new bank account for withdrawal is slow and produces a bunch of emails to you. And even if they did add a new bank account and withdraw, that would generate a paper trail that could be used to undo the bank transfer or prosecute the thieves.

Setting up bank accounts with a fake identity is much harder than creating a new bitcoin wallet address to withdraw your stolen coins to.

3. Again, the lack of a "withdraw crypto" button makes all the difference. If that button exists, business partners will always be eyeing each other with suspicion, wondering if one of them is going to steal the coins and claim that a hacker did it. If it doesn't, there is no easy way for one partner to screw the others. The worst he could do is add his personal bank account and try to withdraw to it. Even if he succeeds, that will leave a huge paper trail. The other partners will know who did it and he'll soon discover that the FBI frowns on such things.

4. You're right that you don't avoid the taxation burden, but there is still a difference. First, the fund is more likely to have tax experts who can figure out how to minimize the tax burden from rebalancing. They'll be aware of tricks like tax loss harvesting that a random investor would find burdensome to implement even if they knew about them. Second, as an investor, getting a 1099 from an index fund makes my life simple because I can just copy a few numbers into TurboTax and be done. If I've been running and rebalancing my own portfolio, I instead have to download the year's worth of trade data and fill out IRS form 8949 with a list of all trades.

Debating this should bring up some interesting details!

1) Non-investors have more than that to be thankful for, as Coinbase has offered us a terrific front-running opportunity! Rebalances due to supply changes every Jan 1, and due to added constituents 5 days after trading begins on GDAX, offer great chances to buy with a guaranteed follower. And the more we buy, the more they have to follow! Like the high fees, these gifts to the community are of course extracted from investors.

2-3) You make a good point that withdrawal friction offers a form of security. By far the biggest impact is the fact that withdrawals are "quarterly with 30 days notice". This is the first time I've seen incredibly restrictive withdrawal rights listed as an advantage to investors, but I admit that someone sufficiently risk averse about their account management could see it that way. I still think it's pretty funny to charge a high fee for the inability to access your money. And, we shouldn't pretend that Coinbase's internal handling of capital is uniquely safe -- they are not SIPC insured or such, so a common brokerage account (with no management fee) has better protections against structural events.

4) Keep in mind that this fund trades once a year (plus once more when a currency gets added). There are minimal opportunities for them to exercise expertise in tax characterization -- not to mention that they don't claim they will, and have no incentive to under the terms of the fund. I also would doubt that you're getting a 1099 -- based on requirement for accredit investors, they are probably handing you a K-1, which as a pass-through might or might not simplify your reporting. And finally, producing the most compact tax-form ever would still be something that is done as table stakes for funds with fractions of the management fee.

> There was a guy a while ago who bought a hardware wallet on ebay and lost all his coins.

Was this because he sent his coins to a paper wallet that the seller generated for him? I would be impressed if someone had actually managed to produce a fake trezor, but even then, it's pretty straightforward not to buy them on ebay.

Yes, what happened was the seller went through the initial setup process for the wallet and put a nice-looking laminated card in the box with the recovery key. The buyer didn't realize there was something unusual about this, and didn't re-generate the keys before using the wallet.

My point is, many investors are worried that they'll make a mistake, lose all their money, and then people will just shrug and call them stupid when their story hits HN the following day. With this Coinbase fund, there is no such risk.

You'll still have to pay taxes on capital gains if you have shares of a mutual fund. There will be capital gains/losses generated any time a mutual fund buys or sells the underlying assets (for example, if shareholders liquidate their shares, and there's not enough cash on hand to pay them). Mutual fund managers are required to pay out these capital gains to shareholders on a regular basis. These get reported to you (and the IRS) on a 1099-DIV as "capital gains distributions", and you report them on your tax return for that year.

The fund may try to minimize trading to be tax-efficient, but this may not always be possible. For example, if asset prices drop suddenly and lots of investors try to cash out, the fund may be realizing (and distributing) large capital gains if it's forced to liquidate assets that it has held for a long time. If it's forced to liquidate assets that it has held less than a year, you'll get a short term capital gains distribution which is taxed like ordinary income. (Of course, when you sell your own shares, you'll incur a long/short-term capital gain or loss based on the difference between your sales and purchase price.)

More information on capital gains distributions can be found here: https://www.investopedia.com/terms/c/capitalgainsdistributio...

Regarding #4, you may still have a capital gains event[1] on rebalance depending how this is structured. A good analogy is the tax treatment of mutual funds vs ETFs.

[1]: Or more likely loss.