Have you heard all the talk about crypto index funds? What are they, and how can you benefit from them? Or, do you want to understand how these cryptocurrency index funds are different from traditional investing methods?
Well, we are here to unravel all your queries from start to finish, so read along!
Index funds are a great way to invest in maintaining a diversified portfolio. They’re inexpensive, and they generate good returns. It is easy to invest in them as you don’t have to research and invest in specific crypto assets. Considering all these benefits, crypto index funds are an attractive investment opportunity.
In this Investing guide, we will discover about crypto index funds and explore popular funds like Bitwise 10 Crypto Index Fund.
What Is A Crypto Index Fund?
A crypto index fund is a financial vehicle that pools funds from investors to invest in a diversified group of cryptocurrencies. It allows you to track the performance of specific cryptocurrency indexes, such as the top 10 or 20 coins, by market capitalisation.
The index contains a pool of funds from investors who invest their money in the index fund for a diversified portfolio. Crypto index funds work on a similar concept to index funds. An index fund is a type of mutual fund, which is a pool of investor funds in which a fund manager invests in assets.
Unlike mutual funds, an index fund doesn’t have a fund manager, it invests in a specific stock market index. These stock market indexes can be the Nifty 50, S&P 500 or the Nasdaq 100. For example, the Nasdaq 100 is a market index of the 100 largest, and most actively traded companies on the Nasdaq stock exchange.
- Crypto index funds are similar to traditional stock index funds, which aim to track performance indexes like the Nifty 50, S&P 500 or the Nasdaq 100.
- Instead of stocks, cryptocurrency index funds hold a basket of various cryptocurrencies, attempting to replicate the performance of a specific cryptocurrency index.
- The main plus of these index funds is how they spread out your investment. Instead of betting everything on one coin, your investment is diversified.
Types Of Crypto Index Funds
There are two main types of cryptocurrency index funds: market capitalisation-weighted and equal-weighted.
1. Market Capitalisation-Weighted Index Fund
In a market capitalisation-weighted crypto index fund, the bigger a cryptocurrency’s market value, the greater its influence on the fund. So, if a cryptocurrency has more market cap or value, it carries more weight in the overall performance of the fund. This approach aligns the fund’s success more closely with the performance of the larger cryptocurrencies like Bitcoin and Ethereum.
2. Equal-Weighted Index Fund
Equal-weighted index funds allocate every cryptocurrency equally, irrespective of their market capitalisation. This means that smaller cryptocurrencies have an equal impact on the fund’s overall performance. It’s a relatively democratic approach, ensuring that the fortunes of smaller players contribute proportionally to the fund’s success.
The choice between ‘market capitalization-weighted index funds’ and ‘equal-weighted index funds’ is a crucial decision. It determines how the crypto index fund responds to changes in individual cryptocurrency values in the crypto market.
Best Crypto Index Funds in 2024
Cryptocurrency’s gone mainstream, and so has investing in it! Crypto index funds act like baskets, holding a variety of cryptocurrencies and letting you diversify your investment. Here are the top crypto index funds in 2024 for your crypto goals.
1. Bitwise 10 Crypto Index Fund (BITW)
As the name suggests, this fund from Bitwise tracks the performance of the 10 largest cryptocurrencies by market capitalisation. The fund is market cap-weighted, meaning that larger cryptocurrencies like Bitcoin and Ethereum have a higher fund allocation.
Quick View
- Ticker Symbol: BITW
- Current Price: $32.56 (as of May 18, 2024)
- Returns (NAV): 110.7% (1 Year)
- Fund Holding Cryptocurrencies: Bitcoin, Ethereum, Solana, Ripple, Cardano, Avalanche, Bitcoin Cash, Polkadot, Chainlink and Polygon
Pros Of Bitwise 10 Crypto Index Fund
- BITW invests only in the top 10 cryptocurrencies by market capitalisation, which reduces the risk.
- This crypto index fund is managed by Bitwise Asset Management, which is a popular crypto asset manager in the industry.
- The fund has a potential for high returns if the cryptocurrency market thrives.
Cons Of Bitwise 10 Crypto Index Fund
- Investors can’t control individual crypto holdings within the fund.
- The expense ratio for managed funds is 2.5%, which reduces the returns.
2. Nasdaq Crypto Index (NCI)
Nasdaq developed the Nasdaq Crypto Index in partnership with Hashdex. This crypto index fund’s primary goal is to mirror the performance of its benchmark index. The NSI fund is created to be a dynamic representative of the market that investors can track.
Quick View
- Ticker Symbol: NCI
- Current Price: $3,499.22 (as of May 18, 2024)
- Returns (NAV): 120.04% (1 Year)
- Fund Holding Cryptocurrencies: Bitcoin, Ethereum, Chainlink, Litecoin, Arbitrum, Polkadot, Uniswap and Stellar
Pros Of Nasdaq Crypto Index
- This fund measures the performance of multiple cryptocurrencies, reducing risk compared to focusing only on top coins.
