Crypto Index Trading: How It Works?

• May 31, 2024
Crypto Index Trading: How It Works?

Trading crypto is trendy. But how can it be done while minimizing risk? Have you ever heard about crypto index trading?

More and more enthusiasts and institutional investors are joining the crypto revolution started in 2009 by Bitcoin, attracted by its potential to serve as a decentralized, anti-inflationary store of value. By challenging the dominance of government-issued fiat money the upside potential is considerable. However, statistically, only 30% of active traders actually turn a profit. As Warren Buffett said, "The first rule in investing is not to lose money": So, there is a problem if 70% of investors lose money. It is often due to a lack of skill, research and study, and/or experience. This is precisely why our platform was born: Trakx allows advanced investment strategies to be applied to all types of users, making the investment industry safer, more inclusive, and more democratic through crypto index trading. But what exactly is it?

Crypto index trading allows you to diversify your investments in cryptocurrencies through different crypto baskets designated to meet the needs of different user categories. It is an innovative way of investing, as you can get exposure to many cryptocurrencies via a single investment. If, for example, you are interested in the DePin crypto sector, you can easily invest in a related crypto index fund containing the 10 most promising cryptocurrencies in this sector, ensuring a significant decrease in risk and easy diversification of your investments.

The Fundamentals of Crypto Index Trading

Crypto index trading involves buying and selling crypto index funds, specific crypto baskets designed to gain exposure to multiple assets simultaneously with a single investment. Numerous types of indices have been created to represent specific segments of cryptocurrencies. For instance, in our offering of Crypto Tradable Indices, some indices represent specific sectors, such as DeFi or Proof of Stake. Other CTIs, such as the BTC Momentum CTI, follow advanced algorithmic investment strategies.

Unlike classic investments in individual cryptocurrencies, which require the management of numerous crypto wallets that are often incompatible with each other, crypto index trading succeeds in providing broad exposure and diversification in a simple and functional manner through a single investment. This approach to investing is advanced and strategic, allowing one to minimize risk and maximize profit potential.

Advantages of Crypto Index Trading

If you are deciding whether to invest in crypto ETFs, individual cryptocurrencies, or crypto index funds, we now explain in concrete terms the advantages of these advanced products.

Advanced Diversification

Crypto index trading offers advanced diversification opportunities beyond what is achievable through individual crypto trading. By investing in a crypto index fund, traders gain exposure to high-targeted cryptocurrencies across various categories, such as decentralized finance (DeFi), DePin, Real World Assets (RWA), and Proof of Stake (PoS) projects. This diversified approach helps mitigate concentration risk inherent in single assets, as losses in one asset can be offset by gains in others. Moreover, our Crypto Tradable Indices, for example, include a mix of thematic indices and strategies, further enhancing diversification across market segments. Advanced diversification reduces portfolio volatility and improves long-term stability and resilience against market fluctuations.

Passive Rebalancing

One of the key benefits of crypto index trading on our platform is passive rebalancing, which is integral to maintaining portfolio consistency and alignment with the index methodology. Unlike active trading strategies that require constant monitoring and manual adjustments, passive index funds automatically rebalance holdings according to predefined rules or criteria through our Trakx Index Manager tool. This passive approach ensures that the portfolio remains aligned with the target allocation as market conditions evolve. By eliminating the need for frequent trading, passive rebalancing minimizes transaction costs, tax implications, and behavioral biases associated with emotional decision-making. Overall, passive rebalancing streamlines portfolio management and enhances the efficiency of index fund management.

Advanced Investment Strategies

Our crypto index funds also enable the implementation of advanced investment strategies that leverage the unique characteristics of index products. For example, swing traders, instead of opening and closing positions manually depending on market trends, can use the BTC Momentum CTI to self-balance exposure to Bitcoin based on market trends: When the market goes down, exposure to Bitcoin decreases, as does risk; when the market goes up, exposure to Bitcoin rises to 100%, allowing you to seize opportunities effectively. Additionally, index funds provide flexibility for implementing sophisticated trading strategies, such as dollar-cost averaging (DCA) or smart strategies, which aim to outperform traditional market-cap-weighted indices. Moreover, our index methodologies' transparent and rules-based nature allows for systematic and disciplined investment approaches, reducing reliance on subjective judgment and market timing. By harnessing these advanced strategies, investors can optimize risk-adjusted returns and capitalize on market inefficiencies more effectively.

