The cryptocurrency market is undergoing a level of diversity and sophistication that is unprecedented for an industry that has only existed for a decade. This refinement will continue as more capital flows and more regulators acknowledge digital assets as true alternatives to securities and bonds.
For people looking to start trading Bitcoin (BTC) today, there are more options than there were a few years ago. There are numerous types of investment funds to help diversify your portfolio and guarantee better returns.
In mainstream finances, index funds offer investors a simplified, low-cost way to invest in diverse stocks. The exact manner in which it works is, obviously, more detailed, and that’s what we’ll take a look at in this article.
Let’s look at what index funds entail before looking at the crypto index fund scene.
What is an index fund?
An index fund is a unique group of assets that investors can buy as a bundle. The assets that make up the index often have something in common and are rebalanced regularly, such as on a monthly or a quarterly basis. An index fund can be from a given subsector. For example, in cryptocurrency, an index fund could be based on digital assets from technology and science, sports, or even energy and utilities. Funds are based on the included assets and mimic the performance of the underlying index.
Examples of indexes in the stock markets are the Dow Jones industrial index and the S&P 500. By owning a share of a fund, you essentially own the individual assets, stocks, or cryptocurrencies that make up that index.
In this way, an index fund is a portfolio that gives investors access to a wide range of assets. Usually, picking specific assets in the market is risky. Therefore, an index fund provides an array of assets such that some appreciate and some dip, meaning investors are generally shielded from single-source shocks.
In general, the goal of an index fund is to provide diversified exposure and lower operation costs. Index funds typically rely on specific rules or standards to stay put, regardless of the market conditions.
The world’s largest index fund, the Vanguard 500 (VFIAX), tracks the performance of the S&P 500 and relies on asset ratios of the stocks that make up the S&P 500. Even though some stocks have depreciated, the S&P 500 has generally surged over the past 20 years.
Index funds have a track record as an effective long-term investment strategy because the lower management costs relative to active mutual funds justify the return over a long period of time.
Warren Buffet, the greatest stock market investor of all time, summed up the value of index funds in an interesting way:
“A very low-cost index is going to beat a majority of the amateur-managed money or professionally managed money.”
Cryptocurrency Index Funds
The crypto market is a very dynamic market. The financial world is now acquainted with the delicate task of tracking Bitcoin prices, which can undergo dramatic swings within days or even hours. For investors, keeping up with the prices of a number of cryptocurrencies is demanding and extremely tedious. Doing this in real time requires a demanding level of dedication and awareness.
A cryptocurrency index fund offers an easy way to invest in the crypto markets, especially for investors who may not be familiar with the nitty-gritty of cryptocurrency. Investing in indexes reduces the necessity of safe storage for a particular asset, which, in the case of Bitcoin and other cryptos, can be a complicated task, and many traditional investors do not want to be exposed to the storage risks.
This market is only about 11 years old, and many people are understandably not completely familiar with the factors that dictate prices.
A great crypto index fund should bear the following characteristics:
- The ability to track the total cryptocurrency market cap very closely with a reasonable weighting strategy (ideally, no coin should make up more than 30% of the index)
- Have a sufficient amount of liquidity for investors to redeem the underlying assets quickly and easily
- Provide access even to ordinary investors
- Be constructed by an experienced team for appreciable results
- Have 100% of its underlying assets be held by a qualified and independent custodian
- Be a tracked index that is solid and satisfactorily diversified
- Offer low fees
So, how does a cryptocurrency index fund work? Just like with stock index funds, a crypto index fund is a portfolio of select cryptocurrencies designed as a financial market index. A crypto index fund is a way to collectively invest in a number of cryptocurrencies simultaneously without necessarily having to purchase the specific coins.
This way, it’s more like buying shares in the fund. Fund managers use their expertise in analytics or advanced algorithms to set index fund rules and manage it for you.
The essence of investing in a crypto index fund is the reduction of risk in your portfolio, alleviating the amount of work for you. Diversifying your portfolio through a cryptocurrency index fund is a way to spread out risk.
In other words, your investment doesn’t depend on the performance of a small number of coins. This makes it more difficult to lose money with a single wrong move. It’s a cost-effective way of protecting your finances against the volatility of this market, where no cryptocurrency is a 100% secure investment.
One underemphasized aspect of the cryptocurrency market is how complicated it is. Indeed, an investor has to have at least some rudimentary knowledge of how the markets work. However, index funds offer the luxury of delegating away a lot of the tracking work for variables like price, performance, and capitalization.
Having an ongoing investment in a cryptocurrency index fund saves you the hassle of tracking coin performance daily. Fortunately (or unfortunately), however, crypto index funds are not ideal for day trading. Only if you are looking at long-term gains from passive investment options for a large investment is it something to consider.