- The NCI is managed in partnership with Hashdex, a well-known Brazilian asset manager.
- The Nasdaq Crypto Index is rebalanced and reconstituted every quarter as per market conditions.
Cons Of Nasdaq Crypto Index
- The fund’s performance is linked to the performance of the included cryptocurrencies, which can be volatile.
- The cryptocurrency index fund is relatively new, it was launched in April 2021 so its long-term performance track record is limited.
3. Grayscale Digital Large Cap Fund (GDLC)
Offered by Grayscale Investments, this fund invests in a market capitalization-weighted fund of large-cap coins, including Bitcoin, Ethereum, and other major cryptocurrencies.
You can research these funds and understand the investment strategy, holdings, and fees before making an investment decision.
Quick View
- Ticker Symbol: GDLC
- Current Price: $20.22 (as of May 18, 2024)
- Returns (NAV): 84.21% (1 Year)
- Fund Holding Cryptocurrencies: Bitcoin, Ethereum, Solana, Ripple and Avalanche
Pros of Grayscale Digital Large Cap Fund
- GDLC simply invests in major cryptocurrencies without the hassle of directly buying and storing individual coins.
- The Fund’s crypto holdings are stored in offline or “cold” storage with Coinbase Custody Trust.
- This cryptocurrency index fund trades on the OTC Markets like a stock, offering more familiarity and security for investors.
Cons of Grayscale Digital Large Cap Fund
- You don’t actually own any cryptocurrency, but share in a trust that holds crypto assets. These shares may trade at a premium or discount to the value of the underlying assets.
- This fund holds more than 94.21% only in Bitcoin and Ethereum. This means you may miss out on some potential benefits of altcoins.
How To Invest In Cryptocurrency Index Funds?
Don’t gamble on a single crypto! Crypto index funds offer a diversified basket of coins, like a buffet. Let’s invest smarter, not harder.
1. Research
Before investing, it’s crucial to research the various crypto index funds available in the market. Evaluate their investment strategies, holdings, fees, and historical performance.
2. Choose A Fund
Once you’ve gathered sufficient information, select the crypto index fund that best aligns with your investment goals. Also, analyse your risk tolerance and overall portfolio strategy.
3. Fund Your Account
4. Buy Shares
Once you have added funds to your account, you can place orders to purchase shares of the crypto index fund you’ve selected. The process for buying shares may vary depending on the platform, but it generally involves specifying the number of shares or the amount you wish to invest.
5. Monitor Your Investment
After investing in a crypto index fund, it’s important to monitor its performance regularly. Any major changes to market conditions or the fund’s underlying holdings and investment strategy may impact your profitability. Many platforms provide portfolio tracking tools and regular updates to help you stay informed.
6. Track Gains And Losses
As with any investment, it’s essential to understand the tax implications of your crypto index fund holdings. Be sure to track gains or losses for tax reporting purposes. You can use KoinX to seamlessly calculate your crypto taxes. KoinX integrates with all the major crypto exchanges, blockchains, and wallets, making calculations much easier.
Benefits of Crypto Index Funds
Investing in crypto index funds offers several advantages over holding individual cryptocurrencies. You get experts to manage your money without you being involved in actively managing a crypto portfolio. Here are some of the key benefits of crypto index funds:
1. Diversification
One of the primary benefits of cryptocurrency index funds is the diversification they provide. You can hold a basket of various cryptocurrencies and mitigate the risk associated with any single asset’s performance. This diversification can help reduce overall portfolio volatility and potentially minimise losses during market downturns.
2. Simplicity
Crypto index funds offer a simple and convenient way to gain exposure to the cryptocurrency market without having to do extensive research or purchase and manage individual digital assets. This can be particularly appealing for investors who are new to crypto investing or have limited time and resources to dedicate to actively managing a cryptocurrency portfolio.
3. Accessibility
Many crypto index funds require a low minimum investment, making it accessible for every investor. This can be beneficial for you to gain exposure to the crypto market if you have even limited capital.
4. Professional Management
Experienced professionals with years of experience manage crypto index funds. They are responsible for selecting and maintaining the fund’s holdings, as well as asset rebalancing. This can be a valuable advantage for investors who lack time or expertise.
5. Theme-Based Exposure
Like we have theme-based investment options in the stock market, you can invest in a similar function in the crypto market as well. Theme-based crypto index funds focus on specific sectors or use cases within the cryptocurrency space. This can be decentralised finance (DeFi), non-fungible tokens (NFTs), or other emerging trends like AI or RWA. These specialised funds provide exposure to the theme of the crypto market that an investor is particularly interested in.
