Things Blockchain Investors Must Know About Crypto Index Funds

An index fund tracks a particular market and stocks enlisted in that domain. Dow Jones Industrial Average (DJIA), Nasdaq Composite Index, and S&P 500 are typical examples of that. It also works like a portfolio that consists of multiple instruments. In the crypto market, it contains a number of digital assets. Professional fund managers handpick these coins based on their performance. Most likely, they belong to the top 10 or 20 list. 

However, there’s much more to crypto index funds than just the amount of holdings. So, let’s explore its depths and see what all is there to learn.

Crypto Index Funds: The Nitty-Gritty of It

In terms of structure, crypto index funds are quite similar to traditional index funds. They both track the performance of specific stock markets. However, crypto index funds follow different criteria from those of exchange-traded funds (ETFs). On the other hand, traditional ETFs and crypto ETFs don’t share the same ilk of holdings.  While the former holds the underlying assets they track, the latter holds derivatives like futures.

A good example of a crypto index fund is Grayscale’s Digital Large Cap Fund. It tracks Bitwise’s 10 crypto index funds and the top 10 cryptos by market capitalization. Diversification is the biggest advantage that investors get with crypto index funds. Instead of manually selecting different funds, they can just invest in a crypto index fund. 

This way, they are able to minimize the risk, maximize the profits, and reduce their efforts. It’s a great strategy when one wants to hedge volatility and increase liquidity. 

As mentioned above, these CIFs are chosen and managed by experts. So the factor of expertise also makes this instrument significant for investors. 

Nonetheless, investors should know that crypto index funds are relatively new. They are still evolving as per the market standards and regulations are not clear on them. 

What Investors Must Know About Crypto Index Funds Working?

While maintaining a bunch of assets, CIFs do a good job offsetting the losses. For instance, if one fund performs poorly, the others make up for them. To make sure that all funds don’t face losses, fund managers pick them from different markets. Thus, if there are five different cryptos in a portfolio, they all would belong to different niches. 

So, if cryptos belonging to real estate are facing losses, the other ones will bring profits. Furthermore, index funds track the performance of certain markets. Therefore, the fund’s performance depends highly on the underlying market. 

As CIFs bring ease into the investment, they have emerged as the go-to option for many. Especially for those people who lack knowledge of crypto or the market in general.  

They also suit those who don’t have time to study and select each coin from one domain. One more highlight of it is that crypto index funds work like passive investment strategies. They don’t require the active involvement of fund managers or investors.

In return for convenience and profits, the investors need to pay a fee to fund managers. Some funds may have an expense ratio as well. It means that if funds’ assets require administrative or operational expenses, they get deducted from funds returns. Usually, the fee consists of costs to manage the fund. It could be categorized into trading or custody fees. 

Figuring Out the Pros And Cons of Crypto Index Funds

These funds may or may not work for certain investors depending on several factors. 

Pros

Diversification– With an assorted portfolio, CIFs bring great diversification in investment and enhance the chances of profitability. 

Managed by Professionals– Seasoned investment professionals pick the cryptos based on analysis. So it’s a good option for amateur investors.

Easy Liquidity– Index funds can be bought and sold on exchanges like any other asset. Hence, they become a source of a significant amount of money. 

Tax Efficiency– Index funds can offer tax advantages too. However, investors must consult with a tax expert in their country.

Cons

No Control– Investors of CIF have no control over the selection or management of assets. Fund managers are the ones who make all the decisions.

High Fee– The fee of an index fund depends on many factors and they can be significantly high too. 

Less Availability– Crypto index funds are relatively new and they haven’t become very popular in all parts of the world.

Investing in Crypto Index Funds

Those who want to invest in CIFs must begin their journey with research. That’s because there are multiple funds available and one must choose them wisely. They must check the historical performance of the fund and keep monitoring them from time to time. Remember, investors can discontinue the funds whenever they want. They should compare different crypto index funds based on their fee and other aspects. With knowledge, they can pick the right funds and most probably, make the most of them.

Disclaimer

This article is only for information purposes and does not promote any type of investment, it is strictly suggested to do your research before investing or to consult with investment professionals.

Nancy J. Allen is a crypto enthusiast, with a major in macroeconomics and minor in business statistics. She believes that cryptocurrencies inspire people to be their own banks, and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning. She frequently researches, and posts content on the top altcoins, their theoretical working principles and technical price predictions.