What is a cryptocurrency index fund?

What exactly is a cryptocurrency index fund and can it change the playing field for investors?

For people who don’t have time to track the cryptocurrency market or stay up to date with the latest news, a cryptocurrency index fund is probably the safest way to invest in digital coins.

With over 1,500 cryptocurrencies on the market, it’s hard to tell which of them is a good investment. High risks often generate high returns. But what happens if you invest more than you can afford to lose?

A cryptocurrency index fund is one of the easiest ways to put your money in cryptocurrency, even if you aren’t familiar with the industry. It works like any other index fund in the financial market, except that it follows digital assets instead of stocks or bonds.

How a cryptocurrency index fund works

An index fund is a portfolio of stocks or bonds just like a financial market index. A cryptocurrency index fund follows the same principles. So, instead of investing directly into coins and other digital assets, you buy shares in the fund. Then, industry experts use their knowledge and data to invest your money in multiple cryptocurrencies, depending on the fund’s index.

Investing through a cryptocurrency index fund reduces the risks mainly because you own a more diversified crypto portfolio than you would if you invested by yourself.

In other words, your investment doesn’t depend on the performance of a small number of coins. This makes it more difficult for you to lose your 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.

Another major benefit is that the index fund does all the work. It tracks variables like price, performance, or capitalisation of various cryptocurrencies to decide where to send the money (similar to the S&P500 index with stocks).

So, as you don’t have to make the hard decisions, you save yourself the hassle and stress of managing your coins and tracking their daily performance. You don’t need to keep calculating risks and possible returns. You don’t have to be a master of risk management either or have to worry about setting up a wallet since each fund has its own secure wallets for storing coins and tokens.

A cryptocurrency index fund isn’t a tool for day trading, however. It works better when you’re looking at long-term gains from passive investment options.

Cryptocurrency index funds

The crypto market has witnessed the rise of many crypto index products in the past few years. This is mostly because these funds reduce the risks that come with investing in cryptocurrencies and resonate better with traditional investors.

They provide exposure to volatile new digital assets while still spreading the risks across a substantial portfolio of cryptocurrencies.

Currently, some of the most popular cryptocurrency index products on the market are:

  • Bitwise Asset Management: As the first cryptocurrency index fund, Bitwise follows the top 10 coins. The fund adjusts the holding monthly and keeps its assets in cold storage only.
  • Coinbase Index: This fund indexes seven cryptocurrencies weighted by market capitalisation. People who want to join must invest between $250,000 and $20 million.
  • Crypto 20: This is a tokenised cryptocurrency index fund that uses an Ethereum-based C20 token. All transactions are visible on the blockchain.
  • Iconomi: This platform provides users with multiple investing options. You can buy simple coins or invest in digital portfolios created with numerous cryptocurrencies and managed by experts.
  • BB Index: This platform lists various index funds, some following the top cryptocurrencies on the market and others holding infrastructure coins.

Pros and cons of a cryptocurrency index fund

Like any other tool regarding investment, cryptocurrency index funds come with a series of pros and cons. Here’s a breakdown for you:

Pros:

  • Simplified investing without the stress of managing your own portfolio.
  • Reduced risks thanks to a diversified portfolio.
  • A more predictable performance as a result of algorithm tracking and analysing real-time market data.

 

Cons:

  • Costly method of investing due to management fees that can reach 2.5% annually or more.
  • Small returns within short time frames.
  • Possible barrier to entry as many cryptocurrency index funds require investors to make a minimum investment to join (like $250,000, for example).

The takeaway

Investing through a cryptocurrency index fund is more accessible than creating a digital portfolio from scratch, and it comes with lower risks. However, it won’t make you rich overnight, and there are no guaranteed returns.

An index fund can help you save investing costs and unlock more value for you as a beginner. But you still have to do your own research and choose the product that suits your needs and financial goals.

Related Articles