Cryptocurrency Index Funds — a better alternative to trading?

ByteX
6 min readMar 10, 2023

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There are currently over 20,000 cryptocurrencies available, making it difficult to know which ones to put your money in. You can always risk it, as high risks often provide high returns. However, what if you put in more money than you can afford to lose? This is where index funds come in.

A cryptocurrency index fund is one of the simplest ways to invest in the digital assets market without worrying about the assets’ technicalities. It is similar to a stock or bond index fund but tracks digital assets rather than stocks. As a relatively new investment vehicle, cryptocurrency index funds have been making headlines lately. Index funds are great options for investing because of their low entry barriers, ease of use, and return rates.

In this article, we delve deep into crypto index funds so you can learn what makes them tick, why they are becoming so popular, and whether or not you should put your money into one.

What is a cryptocurrency index fund?

A stock or bond index fund is a mutual fund that mimics the performance of a market index by buying a diversified portfolio of securities. Index funds for cryptocurrencies function in the same way. You acquire shares in the fund rather than investing directly in coins and other digital assets. Then, based on the index, professionals use their expertise and data to diversify your investment across several cryptocurrencies.

So, how do crypto indexes work?

Each cryptocurrency index is a collection of tokens that are combined and given relative importance based on their market capitalization. Any time the market capitalization of all cryptocurrencies relative to the US dollar increases, the value of the crypto index rises, and vice versa whenever the price of cryptocurrencies declines.

The risks associated with investing through a cryptocurrency index fund are lower than investing in cryptocurrencies entirely on your own. That is to say, the success of your investment is not contingent on the success of a handful of coins. As a result, it will take more than one wrong decision to wipe out your savings. In a market where no coin is 100% safe, this is an inexpensive way to hedge your bets against the market’s uncertainty.

The index fund also eliminates the need for active management, which is a huge perk. To choose where to move the funds, it monitors metrics, including the price, performance, and market capitalization of multiple cryptocurrencies (similar to the S&P500 index with stocks).

Therefore, you are spared the responsibility of making tough choices and worrying about the ups and downs of your crypto investment’s value. There is no need to maintain tabs on potential profits or losses. Further, every fund has its secure wallet for holding coins and tokens, so you do not need to be a risk management expert or worry about setting up a wallet.

Are crypto index funds good?

Investing via crypto index funds offers some compelling benefits over regular trading:

Lower risk/higher stability: Compared to actively trading cryptocurrencies, the risk associated with investing in an index fund is far lower. Index funds let you invest in several crypto assets. Having your investments spread out in this way significantly lessens your risk exposure.

Less prerequisite crypto knowledge to start: With index funds, you can make investments without learning the ins and outs of the cryptocurrency market.

Simplifying portfolio: You may invest in a wide range of cryptocurrencies with only one investment product.

Much lower barriers to entry: If you are not a high-net-worth individual (HNWI), tokenized crypto funds make it easy for you to start index investing.

What are some notable crypto index funds?

Over the years, several cryptocurrency index funds have emerged. Some of the best crypto index funds are:

Bitwise Asset Management: As the first cryptocurrency index fund, Bitwise monitors the top 10 currencies. The fund makes monthly adjustments and exclusively uses cold storage.

BB Index: This platform includes numerous index funds, some following the major cryptocurrencies on the market and others holding infrastructural tokens.

Coinbase Index: This fund tracks seven cryptocurrencies by market capitalization. Participants are required to put up anything from $250,000 to $20,000,000 to become a member.

Iconomi: This platform offers consumers a variety of investment choices. You may buy primary coins or invest in digital portfolios managed by specialists.

Crypto 20: The Crypto 20 index fund is a tokenized cryptocurrency investment vehicle backed by the Ethereum blockchain and denominated in C20 tokens. Blockchain records all transactions.

Why are crypto index funds important to the crypto sector?

Index funds are becoming a crucial part of the cryptocurrency economy for several reasons:

Offer diversification

It is difficult to predict the price of a crypto asset. Cryptocurrency index funds provide customers with exposure to diversity. Allocating capital after carefully analyzing the performance of various crypto assets is time-consuming and laborious. Instead, one can acquire several assets with a single transaction.

It opens the door for them to acquire a bigger portfolio of crypto assets and diversify their investment risk. Index funds are ideal for first-time investors since they employ automatic tracking to keep their assets secure and in line with the indices.

Attract new investors

People all across the globe are eager to invest in cryptocurrencies. But they are skeptical of the market’s technology and reliability.

Crypto index funds provide a reasonable argument for new, wary investors. Yes, the market will continue to be volatile, fragile, and risky. However, investors won’t have to analyze and ponder about which assets to invest in. Instead of worrying about buying Bitcoin or Ethereum, users would have access to a range of crypto assets. This will alleviate a lot of stress for investors.

Boost Awareness

Multiple banks and other financial organisations have already recognized cryptocurrency’s immense potential. They have made deliberate efforts to enter this frontier, such as introducing crypto indices by S&P Dow Jones. As a transparent alternative to manipulative and inflationary assets, blockchain-based digital currency can become a popular choice among investors, with index funds paving the way.

Conclusion

A cryptocurrency index fund makes investing in digital assets more convenient and less risky than building a portfolio from scratch. But do not expect to get rich quickly, and remember that returns are never guaranteed.

If you are starting in the cryptocurrency market, an index fund can help you save on fees and access more possibilities. Even so, it remains up to you to do the legwork and select the solution that best meets your requirements and financial objectives.

Important Disclosures:

Certain statements in this document might be forward-looking statements, including those identified by the expressions “anticipate”, “believe”, “plan”, “estimate”, “expect”, “intend”, “target”, “seek”, “will” and similar expressions to the extent they relate to the material produced by Bytex staff member. Forward-looking statements are not historical facts but reflect the current expectations regarding future results or events. Such forward-looking statements reflect current beliefs and are based on information currently available to them. Forward-looking statements are made with assumptions and involve significant risks and uncertainties. Although the forward-looking statements contained in this document are based upon assumptions the author of the material believes to be reasonable, none of Bytex’s staff can assure potential participants and investors that actual results will be consistent with these forward-looking statements. As a result, readers are cautioned not to place undue reliance on these statements as a number of factors could cause actual results or events to differ materially from current expectations

The commentaries contained herein are provided as a general source of information based on information available as of MMMM DD, 2022. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change investment decisions arising from the use or relevance of the information contained here. ByteX. makes no representation or warranty to any participant regarding the legality of any investment, the income or tax consequences, or the suitability of an investment for such investor. Prospective participants must not rely on this document as part of any assessment of any potential participation in buying and selling of virtual currency assets and should not treat the contents of this document as advice relating to legal, taxation, financial, or investment matters. Participants are strongly advised to make their own inquiries and consult their own professional advisers as to the legal, tax, accounting, and related matters concerning the acquisition, holding, or disposal of a virtual currency. All content is original and has been researched and produced by ByteX.

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