Like every other investment option, crypto index funds have their advantages and disadvantages.
Let’s have a look at some of them:
Reduced investment risk: By virtue of diversifying an investor’s portfolio, crypto index funds minimize exposure to specific volatility in the market. Investing in a single crypto spells a greater risk than diverse asset spending. Moreover, the fact that index funds are in the hands of seasoned experts means that they probably rely on expertise and advanced algorithms to allocate the portfolio assets. This generally translates to a better guarantee of positive returns.
There can be barriers to entry: Traditional index funds typically limit access to accredited investors. While crypto funds mostly waive this requirement, some have minimum investments of amounts such as $25,000 for an initial investment, as is the case with the Bitwise index fund.
Simplified investing: Tracking the performance of specific coins in the market both is time-intensive and requires research. The luxury of an index fund is that it handles much of the clumsy overhead and takes that complication away from investors.
Small returns within short timeframes: Crypto index funds are not something to jump into if you want to make a quick return and leave the market. They work better for investors who intend to use it as a passive investment with long-term returns.
Lowered cost of investment: Crypto index funds are larger and more active than individual coins/tokens. In the crypto domain, making individual investments can incur considerable fees over time. Index funds offer significantly lower trading fees, meaning more of your money remains active in the market.
Price of management: Even though index funds lower the cost of management, there is still a management fee. Bitwise, for instance, charges a 2% annual management fee. Pools with less management have lower fees and make it less costly for frequent and high-volume traders.
|Reduced investment risk: By virtue of diversifying an investor’s portfolio, crypto index funds minimize exposure to specific volatility in the market. Investing in a single crypto spells a greater risk than diverse asset spending. Moreover, the fact that index funds are in the hands of seasoned experts means that they probably rely on expertise and advanced algorithms to allocate the portfolio assets. This generally translates to a better guarantee of positive returns.||There can be barriers to entry: Traditional index funds typically limit access to accredited investors. While crypto funds mostly waive this requirement, some have minimum investments of amounts such as $25,000 for an initial investment, as is the case with the Bitwise index fund.|
|Simplified investing: Tracking the performance of specific coins in the market both is time-intensive and requires research. The luxury of an index fund is that it handles much of the clumsy overhead and takes that complication away from investors.||Small returns within short timeframes: Crypto index funds are not something to jump into if you want to make a quick return and leave the market. They work better for investors who intend to use it as a passive investment with long-term returns.|
|Lowered cost of investment: Crypto index funds are larger and more active than individual coins/tokens. In the crypto domain, making individual investments can incur considerable fees over time. Index funds offer significantly lower trading fees, meaning more of your money remains active in the market.||Price of management: Even though index funds lower the cost of management, there is still a management fee. Bitwise, for instance, charges a 2% annual management fee. Pools with less management have lower fees and make it less costly for frequent and high-volume traders.|
The Best Cryptocurrency Index Funds in 2019
Crypto index funds are a way to access to newer, volatile assets in the crypto market while maintaining a portfolio wide enough to absorb the shocks of specific coins going under. The coin market is, of course, historically volatile, and keeping all your eggs in one basket can lead to profound losses.
Cryptocurrency index funds come with different specifications. In any new industry, diversity is essential, as it gives market participants a wider range of options. Therefore, based on the profiles of some of the leaders in this market, it is clear that the companies that have ventured into this sector vary from high automation to fully delegated portfolio management, among other differences.
The following are some of the top index funds in the market today:
|Coinbase Index Fund||4||62||27||Annually*||Excluded||2||N/A|
|Grayscale Digital Large Cap Fund||5||54||26||Quarterly||Held by Fund||3||$7.3 million|
|Bitwise HOLD 10 Index Fund||10||51||21||Monthly||Included Until Rebalancing||2.5||N/A|
|Crypto20||20||10||10||Weekly||Included Until Rebalancing||0.5||$61.6 million|
|ICONOMI Blockchain||33||15||14.64||Monthly||N/A||3||$15.1 million|
- Bitwise Asset Management: Bitwise’s “Bitwise 10 Private Index Fund” was the first cryptocurrency index fund. It tracks the top 10 coins in the market, adjusting monthly while keeping assets in cold storage only.
- Bit20: This index fund was created out of the BitShares platform as a smart coin. The index fund is rebalanced monthly and is made up of the top 20 coins and tokens by market cap. Note that the Bit20 management doesn’t view XRP as a cryptocurrency and therefore excludes it from the index. Bitcoin has a weighting of 10%, and the remaining 90% is shared by the 19 leading assets by market cap.
