In this video, we take a closer look at some of the most popular
cryptocurrency index funds
available today, including their pros and cons, as well as general information
about how they work helping you make a more informed investment decision.
Cryptocurrency Index funds allows investors to gain diversified
exposure to the digital asset market at a relatively lower cost.
Vanguard founder
John Bogle launched the first index fund for retail investors in the United States
in August of 1976, called the Vanguard First Index Investment Trust.
It was created to track the performance of the S&P 500, a stock market
index that consists of the 500 largest public companies in the U.S.
with a main goal to allow retail investors to invest at a low fee.
Since then, index funds
have exploded in popularity, and as of March of 2022, retail investors
have invested more in passive index funds than actively managed funds
at 8.53 trillion versus 8.34 trillion.
But what about index funds for other asset classes, particularly digital assets?
Cryptocurrency index funds represent a new and exciting way for investors to gain
exposure to the digital asset market In a rapidly growing
in popularity among both traditional and crypto native investors.
So firstly, what are traditional index funds?
Traditionally, index funds are simplified investment vehicles
that mimic a financial market index, such as benchmark indexes like the S&P
500, Dow Jones Industrial Average, NASDAQ Composite, and also Russell 3000.
So this allows users to speculate on the price movement
of a basket of assets without needing to hold each asset individually.
So index funds can come in two main forms mutual funds and exchange
traded funds or ETFs.
Mutual funds are managed
by professional fund managers and are typically bought and sold.
Three brokerage firms.
ETFs are similar to mutual funds, but they trade like stocks on the stock exchange.
One of the main benefits of index funds is that they offer low cost
investment options compared to actively managed mutual funds.
This is because index funds
follow a passive investment strategy, which requires fewer resources
and therefore results in the lower operating costs.
And as a result, traditional index funds typically have lower expense ratios.
And more on this later, investing in traditional index funds is a simple way
to gain diversified exposure to a broad market or specific sector
with the potential to achieve returns that closely track the benchmark index.
The low cost nature of these funds also makes them an attractive option
for long term investors who seek to build wealth over time.
Crucially, index funds are not designed to outperform the underlying index.
They track, but to mimic its returns as closely as possible.
So that brings us to the question What are crypto index funds?
Cryptocurrency index funds are investment vehicles that provide exposure
to a basket of cryptocurrencies,
similar to how traditional index funds provide exposure to a basket of stocks.
Cryptocurrency index funds tracks
the performance of a benchmark index, such as a specific cryptocurrency sector.
So for example, DeFi or Metaverse or the overall market.
The main difference between cryptocurrency and traditional index
funds comes down to the types of assets that they invest in.
While traditional index funds invest in stocks, bonds
or other traditional financial assets, Cryptocurrency index funds
invest in cryptocurrencies such as Bitcoin, Ethereum, BNB and others,
while traditional index funds are a well-established investment medium.
Cryptocurrency index funds remain in emerging investment options.
They also operate in vastly different regulatory environments, with traditional
index funds typically being subject to heavy regulatory scrutiny.
Whereas cryptocurrencies are regulated differently based on the jurisdictions.
How do cryptocurrency index funds work?
While cryptocurrency index funds work by investing
in a basket of different cryptocurrencies rather than individual assets.
So the fund is constructed to mimic the performance of a benchmark index,
such as the top ten or top 20 cryptocurrencies by market capitalization.
The proportion of the assets held in the fund
is usually weighted by their market capitalization and rebalanced
regularly to ensure the fund composition accurately tracks the benchmark.
So by investing in an index fund, investors can gain exposure
to a broad range of coins and tokens in a single swoop,
rather than having to pick and choose individual assets to invest in.
And this helps to both diversify risk and also reduce the barrier to entry.
Index funds are often managed by professionals who will make decisions
about which coins to include in the portfolio to align with the index.
It's tracking and when to rebalance the fund.
These are known as actively managed funds and typically tracks specific sectors
or indexes.
They can offer greater returns but often have higher fees.
Cryptocurrency index funds have a variety of fees associated with them,
but the most important are the management fees, expense ratio and performance fees.
So let's get into those. First of all, management fees.
This is a fee charged by the fund manager for running and maintaining
the fund, typically charged as a percentage of the asset in the fund.
So, for example, if you invested $100,000 in a fund with a 1% management
fee, the yearly management fee will be $1,000.
And next up is the expense ratio.
This is the total cost of operating
the fund expressed as a percentage of the fund's assets.
It is the total of all the fees associated with running the fund,
such as the management fees, administrative costs and other expenses.
And next up is the performance fees.
Some funds actually charge an additional sum if the fund outperforms
a specific benchmark.
This often ranges between 10 to 20% of the profits above the benchmark.
Cryptocurrency index funds
take the research and decision making burdens off of individual investors
and make it easy to speculate on a broad range of cryptocurrencies all at once.
Most cryptocurrency index funds only invest in digital assets
that can be transacted on chain, such as cryptocurrencies,
utility and governance tokens and fees, and on chain derivatives.
But there are also more traditional funds that provide exposure
to the price movement of cryptocurrencies and blockchain companies.
Stock such as mining companies,
exchanges, hardware manufacturers and infrastructure providers.
Cryptocurrency index funds can be described
as either off chain or on chain based on the way that they are access.
Off chain index funds are currently by far the most popular include
only index funds that are traded through an asset management firm, whereas on chain
index funds are managed via smart contracts and the index fund
tokens can typically be bought or sold on DeFi platforms.
