Cryptocurrency index funds are mutual funds meant to track returns of a group of digital securities in a given market. Cryptocurrency indexes allow you to track the performance of top coins and tokens (basket) in the market. These funds can either be actively managed – meaning they hold a basket of cryptocurrencies and then actively trade them to get the profits and share with investors – or passive meaning they do not actively trade the basket of cryptocurrencies.
A common way of investing in these index funds is to buy shares – normally termed as “buying into” the fund. This means you do not buy the coins themselves but the shares in the fund to share the profits later. That means the expected individual returns and potential for value growth is something you would want to look into before proceeding to buy into them.
Essentially, most of them also try to capture the most popular tokens or coins in the market in their lists, so you might hear them say they list assets that carry 85% of the market value (based on individual cryptocurrency’s market capitalization) etc.
Market capitalization is only one factor they consider when deciding which tokens or coins to list in their baskets. Some will list all. Other factors taken into account include eligibility criteria, inflation adjustment of market capitalization, distinguishing circulating supply, rebalancing policies, composing price data, data sources, and policies for hard forks and other rare events.
Inflation adjustment of market capitalization is determined by a formula that itself considers different factors. An example is the formula inflation adjustment of market capitalization = (composite price) x (circulating supply + additional supply publicly scheduled for the next 5 years).
Nevertheless, many cryptocurrency traders and investors alike use indexes to estimate the returns they expect in the future from their individual token and coin investments. They also allow you to invest in economic growth of cryptocurrencies with lesser headache – by buying a basket of coins.
And of course, most of these indexes have their own tokens, allowing you to buy into the investment either through an ICO and/or buying and holding the tokens and watching their value grow.
The tokens and shares can be exchangeable in exchanges or through peer-to-peer trading. Some others have additional specifications such as a minimum amount that you should put into the index fund investment and fees for trading services. Why you should care about crypto index funds
For instance, you can use a cryptocurrency index to invest in and manage cryptocurrency assets either manually or through a management platform such as Iconomi.
If doing it manually, you can use an index to track top ten tokens and then say allocate $1000 to the top ten tokens in the index. You can then use weighting where you weigh (assign a value of weight) a token based on its performance potential.
The weighing is informed by extra information about the cryptocurrency say historical performance, public interest and development activity, prospects in the current market, etc.
If you do not want to do all that manual work, then tools and platforms that do that are available and then allow you to invest in a basket of tokens based on their estimation of returns to expect – see our list of index funds.
Plus the liquidity is a nagging issue for cryptocurrency investors. Institutional investors may want to pay premium due to this.
For instance, some index funds have come up with a solution to the liquidity issue using gated redemptions from the fund to quarterly intervals with a 30 day notice. However, investors may still fear the asset-liability mismatches such that if they request funds and the gated redemption requirement means they get the funds after four or so months, would they receive their funds with their value adjusted to current prices (which could be up or down)?
Investing through an index fund can be a good thing for a crypto trader but under certain circumstances. First, many will actually give you better returns than when you own and hold a single cryptocurrency. Also, high volatility comes with the risk to traders and investors and therefore you might want to minimize incurring volatility-related loss by dispersing your capital across an array of coins and tokens.
Minimize because avoiding the effect of volatility is definitely impossible at the current state of market.
In addition, excessively frequent trading is associated with high fees and some performance drag.
Additionally, some cryptocurrency traders simply do not have a lot of time to investigate how each crypto in order to invest in them. For some traders and investors, a crypto index fund may be one way of staying away from leaning on an unproductive mindset and opinion about a given digital asset.
Besides the above benefits, an index fund is good for a passive investor interested in maximizing long-term benefits of investment in cryptocurrencies by keeping the value of investment to a minimum. Below are some of the top cryptocurrency index funds that you can track and may be invest in: Bittwenty
Bittwenty is owned by BitShares, which is a decentralized exchange. It was launched in December 2016 and was one of the first indexes in the cryptocurrency markets. The index tracks performance of top 20 cryptocurrencies and has the BTWTY token as an investment vehicle.
To invest, you simply buy some Bitshares by opening an account with them and transferring Bitcoins as per this guideline . Trading operations on the BitShares ecosystem attracts a fee of around 0.1 BTS. The fees goes to the development of Bittwenty, the website maintenance and future evolvements, publicity and other undertakings meant to grow the market.
Coinbase index fund
Coinbase announced recently that it will launch a passively managed Index Fund to allow investors exposure to all assets listed on GDAX cryptocurrency exchange. You must be US accredited and have a minimum of US$10,000 for the investment in order to participate. The fees will be 2 percent annually.
Currently, it has four coins and will add more in the future. Below is their initial distribution of the fund. Bitcoin – 65.79 percent .