What are cryptocurrency index funds? Types of funds, their advantages and disadvantages
Cryptocurrency index funds are funds with an investment portfolio representing a wide cross-section of the cryptocurrency market. They are not intended for active intraday trading , but for long-term passive investments. Tell you more about them.
Types of cryptocurrency index funds
Active or passive control
There are two types of cryptocurrency index funds: active and passive. The former actively trade in cryptocurrencies, and the latter on your behalf invest long-term in certain coins or tokens.
Solid market coverage or selectivity
Most cryptocurrency index funds invest only in leading coins and tokens, although there are some that try to cover the entire market. The principle of selection of tokens can also be different – the market capitalization, liquidity and price can be compared in different ways.
Manual or automatic control
Some cryptocurrency index funds allow you to manually select the coins of interest, while others create an investment basket for the client, based on his profitability expectations and his own forecasts.
Advantages of cryptocurrency index funds
Buying a cryptocurrency index fund is a way to diversify a portfolio, because buying a wide range of different coins and tokens partly protects against market volatility.
The logic here is the same as when investing in any mutual fund: investments in one company are very risky, and taking a lot of assets, we reduce this risk.
Simple investing in cryptocurrency
Active investments in such a dynamic market as a cryptocurrency require total immersion: it is safer to keep assets (in a cold wallet, in a hot wallet, on the stock exchange), what happens to them – all these thoughts take a lot of time.
But the long-term investor does not need all this, and index funds just come to his aid.
More predictable returns
Like any other tool that tracks the profitability of a whole pool of assets, a cryptocurrency index fund is designed to reflect market returns and redistribute investments in order to increase portfolio returns. In addition, management here is not done by the forces of one person – the organization is engaged in this with its own specialists and algorithms.
Yes, such funds also have commissions, but the larger and more active your trading portfolio, the more money you will save by turning to professionals.
Disadvantages of cryptocurrency index funds
For a particular investment strategy, a certain cryptocurrency index fund may not be suitable – for example, if it gives priority to liquidity at the expense of long-term profit.
Lack of liquidity
Although cryptocurrency index funds are liquid to varying degrees, on average, it is relatively difficult to withdraw funds from them. The fact is that sometimes an investor invests in a token representing an investment portfolio, therefore, to turn it into cash, an additional step is required.
Such funds imply a very different level of management, and commissions may differ, but they exist. So, for example, Bitwise takes 2.5% per annum for management, which can be a lot in the case of a large portfolio. Of course, if the fund does not imply active management, the commissions are lower, and such options, of course, are more suitable for traders with high trading volumes.
Today, cryptocurrency index funds are available only to accredited investors – in the US this means compliance with the rules of the Securities and Markets Commission, which in recent years suggested that the portfolio should be more than 200 thousand dollars or capital of more than 1 million dollars.
In addition, the funds themselves set a minimum threshold – for example, you need to invest at least 250 thousand dollars in the Coinbase Index.
How are cryptocurrency index funds different from ETF?
Exchange Traded Funds (ETFs) and cryptocurrency index funds are two different things. Exchange funds exist on the stock exchange and are traded in the framework of stock exchange sessions, and also, as the Securities and Exchange Commission states, have greater liquidity. In addition, they usually have a lower entry threshold.
Conversely, index funds imply less investor attention.
The largest cryptocurrency index funds
Bitwise Asset Management
This fund was founded in 2017 and became the first cryptocurrency index fund. The portfolio of the top 10 for a five-year blurred market capitalization of cryptocurrency, calculated on the basis of their reporting. The company adjusts the portfolio monthly and states that it is stored in a completely autonomous mode.
In the past, Bitwise Asset Management has overtaken Bitcoin.
Strictly speaking, Bitwise is an asset management service with several sets of cryptocurrencies :
- 10 Private Index Fund
- 10 Index Offshore Fund
- Digital Asset Index Fund
Coinbase Index Fund
Coinbase Exchange launched its own index fund in 2018, and, unlike their wallet and exchange services, it is available only to accredited investors and requires a minimum investment of $ 250 thousand. Management fee is 1%.
By their own calculations, since 2015 (when the company was founded), the Coinbase index overtook Bitcoin in terms of profitability. It consists of the following assets.
Iconomi is a fund without an entrance barrier, that is, any investor can use it. Unlike Coinbase, where the focus is on a small circle of coins with high capitalization, there are service tokens, and second-line digital assets.
An investor can choose between low, medium and high risk.
Institutional cryptocurrency investments
Index funds bring traditional investment approaches to the cryptocurrency market, including paying a fee for creating a portfolio.
An investor can indicate the level of risk and the types of cryptocurrencies of interest, such as well-known coins or tokens, securities, as well as the degree of portfolio personalization.
However, this applies to professional investors who would otherwise pay large transaction fees.