Bitwise Debuts First DeFi Fund Amid Boom in Crypto Frontier

(Bloomberg) -- Exposure to one of the fastest growing and most controversial corners of the crypto world is now available in an index fund format.

The Bitwise DeFi Crypto Index Fund launched on Wednesday, according to a statement from Bitwise Asset Management. The fund will track companies and securities involved in what’s been referred to as decentralized finance, in which people borrow and lend money from each other directly, without intermediaries such as banks.

Decentralized finance -- known as DeFi -- has boomed in use, with some of the more popular applications including instant borrowing known as flash loans and the arbitrage of price discrepancies in cryptocurrencies among different exchanges. It’s been heralded by advocates as a way to further democratize finance and cut out middlemen such as exchanges and insurance companies. While DeFi’s possibilities are “very exciting,” given how new the space is, buying into a fund that invests across the industry minimizes the risk of picking a dud, according to Bitwise’s Matt Hougan.

“There’s going to be issues, not everything’s going to work out, there’s probably even going to be some blow-ups, but you want exposure to the theme,” Hougan, the firm’s chief investment officer, said in a phone interview. “So a diversified, index-based approach can make all the sense in the world. You don’t have to monitor it, the index rebalances on a monthly basis, you don’t have to watch to see what new hot asset is emerging.”

There have already been a handful of blow-ups in DeFi’s infancy. In August, an anonymous entity named Chef Nomi launched an exchange called SushiSwap after copying the code of Uniswap, another DeFi project. SushiSwap lured hundreds of millions of user funds within days before Chef Nomi cashed out, triggering a dip across the nascent sector. SushiSwap is now under different leadership.

Still, interest in the space continues to build. Total U.S. dollar value locked in DeFi is currently more than $40 billion, up from about $11.6 billion in late November, according to data tracker DeFi Pulse.

High-profile crypto investors such as Mike Novogratz are optimistic about DeFi. The Galaxy Digital Holdings chief executive officer told Bloomberg News in September that his firm had invested in ParaFi Capital, along with the likes of Bain Capital Venture and Henry Kravis, co-founder of private-equity powerhouse KKR & Co.

The new Bitwise fund has an expense ratio of 2.5% and has Anchorage Digital Bank, N.A. as its custodian. Its top holdings include Aave, Synthetix and Uniswap and span lending companies to exchanges. The fund is only open to accredited investors.

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