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Reading the weighting section of the index fund ( https://am.coinbase.com/documents/cbi-methodology.pdf https://am.coinbase.com/documents/cbi-methodology.pdf --

Reading the weighting section of the index fund ( https://am.coinbase.com/documents/cbi-methodology.pdf https://am.coinbase.com/documents/cbi-methodology.pdf -- linked in a few sibling comments too) the following statement, while standard language and approach, makes me wonder in this case: "The market capitalization of each constituent asset is calculated as the price of the asset multiplied by the supply of the asset." There are always some small mistakes in the supply of the asset. Bitcoin however has a considerable amount of lost coins. This has been discussed a lot and there are a couple of studies out there (here is a quick link via fortune (placeholder till I find the original study): http://fortune.com/2017/11/25/lost-bitcoins/ http://fortune.com/2017/11/25/lost-bitcoins/). They seem to ignore this fact in their calculations (they follow a fixed supply approach it appears. Does anyone with experience in investing have any opinion? Shouldn't indexes at least attempt adjustment? Note paragraph 2.10 mentions that no supply adjustment ever is going to be made. I think this considerably inflates the nominal value of the fund (for the eyes of the world). Thoughts?

dahdum 9y ago
How would that increase the nominal value of the fund? Worst it would do is inflate the market cap of a specific coin in relation to others, altering the weighting a little bit. They note there's no definitive way to calculate true supply so they aren't going to get in the business of trying to do so.
omarchowdhury 9y ago
If they adjust the price of the coins by removing lost coins from the supply (how would they even know with certainty which coins are lost, making this definition on their own would be going against the sanctity of the blockchain) then the price per coin would increase.
wtvanhest 9y ago
There is a concept in index weighting called float-adjusted where you remove shares that have not been issued. that isnt really the same as what you are talking about, but it is a similar concept. The real problem would be finding out how many bitcoin exist or have been lost. I dont think there is any way to do that at this time.

dahdum 9y ago

How would that increase the nominal value of the fund? Worst it would do is inflate the market cap of a specific coin in relation to others, altering the weighting a little bit. They note there's no definitive way to calculate true supply so they aren't going to get in the business of trying to do so.

omarchowdhury 9y ago

If they adjust the price of the coins by removing lost coins from the supply (how would they even know with certainty which coins are lost, making this definition on their own would be going against the sanctity of the blockchain) then the price per coin would increase.

wtvanhest 9y ago

There is a concept in index weighting called float-adjusted where you remove shares that have not been issued. that isnt really the same as what you are talking about, but it is a similar concept. The real problem would be finding out how many bitcoin exist or have been lost. I dont think there is any way to do that at this time.