6. Long-Term Investment Strategy
Crypto index funds are well-suited for investors with a long-term perspective. The inherent volatility of individual cryptocurrencies can be challenging for short-term traders to navigate.
However, if you are looking to build wealth over time, the stability and profitability features of index funds make them an attractive option. This patient approach can be beneficial in the changing market conditions where long-term trends may be more meaningful to the market’s overall direction than short-term fluctuations.
Risks Associated With Crypto Index Funds
Crypto index funds provide a convenient and diversified way to invest in the cryptocurrency market, they are not without risks. Here are some of the potential risks associated with investing in crypto index funds:
1. Lack Of Control
When investing in a crypto index fund, you don’t have control over the specific assets held in the portfolio by the fund manager. This means you have limited ability to change the fund’s holdings based on your preferences.
2. Higher Fees
Compared to directly holding individual cryptocurrencies, crypto index funds typically charge management fees and other expenses. These charges are similar to those you pay for traditional stocks and mutual fund management. These fees can vary widely between different funds and can significantly impact your overall returns over the long term.
3. The Barrier To Access
Depending on your location, access to certain cryptocurrency index funds may be restricted or limited. Some funds may only be available to accredited or institutional investors, limiting their accessibility to retail investors.
4. Lack Of Knowledge
It is risky to invest in crypto index funds without fully understanding them. While these funds aim to provide diversification, some investors may not fully understand the underlying assets they are investing in.
5. Liquidity Risk
When you invest in crypto index funds, getting your money in and out quickly might be tougher than you think. This is because not all cryptocurrencies can be easily sold for cash, especially when the market is down. If too many people try to sell at once, or if the coins in the fund aren’t popular, you could be stuck waiting.
6.Regulation And Compliance
The regulatory landscape surrounding cryptocurrencies and crypto-related investment products is still evolving and subject to change. Changes in regulations or compliance requirements could impact the operations or viability of certain crypto index funds. For example, an increased tax or a ban on investing platforms in a particular region could impact these funds.
You need to evaluate the risks associated with any crypto index fund. Before investing, ensure that the potential rewards align with your investment objectives and risk tolerance.
Conclusion
Investing in a crypto index fund offers a simple way to diversify your cryptocurrency portfolio and mitigate risk. These crypto index funds will see more growth in the bull market as more investors become interested in the cryptocurrency space. However, it is equally important to understand the risks associated with crypto index funds. When picking a crypto index fund, consider factors such as the fund’s strategy, fees, and past performance.
Additionally, crypto investing attracts taxes in different countries. And manually calculating many transactions can be very daunting and time-consuming.
Hence, you can use KoinX, an automated crypto tax tax-calculating software that segregates transactions based on their nature and calculates the crypto taxes. KoinX also provides features like portfolio tracking and management. You can effortlessly track your holdings across different chains and exchanges while tracking current debts, and gains. So, sign up today and get your crypto tax sorted.
Frequently Asked Questions
Are Crypto Index Funds Good For Investment?
Crypto index funds can be a good investment option if you are seeking diversified exposure to the cryptocurrency market. Similar to traditional index funds, cryptocurrency index funds are long-term investments. They provide a convenient way to invest in a basket of digital assets, which is profitable in the long term.
Can I Create My Own Crypto Index Fund?
Yes, you can create your own “DIY” crypto index fund on Binance. On the Binance menu, select Index-Linked and choose the Create a Plan option. Now, choose the coins you want in your index fund. After that, add your investment amount, recurring cycle and confirm the order. However, creating your own index fund involves tasks like researching and selecting cryptocurrencies, determining allocations, and periodically rebalancing the portfolio to maintain your desired asset allocation.
What Is The Minimum Investment For A Crypto Index Fund?
The minimum investment required for crypto index funds can vary across different providers and fund offerings. Some crypto index funds may have low minimum investment requirements, such as $100 or $1,000. Other funds targeting institutional investors may have higher minimum investment thresholds, such as $20,000 or $100,000.
Can You Buy The Bitcoin Index?
Presently, there is no single “Bitcoin Index” that you can directly invest in. However, there are crypto index funds that include Bitcoin as a significant component of their portfolio. For example, the Bitwise 10 Crypto Index Fund and the Grayscale Digital Large Cap Fund both hold Bitcoin as one of their largest holdings. The Binance CMC cryptocurrency Top Equal-Weighted Index has 10% exposure to Bitcoin and 90% in other leading cryptocurrencies.
How Do I Buy Crypto indexes?
To invest in crypto index funds, you can open an account with a cryptocurrency exchange or investment platform. Choose the type of fund you want to invest in, like funds that focus on Bitcoin or funds that have equal weightage for the top 10 cryptocurrencies. Choose your investment amount and frequency, such as daily, weekly or monthly. Now complete the payment and you are done.
