A lot of people do not have time to follow news on cryptocurrencies or track the individual performance of a coin. That is why they might prefer a crypto index fund. This way you have a safe way to invest in cryptocurrencies with lower risk.
Cryptocurrency index funds provide a diversified exposure to digital assets while still spreading the risks across a substantial portfolio of cryptocurrencies. It is beginner-friendly and you do not need to do your portfolio management.
The principle works the same as the stock market, where you can buy a basket of stocks that gets rebalanced at specific intervals.
There are various types of index funds and different ways to buy them. For example, you can buy it via a broker, or buy it in a more decentralized manner through a smart contract.
We explain how crypto index funds work, the differences between centralized and decentralized crypto index products, show you how you can buy it the easiest way, list a few pros and cons of a crypto index fund in general, and conclude on why using a crypto index fund can be a great way to invest in cryptocurrencies.
How a cryptocurrency index fund works
Basically, it works the same as the stock market: instead of investing directly into coins and other digital assets, you buy shares in a fund. Then, domain experts (or AI) use knowledge and data to invest money in multiple cryptocurrencies, depending on the characteristics of a fund.
Investing through a crypto index fund is a cost-effective way of protecting yourself against the current volatility of this new market.
A great benefit is that the index fund does all the work. By tracking all variables it can decide i.e. to sell off a coin that has risen a lot to get back to the intended initial weighting and thus lock in profit. It can also include good-performing assets in the index, as well as delete underperforming ones. Therefore protecting your losses. The criteria for such triggers can usually be found in a datasheet (prospectus).
All in all, it gives you a balanced way to track a set of coins.
You don’t need to make hard decisions about when to sell and buy anymore and keep yourself from stressing out about fund management. Because you only need to buy the index product instead of separate coins, you also have the advantage of not having to worry about setting up wallets for storing each coin et cetera.
However, a crypto index product is not intended for (day) trading. It really shines when you have a long-term mindset. It can bring you long-term gains while investing passively into crypto.
Examples of cryptocurrency index funds
There are two ways of buying cryptocurrency index funds. The first option is via a cryptocurrency exchange or broker (choose the best exchange here). This is the most beginner-friendly option.
Advantages include hassle-free investing without technical knowledge. Disadvantages might be higher fees and the fact that you do not really ‘own’ the index, since it is custodial. If the exchange gets hacked or disappears in another way, you might lose your (access to) the index fund. Also, you are obliged to upload personal documents.
The second option is decentralized. This offers more choice, customization, and freedom. But the disadvantage may be that you need to have some know-how about managing your own wallet. Also, there is more room for error if you do not know what you are doing.
1. Centralized crypto index funds
Currently, some of the most popular centralized cryptocurrency index products on the market are:
- Bitpanda – Repetuable exchange that offers world’s first crypto indices for the top 5, 10 or 25 coins. We use this in our mini-tutorial below.
- Iconomi – community driven investing strategies created by members for more advanced users.
- Bitwise – professional exposure to crypto index funds through traditional ETFs and other crypto indices for accredited investors only.
2. Decentralized crypto index funds
“Should I buy Decentraland or Metaverse? Or a smaller metaverse coin?” Why not all popular ones!
IndexCoop describes the app’s service as follows:
We build simple yet powerful index products to help you access crypto investment themes.IndexCoop homepage
Users hold, at the time of writing, almost a billion Dollars in various decentralized crypto index funds around various themes. The main ones are:
- DeFi Pulse Index – weighted index that tracks performance of Decentralized Financial Assets (DeFi coins)
- Metaverse Index – captures the shift of entertainment, businesses and sports to virtual environments
- Data Economy Index – buy the Data Economy that is disrupting the data monopolies of Big Tech.
For each decentralized index product or ‘set’, you can check what coins/tokens (diff.) are included and in what distribution. On IndexCoop you can also read the weight calculation, inclusion criteria, information about the rebalancing phase, and more.
TokenSets also offer so-called ‘community sets’. People can create their own crypto index fund and deploy it as a token on the Ethereum or Polygon blockchain. Only these two blockchains are currently supported.
A decentralized alternative to the two described above is Indexed, but it is still in beta at the time of writing.
Read more about decentralized fund management in the article about DeFi categories.
How to buy a crypto index fund via a broker
Buying a crypto index fund via a broker is easy. For this example, we have used Bitpanda, which is a German-based regulated crypto exchange.
According to Bitpanda, they offer the world’s first real crypto index. It is an easy, automated way to invest in the whole crypto market.
The prospectus ensures full transparency on all relevant aspects of the product and is externally checked by an auditor. All assets in the indices are purchased directly and kept in cold storage. The balancing is done by MVIS, a VanEck company that is known for its index expertise on the traditional stock market.
One of the great benefits is to combine it with a savings plan. You can set up a plan to automate regular deposits from your bank account to purchase one of the indices. This is definitely great for the long term.
Bitpanda currently offers three crypto index funds: the top 5, 10, and 25 of crypto by market cap and liquidity (excl. stable coins)
If you choose to use Bitpanda using this link, you will receive a free €10 after depositing your first €25.
Pros and cons of a cryptocurrency index fund
Like any other investment tool, crypto index funds have pros and cons. Below we listed a few:
- Beginner-friendly. No need for portfolio management.
- Reduced risks through diversification
- Zero maintenance
- Great for long-term portfolio building
- No need to pick individual winners or missing out
- Less fees because of only needing to buy 1 product
- Possible management fees
- Smaller returns on shorter timeframes
Investing in a crypto index fund usually comes with lower cost, lower risk and has great long-term benefits.
Cryptocurrency index funds are a great tool to follow a broad selection of coins, or to have exposure to a specific category/theme of coins. Thanks to the power of DeFi, people are now also able to easily make their own sets and share it.
Buying through an exchange is the most beginner-friendly and accessible, and many exchanges offer a way for automated investing.
However, it will not make you rich overnight, there are no guaranteed returns and one should also do their own research and pick the product that suits their financial needs and goals the best.
Do you use a crypto index fund in your toolbox?
What is your favorite crypto index fund? And what are the pros and cons of it?
Share your thoughts in the comments below…
Last Updated on 29/03/2022 by Jeremy Timessen