- Grayscale Digital Large Cap Fund: This index fund provides investors with diversified exposure to the top 5 most liquid assets weighted by market cap through a traditional investment vehicle. In general, the fund seeks to hold large-cap digital assets whose market cap comprises over 70% of the total cryptocurrency market cap. The assets are stored by Coinbase Custody Trust Company, a certified custodian and a fiduciary under New York banking law.
- Crypto 20: C20 is an index fund for the 20 leading cryptocurrencies in the market. This portfolio tracks the coin markets using a novel all-in-one Ethereum token called the C20, which investors purchase. With C20 tokens, investors subscribe to the entire index fund. The platform has gained popularity as a low-cost, transparent crypto index fund.
- Iconomi: On Iconomi, investors have multiple investment options. For index funds, you can invest in digital portfolios created and managed by experts. Iconomi also offers investors the opportunity to invest in digital portfolios created by experts on their site.
How to Invest in Index Funds
It is evident that cryptocurrency index funds vary dramatically in management structure but still have a string of commonalities. Nonetheless, it is better to consult a specialist in the intricacies of a specific index fund before making an investment, especially if it requires a lot of capital.
Investing in a specific fund can mean purchasing an all-encompassing token or taking a part in selecting the stocks that match your portfolio preferences. Still, when selecting a top index fund, you should go for a fund that tracks the cryptocurrency market cap very closely because of how fast the crypto market moves.
Moreover, liquidity might be a consideration because you should be able to redeem the value of the underlying assets as soon as possible. If you are a smaller investor, you should probably look for a fund that offers services to ordinary (non-accredited) investors.
Index Funds vs. Mutual Funds
Index funds and mutual funds are both types of investment funds. An index fund differs from a mutual fund in certain ways. The most prominent difference is the management style and investment objective.
Here are some differences:
|Mutual Fund||Index Fund|
|Management style||A mutual fund is an active investment that requires making daily and at times hourly investment decisions. There is a need for fund managers who actively pick stocks to choose fund holdings.||An index fund takes a passive approach. There is sometimes no need for a human to determine which investments to use. An example is a crypto index fund that is preset to track the top 10 cryptocurrencies and rebalance monthly.|
|Investment objective||Mutual funds try to beat the investment returns of a related benchmark index.||Index funds try to match the returns of a related benchmark stock market index.|
|Management fee||Fees are typically higher because aggressive management can mean higher returns.||Fees are typically lower because of the degree of automation and the passive approach.|
The two differ somewhat from cryptocurrency exchange-traded funds (ETFs). What is an ETF? It is a regulated investment vehicle that tracks the performance of the underlying asset or group of assets. For example, a Bitcoin ETF tracks the performance of Bitcoin via a benchmark index, while an XRP ETF mimics the daily performance of XRP prices through an approved index. Owning a crypto ETF saves traders the agonizing steps of buying and storing individual coins.
In simple terms, an ETF is a regulated security fund that involves a group of pool investors trading via a public exchange. Since ETFs are available for accredited investors, they have high daily trading volumes, and the issuing exchange charges low fees, making them a viable option.
Trading a crypto ETF, or any ETF, for that matter, is just like owning a “share” because the issuing exchange offers the ETF just like any other share. It has variable liquidity, and the prices change depending on supply and demand. If a Bitcoin ETF is approved by the US Securities and Exchange Commission (SEC), then investors, through institutions, will invest in BTC over the long term without needing to buy and store the coin directly.
The SEC has been reluctant to approve Bitcoin and other cryptocurrency ETFs. Notably, the rejection of Winklevoss’s Bitcoin ETF proposal left the crypto market in a dampened mood. If the SEC approves crypto ETFs, it will herald a tremendous flow of capital into the crypto markets. This is why many stakeholders are pushing for the recognition of crypto ETFs.
In summary, crypto index funds work for investors looking to make passive long-term forays into the market. Overall, top index funds offer a way to reduce volatility and risk exposure and gain a possibly decent long-term return.
That said, no investment is completely free of risk, and even an index fund can provide disappointing returns. Crypto funds have vastly different rules to suit different needs. This sophistication makes the need to consult a specialist, especially if you are new, all the more important. When learning how to start trading cryptocurrency, it is not wise to just dive in at the deep end. Take the initial necessary learning steps before you run full speed.As mentioned above, requirements from index funds can lock out investors such as unaccredited investors. Small-scale investors who are looking for normal margins in the short-term have little to gain from index funds. It is better to trade directly on Xena Exchange, where you have access to a wide variety of digital assets, useful tools, and proprietary indicators while enjoying the benefits of low fees and high liquidity.