Cryptocurrency Index Fund: What It Is and How It Works


Cryptocurrency Index Fund

Cryptocurrency index funds are funds with an investment portfolio representing a wide section of the cryptocurrency market. They are not intended for active intraday trading, but for long-term passive investments. We will 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 cryptocurrencies, and the latter, on your behalf, invest in certain coins or tokens for a long time.

Continuous market coverage or selectivity

Most cryptocurrency index funds invest only in leading coins and tokens, although there are ones that try to cover the entire market. The principle of selection of tokens may also differ – 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 expectations for profitability and his own forecasts.

Pros of cryptocurrency index funds

  • Risk reduction. Buying a cryptocurrency index fund is a way to diversify a portfolio, because buying a wide range of different coins and tokens partially 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 by taking many assets, we reduce this risk.
  • Simple investment in cryptocurrencies. Active investments in such a dynamic market as cryptocurrency require complete immersion: how to safely store assets (in a cold wallet, in a hot wallet, on the exchange), what happens to them – all these thoughts take a lot of time. But a long-term investor does not need all this, and index funds come to his aid.
  • More predictable returns. Like any other tool that monitors the returns of a whole pool of assets, the cryptocurrency index fund is designed to reflect market returns and redistribute investments to increase portfolio returns. In addition, here management is not carried out by the forces of one person – the organization is engaged in this with its specialists and algorithms.
  • Less commission. Yes, such funds also have commissions, but the more and more active your trading portfolio, the more money you will save by contacting professionals.

Cons of cryptocurrency index funds

For a particular investment strategy, a particular cryptocurrency index fund may not be suitable – for example, if it gives priority to liquidity to the detriment of long-term profit.

  • Lack of liquidity. Although cryptocurrency index funds are liquid to varying degrees, it is relatively difficult to withdraw funds from them on average. The fact is that sometimes an investor invests in a token representing an investment portfolio, therefore, in order to turn it into real money, an additional step is required.
  • Price. Such funds involve a very different level of management, and commissions may vary, but they do exist. For example, Bitwise takes 2.5% per year for management, which in the case of a large portfolio can be very much. Of course, if the fund does not imply active management, commissions are lower, and such options, of course, are more suitable for traders with high trading volumes.
  • Entry barrier. Today, cryptocurrency index funds are available only to accredited investors – in the United States 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 or capital of more than $ 1 million. In addition, the funds themselves set a minimum threshold – for example, at least 250 thousand dollars must be invested in the Coinbase Index.

How cryptocurrency index funds differ from ETFs

Exchange traded funds (ETFs) and cryptocurrency index funds are two different things. Exchange-traded funds exist on the exchange and are traded within the framework of exchange sessions, and also, as stated by the Securities and Exchange Commission, have great liquidity. In addition, they usually have a lower entry threshold. Conversely, index funds imply less attention on the part of the investor.

 Institutional Investments in Cryptocurrencies

Index funds bring to the cryptocurrency market traditional approaches to investing, including paying a commission for creating a portfolio. An investor can indicate the level of risk and the types of cryptocurrencies that interest him, for example, well-known coins or security tokens, as well as the degree of personalization of the portfolio. However, this applies to professional investors who would otherwise pay large transaction fees.

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