It is no secret that cryptocurrency and blockchain have disrupted the financial landscape, offering new and controversial opportunities for investors across the globe. If you have paid any attention to crypto headlines in recent years, you will be aware that the volatility and complexity of individual crypto coins can be intimidating. However, a growth trend in crypto investing has begun to emerge — crypto index investing.
What Is Crypto Index Investing?
Unlike other popular asset classes, such as the stock market, when investing in crypto, you are typically investing in the performance of specific crypto tokens, whether that’s Bitcoin or one of the 999 and counting altcoins in the market.
Unless you are armed with in-depth crypto knowledge, it can be difficult to know exactly which coins to invest in and the positions you will need to hold to maximize returns. For instance, Bitcoin and Ethereum are two tokens with an established history and the widest array of use cases, be that powering crypto blackjack games or forming the basis of enterprise-level smart contracts. But their popularity does not automatically equate to big returns, especially during a bear market.
Cryptocurrency index investing presents an attractive solution. Instead of having to commit to days of research and face the inevitable choice paralysis of deep dives into cryptocurrency, by taking this approach, you can invest in a diversified portfolio of cryptocurrencies instead.
How Crypto Index Investing Works
To better understand how crypto index investing works, it is helpful to look at the model of traditional index funds.
An index fund is effectively a type of mutual investment that tracks the performance of a specific market index, such as the S&P 500 and the Nasdaq-100. Compared to managed funds, index funds have consistently outperformed, even growing by $375 billion in 2015, while managed funds fell dramatically below that. Since index funds offer automated trading, they also incur lower fees than managed alternatives.
When applied to crypto investing, index funds track the performance of a specific number of coins, such as the top-performing 20 or 50 tokens. Since this approach to investing in decentralized assets is still new, the criteria used to build crypto index funds is theoretical as opposed to performance-based. However, they can be automated just the same as classic index investment vehicles and are rebalanced on a daily, weekly, or monthly basis.
What Are the Pros and Cons of Crypto Index Investing?
Crypto index funds provide exposure to an array of cryptocurrencies, therefore improving portfolio diversification. Furthermore, crypto index funds are professionally managed, ensuring that decisions are made only by experienced analysts who have the knowledge to know what projects to include and when to rebalance the portfolio.
Investing in crypto index funds is also a superior approach to selecting individual coins and projects. Since cryptocurrency is such a volatile market, investors can potentially mitigate the impact of extreme price swings by spreading their funds across multiple coins and tokens. This stability may help investors ride out market downturns and put them in a better position to take advantage of long-term growth trends.
However, that is not to say that this approach is not without disadvantages. As with any index fund, investors in cryptocurrency indexes have less control over their investments than investors with a portfolio of individually selected coins. Higher fees are also a possibility, as there are costs associated with fund management that need to be built in.
Of course, it’s also important to take into consideration just how volatile the crypto market is compared to the stock market or commodities like gold and palladium. While diversification can help to mitigate some of the risks of crypto investing, it doesn’t remove them entirely, so investors need to be prepared for significant price fluctuations and potential short-term losses.
Beginner-Friendly Crypto Index Funds
If you’re considering making a crypto index fund your next investment, you’ll need to approach it as you would any other wealth generation strategy. Begin by conducting research into the different funds that are available — we’ll suggest the most beginner friendly below. Know from the outset how much you’re prepared to invest initially, and plan out the frequency you’ll use to add funds over time, as well as how much you can add in.
Some of the most proper cryptocurrency index funds to begin your investment journey with include:
Bitwise 10 Crypto Index Fund (BITW): holding the position of the world’s sole publicly traded crypto index fund, BITW was initially only offered to accredited investors and hedge funds before shifting to the open market.
eToro Smart Crypto Portfolios: this respected trading platform offers a range of cryptocurrency-based Smart Portfolios that are as beginner friendly as they come. Each portfolio has its own strategies, with the Balanced-Crypto Smart Portfolio being a popular choice.
Galaxy Crypto Index Fund: this unique fund tracks the Bloomberg Galaxy Crypto Index, which measures the performance of the world’s top crypto coins, like for like. The portfolio features 12 decentralized currencies, with a heavy weighting on Bitcoin and Ethereum.