So let's talk about the benefits and risks of cryptocurrency index funds.
Well, cryptocurrency index funds are popular among traditional investors
since they provide a simple way to gain exposure to the price action
of cryptocurrencies and crypto companies without needing to understand
the technicalities of acquiring and securing digital assets.
Besides this, they also have a range of other potential benefits, such as a low
minimum investment.
Many cryptocurrency
index funds either have a low or no minimum investment requirement.
This can also make them attractive to those setting up a relatively small
portfolio or looking to deploy small amounts of capital regularly.
So for example, by dollar cost averaging.
Next up is also simplified by eliminating
the manual effort involved in securing, storing in managing cryptocurrencies.
Cryptocurrency index funds can be attractive to those
that prefer a hands off or simple investment approach.
Next up is one short diversification.
So cryptocurrency index funds provide price exposure to potentially dozens
or even hundreds of crypto assets in a single investment vehicle.
This makes diversification within crypto much simpler.
And next up is also cost efficiency.
So rather than needing to buy, store and manage
multiple separate crypto investments, cryptocurrency index funds
wrap this into a single investment, making them extremely cost efficient.
And that said, they're not without their risks.
So let's talk about that.
Some of the risks include volatility.
So cryptocurrency
are typically highly volatile,
and this can see the value of a cryptocurrency index fund actually
fluctuate considerably over a short period of time,
potentially leading to sizable losses for investors.
Next up is the lack of regulation.
So the regulatory environment around cryptocurrencies is still evolving.
Some cryptocurrency index funds
may be subject to the same level of oversight as traditional investment
funds, which can increase the risk of fraud or also mismanagement.
And also we have lack of liquidity.
So some cryptocurrency index funds may have limited trading volume,
making it difficult to buy or sell shares in the fund without significant slippage.
Cryptocurrency Index funds versus crypto mutual Funds.
Cryptocurrency index funds and Cryptocurrency Mutual funds
are both investment vehicles
that allow investors to gain exposure in the cryptocurrency market.
However, there are some key differences between the two.
While cryptocurrency index funds aim to track the performance of a specific
cryptocurrency market index by investing in a basket of cryptocurrencies
weighted in a manner that reflects the composition of the index.
Cryptocurrency mutual funds are actively managed by a fund manager
who makes active decisions about which assets to invest in.
This can include deciding the portfolio composition and asset
allocation as well as investment timing and risk management practices.
Because of this, they are considered actively managed,
whereas crypto index funds are passively managed.
The popular cryptocurrency index funds for the cryptocurrency
index fund landscape
is still relatively small, but there are a number of well-established funds
that track different crypto sectors or strategies,
and some of the most popular currently include Bitwise 10 Large Cap Crypto Index
fund as index fund includes the top ten largest cryptocurrencies
weighted by market capitalization.
Then we have Coinshares.
Blockchain Global Equity Index tracks the performance of companies
worldwide that have significant exposure to blockchain technology.
And then we have the good old Grayscale Bitcoin Trust Index fund primarily
includes Bitcoin, but may also include other cryptocurrencies in the future.
And then we have the Galaxy Crypto Index Fund.
This index fund includes
a variety of cryptocurrency with a focus on the top performers in the market.
And then we have the DeFi pulse index or DPI, which tracks the most popular
Ethereum based decentralized finance or DeFi protocols and also tokens.
And then we also have Binance's
CoinMarketCap top ten Equal Weighted Index.
This index tracks the top ten cryptocurrencies on CMC, excluding
Stablecoins and is equally weighted in rebalanced on
a monthly basis to reflect the most recent market movements.
So cryptocurrency index funds can vary considerably on the types of assets that
they track, how they are rebalanced, participation requirements, fees and more.
And because of this, it's important
to do your own due diligence and also research before investing in one.
Where to buy Cryptocurrency index funds.
While unlike regular cryptocurrencies, cryptocurrency
index funds are rarely available to trade on standard cryptocurrency exchanges,
typically known as centralized exchanges or also decentralized exchanges.
Instead, they are typically traded on asset management platforms
and some of the most popular platforms for trading.
Cryptocurrency index funds currently include Bitwise,
which offers a variety of low cost index funds, tracking the top crypto
market caps with diverse portfolios and easy investment options.
And we also have economy.
This is a platform offering index funds based on a basket of cryptos weighted by
market cap with a user friendly interface and also low fees.
And then we have Coinshares.
So Coinshares index funds, tracks the top crypto market caps
with low management fees and also diversified portfolios.
It offers physically backed funds for added security as well.
And then we have BitFund.
BitFund Index funds are based on a basket of cryptocurrencies
and track the performance of the top cryptocurrencies by market capitalization.
It's a low. Management fees are one of its standout features.
And then we have Fidelity.
It's a well-established platform offering index funds, tracking
top crypto market caps known for its reputation and reliability.
It also provides custody and trading services.
And then we have Uniswap for on chain crypto index funds
like the DeFi pulse index.
It can be bought directly on DeFi
platforms with DPI having the most liquidity on uniswap.
And then we have Binance, the Binance's CoinMarketCap top ten.
Equal weighted index can be bought directly on Binance and the Auto Invest
feature is available for users interested in DCA.
So anyways guys, that's all we have for this video.
Let us know what you think about cryptocurrency index funds in the
comments down below.