As it stands, an estimated one billion people worldwide use cryptocurrencies.
The technology hasn’t been around for very long, but cryptocurrencies have become incredibly popular in recent years. Some people have made astronomical profits, so it’s understandable that many others want to invest.
New advancements have brought new investment options to the table. One that has gained a lot of traction is crypto index funds. So what are these, and how can they benefit you?
In this guide, we’ll discuss how you can navigate this digital landscape and add crypto index funds to your investment portfolio. Keep reading for more.
A Brief History of Crypto
Bitcoin was the first cryptocurrency and it launched in 2009. At that time, one Bitcoin had a value of less than one cent.
Bitcoin recently reached an all-time high of more than $73,000. This makes it clear just how much potential there is in the crypto space.
Over the years, more cryptocurrencies have hit the market. With advancements in technologies have also come different types of crypto such as stablecoins and security tokens.
Many investors favor index funds as they offer various benefits. Crypto index funds can make investing in crypto more appealing to these investors. The first crypto index fund was launched by Bitwise in 2017.
What Are Crypto Index Funds?
Traditional index funds invest in the same assets using the same weights as a specific target index (usually stocks or bonds). For example, the most popular index fund in the US is the S&P 500. Investing in this provides exposure to the top 500 companies in the US.
Crypto index funds work in a similar way. Those who invest get exposure to the various cryptocurrencies that a crypto index fund covers.
The Bitwise 10 Private Index Fund was launched based on the Bitwise 10 Large Cap Crypto Index. This gave investors exposure to the 10 largest cryptos based on their 5-year diluted market capitalization. This included:
- Bitcoin
- Ethereum
- Bitcoin Cash
- XRP
- Litecoin
- Steller
- Monero
- Dash
- EOS
- Zcash
This index fund only accepted accredited investors and required a minimum investment of $250,000, putting it out of reach for retail investors. Since then, more crypto index funds have been launched, allowing more investors various options.
Portfolio Diversification
Any experienced investor will tell you that having a diversified portfolio is crucial. This applies not just to crypto, but investors in any market. With that said, it’s typically more important for those investing in riskier assets, which is what makes it so vital here.
Cryptocurrencies tend to be highly volatile. There have been various occasions where the value of a crypto has crashed overnight.
If you have the majority of your holdings in one crypto and it crashes, you could suffer a serious loss. Diversifying your portfolio will help protect you from this.
One of the main reasons that crypto index funds are so appealing to investors is that they help with diversification. Holding a crypto index fund will give you exposure to various cryptocurrencies without the need to purchase them all individually. This is a great way to reduce risk, which is vital for anyone who decides to invest in crypto.
How Do Crypto Index Funds Work?
Crypto index funds can be made up of a selection of cryptocurrencies, but which ones? The fund manager selects which cryptos to include based on the index’s rules.
They’ll also rebalance the fund periodically to make sure it tracks the index correctly. As an investor, you can buy a portion of the fund which will give you access to a percentage of the underlying assets.
One key thing that separates these from traditional index funds is the fact that they aren’t regulated by the US Securities and Exchange Commission (SEC). As such, they’re not subjected to the same rules and regulations.
Benefits of Crypto Index Funds
It’s important to maintain a solid investment strategy at all times. Many investors choose to include crypto index funds in their strategies due to the various benefits they offer.
Diversification
As mentioned above, one of the most noteworthy benefits of crypto index funds is that they help you diversify your portfolio. They give you exposure to a range of carefully selected coins.
Simplicity and Convenience
Crypto exchanges and platforms have improved a lot over the years making them much easier to use. Despite that, they can still be a bit complex for beginners.
Crypto index funds are an ideal way to invest in multiple cryptos with a single transaction. Both buying and managing them is easier than doing the same with various crypto assets.
Risk Mitigation
Having a diverse portfolio is crucial for risk mitigation. Investing in crypto index funds will better protect you from market volatility which is a major concern in the crypto space.
Access to Top Performers
Index funds are carefully curated by industry experts. They study different crypto assets and make judgments on which ones will fit the index best. This gives investors a better chance of making good profits from their investments.
Passive Investing
Many people get into crypto with short-term profits in mind, For those who are focusing on long-term goals, crypto index funds can be ideal. They enable passive investing, which tends to align well with long-term investment strategies.
Differences Between Crypto Index Funds and Crypto ETFs
You may have heard of crypto ETFs which have been making waves lately. People often confuse these and crypto index funds, but they’re not quite the same thing.
One key difference is that index funds aren’t traded on exchanges, but this is possible with ETFs. As such, ETFs can be bought and sold throughout the day. It’s only possible to buy or sell index funds at the end of the trading day.
Both follow indexes, offering similar benefits in terms of risk and diversification. ETFs may be more appealing to day traders, while those looking for long-term investments are likely better off with crypto index funds.
Top Crypto Index Funds
There are various crypto index funds currently on the market. The Bitwise 10 Crypto Index Fund remains a popular choice for many investors.
The Bitwise DeFi Crypto Index Fund is another option from Bitwise. As the name suggests, it specifically targets decentralized finance (DeFi) crypto asses. This includes coins such as Uniswap, Maker, Aave, and Compound.
CRYPTO20 is another popular choice that you might want to look into and is noteworthy as the first tokenized crypto index fund. It tracks the top 20 cryptocurrencies by market capitalization and is rebalanced every week.
Each index fund has its own rules and strategies as well as specific indexes that they follow. It’s important to look at the details before making any investments so you know what you’re paying for.
Factors to Consider When Choosing Crypto Index Funds
The world of crypto can be exciting, but you shouldn’t rush into things. There are some factors that you need to consider before investing in a crypto index fund.
Firstly, make sure you fully understand the strategy of a fund. You should have your own strategy that you’re following. Ideally, you should only invest in index funds that have a strategy that aligns with your own in terms of both goals and risk tolerance.
You should also look at the fees of these funds. These can vary, and it’s important to have a good understanding of what fees you’ll need to pay so you don’t get hit with any unexpected charges.
Another thing to look at is the track record of index funds. In general, you should look at investing in index funds that have strong, consistent performance histories.
Risks and Challenges of Crypto Index Funds
Crypto index funds are one of the best ways to invest in cryptocurrencies with minimal risk. Despite that, there’s always some level of risk that you need to be aware of.
Volatility can still be an issue even with a diverse portfolio. There are no guarantees in the crypto space, so your investment could go up or down quite quickly as market values fluctuate.
Regulation is another challenge that shouldn’t be ignored. As time goes by, more crypto regulations are coming into place, and it’s important to understand anything that could affect your investments.
Crypto index funds aren’t available in all jurisdictions, and they don’t always offer the same level of customer protection. Make sure you know what is and isn’t available to you.
Finally, there are the potential security risks, which is a major concern in the crypto space. Technical glitches and cyber attacks can cause serious issues, and you want to make sure your investments are as secure as possible. Always research the security measures of any crypto index fund you’re considering to make sure it’s safe.
Navigating This Digital Landscape and Making Good Investments
The modern digital landscape is a very complex one, and it can be difficult to understand. Research and education are vital if you want to be successful, though you don’t have to do everything on your own.
TrueCode Capital works to help investors manage their wealth and grow it through strategic investments. We performed well throughout the bear market with our fund sitting at +13% from inception to date compared with Bitcoin at -37%.
Take a look at our risk management book for guidance that could help you improve your investment strategy.
