Index funds are considered to be a great investment opportunity. They are cost-effective, and as a result, it is very easy to invest in them. Plus, they typically come up with solid returns. If you consider the advantages of investing in index funds, then you will understand that crypto index funds also happen to be an exciting investment opportunity.
In this particular blog, we will check out how crypto index funds actually work, what makes them any different, and whether they are a good option for 2023. Stay tuned to find out more.
So, What Is A Crypto Index Fund?
A crypto index fund is a type of financial vehicle known for investing in groups of cryptocurrencies. It includes an entire pool of funds from different investors who are interested in putting their money in index funds for portfolio diversification.
The simplest way to determine crypto index funds is to begin with the idea of index funds in its entirety. Index funds are a kind of mutual fund that is also like a pool of funds which the responsible fund manages to invest in securities.
While any mutual fund comes with a fund manager, index funds do not have this particular privilege. Instead, it basically invests in a particular stock market index. These groups of market indexes are basically also groups of securities representing different parts of the complete stock market.
For instance, the S&P 500 happens to be a market index comprising 500 big companies based in the United States.
Since index funds come with passive management, they typically tend to have relatively low fees as compared to mutual funds. The cost for each individual type is known as the expense ratio, which this fund actually charges as a part of the assets that are under management.
To bring it all together, a crypto index fund is a type of fund which invests in a particular index of cryptos. For now, these funds are very theoretical. There have not been several successful attempts for building conventional investment vehicles for tracking multiple kinds of cryptos.
Is There A Cryptocurrency Index Fund?
Currently, there is one crypto index fund that is publicly traded – the BITW or Bitwise 10 Crypto Index Fund. Released in 2017, the fund was originally made available to only accredited investors but now happens to be open to everyone. Bitwise also has multiple crypto index funds, which are exclusively available to accredited investors.
The Bitwise 10 Crypto Index Fund usually tries to follow the ten biggest cryptos by market cap without including stablecoins. While the amount of cryptocurrencies it follows happens to be a major plus, this particular fund has an expensive expense ratio of 2.5%.
To be honest, a majority of exchanges typically charge fees for crypto trading. So, it is easily understandable why a cryptocurrency index fund will have a relatively higher expense rate. But then 2.5% happens to be on the higher side.
One advantage of the best kinds of index funds is that they usually have low fees. Plus, we usually recommend simply sticking to the funds that do not charge over 1%.
So, why are more publicly traded crypto index funds easily available? Although multiple attempts have been made to release cryptocurrency funds over the past years, the SEC has not approved the majority of the same.
It is worth noting in this context that the S&P Dow Jones Indices have developed crypto indices. The S&P Crypto Index Series comprises multiple varieties of indexes designed for tracking the performance of vital digital assets.
You cannot invest in such indexes, but at the same time, you could check out the index funds that follow them right into the future.
How To Invest In Cryptocurrency Index Funds?
If you are planning to invest in crypto index funds via a retirement plan or a brokerage account, then your options happen to be limited. Perhaps the only index fund that can fit the basic bill happens to be the Bitwise 10 Crypto Index Fund. Now, since the fund is traded publicly, it is available to be bought by anyone who has a brokerage account.
While there are no other conventional index funds available for tracking cryptos, there’s an alternative for relatively more advanced cryptocurrency traders. Some developers, in fact, have launched their crypto index fund token. These are the cryptos that typically act as index funds with the help of tracking a whole group of cryptos.
Here are some examples:
- NFT Index (CRYPTO: NFTI) has been designed for tracking digital assets that happen to be a part of the NFT industry.
- DeFi Pulse Index (CRYPTO: DPI) has been designed for tracking the primary performance of the major tokens in the DeFi industry.
- CRYPTO20 (CRYPTO: C20) has been designed for tracking the top twenty cryptos by market cap.
These are all relatively smaller tokens and, as a result, more difficult to find as compared to major cryptos. Typically, investors purchase one of the bigger cryptos on a particular exchange first, transferring the same to a blockchain wallet.
Then, they automatically go through a decentralized exchange, which has a relatively wider collection of available tokens. They trade the bigger crypto they purchased earlier for the simple, tokenized crypto index fund. It is a much more complicated procedure, which is precisely why it is primarily implemented by advanced traders.
And It’s A Wrap!
Of course, there is also a DIY option where you can purchase the cryptos you want. And, then, make your very own versions of a particular crypto index fund effectively. You will just have to create your account with a good cryptocurrency exchange and select the different kinds of cryptos for your index fund.
Now, you will have to find out how much you have to invest in each type of crypto. Once the decision is made, you can easily make your purchases. The primary benefits? You will not only get to enjoy low costs but also get to exercise complete control over the same.
The only problem that you are most likely going to enter happens to be the time you are going to give on this particular project. Purchasing multiple cryptos is definitely a time-consuming affair, especially if you are planning to rebalance and diversify your portfolio.
So, what are your thoughts on investing in a crypto index fund, or building your own for that matter? Feel free to share your thoughts, opinions, and experiences (if any) in the comments below.