Effective Risk Management

Effective risk management is essential in cryptocurrency trading, given the inherent volatility and unpredictability of crypto markets. Crypto index trading offers robust risk management mechanisms that help protect capital and preserve wealth over the long term. Through diversification across multiple assets and sectors, index funds mitigate specific risks associated with individual cryptocurrencies, such as regulatory developments, technological vulnerabilities, or market manipulation. Furthermore, passive rebalancing ensures that the portfolio maintains a consistent risk profile, reducing exposure to concentration risk and excessive volatility. Overall, effective risk management strategies embedded within crypto index trading frameworks enhance investor confidence and promote prudent investment practices in the cryptocurrency market.

By exploiting these advantages, users can achieve better performance compared to ETFs or manual, non-strategic investments in individual cryptocurrencies.

Crypto Tradable Indices: Advanced Index Funds

Trakx was founded in 2019 in France, with the aim of offering a new investment methodology that is more strategic, advanced, inclusive, and secure. Unlike some in the crypto industry, our primary focus has always been on regulatory compliance and ensuring the security of our clients assets. This is a slower and more intensive process than followed by most other crypto firms, but it means we are able to offer a better, and safer, investment platform with a broader product offering than those who have only just started to enter the space. Which Crypto Tradable Indices (CTIs) do we offer?

Thematic Crypto Indices

  • AI (Artificial Intelligence): This index focuses on cryptocurrencies and projects at the forefront of artificial intelligence innovation. It includes tokens associated with AI-driven applications such as machine learning, data analytics, and predictive modeling. Projects may range from AI-based decentralized platforms to tokens powering AI-powered services and solutions.
  • Centralised Exchanges: This CTI tracks the performance of cryptocurrencies associated with centralised exchanges (CEXs). It includes tokens issued by leading exchanges, providing exposure to the infrastructure supporting cryptocurrency trading, including spot trading, derivatives trading, and fiat-crypto gateways.
  • DePIN (Decentralized Physical Infrastructure Network): The DePIN index focuses on cryptocurrencies and projects involved in the development of decentralised physical infrastructure networks. The DePIN CTI is based on the thesis that blockchain technology has the potential to revolutionize traditional physical infrastructure sectors, promoting decentralization, efficiency, and resilience.
  • Decentralised Exchanges: This index focuses on cryptocurrencies of the most recognized decentralised exchange of crypto assets. It includes tokens associated with decentralised exchange (DEX) platforms, liquidity pools, and decentralized finance (DeFi) protocols enabling peer-to-peer trading without intermediaries. Projects within this index aim to provide censorship-resistant and trustless trading solutions.
  • ESG (Environmental, Social, and Governance): The ESG index provides exposure to environmentally sustainable and socially responsible cryptocurrencies. It includes tokens issued by projects focusing on eco-friendly consensus mechanisms, carbon offset initiatives, social impact projects, and governance transparency. Projects within this index align with Environmental, Social, and Governance (ESG) principles and aim to promote sustainability within the cryptocurrency ecosystem.
  • Gaming: The Gaming index includes cryptocurrencies and projects within the blockchain gaming sector. It comprises tokens associated with blockchain-based gaming platforms, in-game assets, and virtual economies. Projects within this index aim to revolutionize the gaming industry by leveraging blockchain technology, offering ownership, interoperability, and play-to-earn opportunities.
  • Interoperability: The Interoperability index focuses on cryptocurrencies and protocols facilitating interoperability between different blockchain networks. It includes tokens associated with cross-chain communication, interoperability bridges, and blockchain interoperability standards. Projects within this index aim to break down silos between disparate blockchains, enabling seamless data and asset transfer across networks.
  • Lending: The Lending index tracks the performance of cryptocurrencies and platforms involved in decentralised lending and borrowing. It includes tokens associated with decentralised lending protocols, liquidity pools, and yield farming strategies. Projects within this index aim to provide liquidity and yield opportunities to users while enabling permissionless borrowing and lending.
  • Top Blockchains: The Top Blockchains index includes leading blockchain platforms based on market capitalization and adoption metrics. It provides exposure to tokens associated with prominent blockchain networks such as Bitcoin, Ethereum, Binance Smart Chain, and others. Projects within this index represent the foundational infrastructure of the cryptocurrency ecosystem.
  • Top 10 DeFi (Decentralised Finance): The Top 10 DeFi index focuses on the top 10 cryptocurrencies within the decentralised finance (DeFi) sector. It includes tokens associated with decentralised lending, borrowing, trading, and yield farming protocols. The projects in this index have the goal of disrupting conventional financial intermediaries and providing unrestricted access to financial services.
  • NFT Metaverse: The NFT Metaverse index provides exposure to cryptocurrencies and projects within the non-fungible token (NFT) and metaverse space. It includes tokens associated with NFT marketplaces, virtual worlds, digital art, and collectibles. Projects within this index aim to create immersive virtual experiences and unlock new opportunities for ownership and creativity.
  • Top 10 Proof of Stake: The Top 10 Proof of Stake index tracks the performance of the top 10 cryptocurrencies based on the proof-of-stake (PoS) consensus mechanism. It includes tokens associated with PoS blockchain networks, allowing investors to earn staking rewards by participating in network validation and governance.
  • Memes: The Memes index includes cryptocurrencies and tokens associated with meme culture and communities. It comprises tokens representing internet memes, viral content, and community-driven projects. Projects within this index often exhibit high social media engagement and community enthusiasm.
  • Real World Assets: The Real World Assets index includes tokenized real-world assets such as equities, commodities, or real estate on the blockchain. It provides exposure to tokenized versions of traditional assets, allowing investors to access fractional ownership, liquidity, and diversification benefits.

