No, lots of index fund investors don't have a diverse portfolio, they get the diversity through the index fund (see bogleheads).

A worldwide index fund from Vanguard is all you need if you want to own the whole market. Optionally add a few bonds to reduce volatility.

Unless you have millions of dollars to park, in which case a single security is a liquidity risk (which has nothing to do with diversity risk) and you take the obvious path of manually diversifying. Same treatment, different problem.

The point was that you can't "diversify" Bitcoin holdings like this. It's inherently illiquid on these scales.

What liquidity issues have there ever been with the big index funds?

If you try to dump $100M in shares of VOO (to finance a luxury hotel purchase, say), you'll flood the market and the share price will drop, and you either won't have access to your funds quickly or you won't get all your money back. There simply aren't enough interested buyers for your single security to absorb your giant sell order. This would not be true if you had manually diversified that holding, which is why no one with liquidity requirements holds single securities in anything like that kind of volume (i.e. people do it, but they do it for e.g. corporate board vote share reasons).

Again, though, the point is that while holdings in big funds only hit this level at really obscene order volume, bitcoin sees liquidity problems at something more like $1M orders.

> bitcoin sees liquidity problems at something more like $1M orders.

$100k or less. http://www.coindesk.com/high-seas-bitcoin-trading-whales-sti...

Gotcha.