Blockchain technology and cryptography are used to implement many products in the cryptocurrency sector. Crypto index funds are just one of those.
They are based on the concept and mechanism of stock and bond index funds, but with the addition of digital assets. To understand what index funds with the prefix “crypto” are, you must first understand the concept's origins.
An index fund is a passive mutual fund (money pooled from various investors, managed by managers) that holds the same assets as a specific market financial index.
One of the most popular is the S&P 500 stock index, which measures the performance of the stocks of the 500 largest publicly traded American companies by capitalization. Many different financial companies have developed investment products based on it.
Hence, an index fund is a type of investment that pools a lot of different assets into a single investment that is traded on a market.
The fund manager buys the financial instruments that make up the index in equal proportions and monitors the balance of the total portfolio of clients. The bottom line is to create a simplified product for mutual passive investment with the same return as a financial index.
In this sense, a crypto index fund is an investment product that entails the transfer of funds to professional management for further investment in the best cryptocurrencies on the market, as measured by a specific index.
There are cryptocurrency indices such as the Crypto Market Index 10 (CRYPTO10), the Bloomberg Galaxy Crypto Index (BGCI), the DeFi Pulse Index (DPI), the Nasdaq Crypto Index (NCI), and the Royalton CRIX Crypto Index (CRIX). Let's examine the most reliable cryptocurrency index funds.
Bitwise 10 Crypto Index Fund (BITW)
A high-quality fund from Bitwise, a well-known digital asset manager based in San Francisco. The index fund was established in 2017 and is a registered investment company with the Securities and Exchange Commission.
The product includes the top ten cryptocurrencies by market capitalization, excluding stablecoins. The impact on the index fund increases with a digital currency's capitalization. For example, Bitcoin and Ethereum have caps of 61.7% and 29.5%, respectively.
The index fund charges management fees of 2.5%. It has a total of $351 million in digital assets under management.
The profitability of Bitwise 10 Crypto since the foundation of the fund is 66.2%. According to the results of the last year, it brought losses by 62.4%. The crypto index fund undergoes rebalancing (reviewing the portfolio structure) once a month.
Aside from the Bitwise 10 Crypto Index Fund, the company offers riskier crypto index funds that track speculative altcoins, NFTs, and blockchain game tokens. However, only accredited investors can invest in them.
Information about the Bitwise 10 Crypto Index Fund on the Bitwise website
Galaxy Crypto Index Fund
The American crypto asset management company Galaxy Fund Management launched a cryptocurrency index fund in 2017. The top 12 cryptocurrencies by market capitalization are among the digital currencies that make up the Bloomberg Galaxy Crypto Index.
The portfolio is based on BTC and ETH, just like in the prior example. But in contrast to the Bitwise 10 Crypto Index Fund, they each make up 35%. Cardano, Solana, Avalanche, Polkadot, Polygon, Cosmos, Litecoin, Chainlink, Uniswap, and Algorand are among the other crypto index fund assets.
Galaxy Crypto Index Fund information page on the website of Galaxy Fund Management
The advantages of crypto index funds
Diversification. Index funds give the possibility to invest in multiple top cryptocurrencies at the same time, ensuring portfolio diversity, which is important for risk management.
Passive investment. You relieve yourself of certain responsibilities and obligations by transferring money to the fund manager. There is no need to sign up for a crypto exchange in order to buy cryptocurrencies and transfer funds to a crypto wallet. You also don't have to worry about the private key, seed phrase, or any other complexities associated with storing crypto assets.
Regulation. The US Securities and Exchange Commission regulates index funds that are publicly traded on stock exchanges. As previously stated, the Bitwise Foundation is registered with the SEC.
The disadvantages of cryptocurrency index funds
High commissions. In the traditional stock market, index funds are valued for their low fees (less than 1%), but crypto indices have a higher expense ratio. This is a result of the cryptocurrency market's risk and volatility.
Small selection for retail investors. BITW and Galaxy are the only widely accessible and well-established cryptocurrency index funds. There are few opportunities to invest in this investment product if you are not a professional investor.
Volatility. Unlike traditional index funds, which are designed to protect investors from large price swings, crypto index funds do not. This is due to the cryptocurrency market's nature. Although the potential return may exceed the initial investment, there is a significant risk that the investor will suffer a loss on the investment in the short term.
As a relatively new and untested product, crypto index funds are currently not in high demand. Perhaps more options will become available as the crypto industry develops in this direction.