Simple Access Crypto Indices

  • Bitcoin: This investment strategy offers simple access to Bitcoin, the pioneering cryptocurrency and digital gold standard. It allows investors to gain exposure to Bitcoin's potential as a store of value and hedge against inflation.
  • Bitcoin Ether 50/50: Maintains a balanced allocation between Bitcoin and Ether, the two leading cryptocurrencies by market capitalization. This strategy offers diversified exposure to the largest cryptocurrencies, combining Bitcoin's store of value properties with Ethereum's utility as a smart contract platform.
  • Top 10 Crypto: Provides simple access to the top 10 cryptocurrencies by market capitalization. This investment strategy offers broad exposure to the cryptocurrency market, capturing the performance of leading digital assets across different use cases and sectors.

Smart Investing Crypto Indices

  • Digital Inflation Hedge: It focuses on Bitcoin and Pax Gold, which serve as inflation hedges and stores of value. This strategy aims to protect against currency debasement and preserve purchasing power over time.
  • BTC Momentum: This strategy utilizes momentum-based strategies for Bitcoin investing, capitalizing on price trends and market momentum. It aims to enhance returns by increasing and decreasing Bitcoin positions based on technical indicators and price signals.
  • Diversifier: This crypto index replicates the performance of the digital assets that have the lowest correlation to a traditional securities portfolio.
  • Recovery: It is made up of cryptocurrencies that have not performed well in the last period, with the aim of taking advantage of the recovery in these assets' performance and benefiting from their rise.
  • Bitcoin Control15: Employs strategies to manage Bitcoin volatility and enhance risk-adjusted returns to maintain volatility around 15%. The volatility is reduced by increasing the amount of cash (USDc) held during periods of higher risks.

Risk-Profiled Crypto Indices

  • Balanced: Targets moderate risk and balanced growth, suitable for investors with a balanced risk-return profile. This strategy aims to achieve stable returns while managing downside risk through diversified asset allocation and portfolio rebalancing.
  • Conservative: This strategy is designed for risk-averse investors seeking stability and capital preservation. It prioritizes capital preservation and income generation, focusing on low-risk assets and defensive investment strategies.
  • Growth: This strategy aims for higher growth potential with increased risk tolerance. It targets capital appreciation through exposure to growth-oriented assets and aggressive investment strategies, suitable for investors seeking long-term wealth accumulation.

Stake & Yield

  • Staked Matic: Allows investors to participate in staking rewards from the Matic Network (Polygon) ecosystem. This strategy enables investors to earn passive income by staking Matic tokens and contributing to network security and decentralization.
  • USDc Earn:  Developed in collaboration with Open Trade, it yields an interest rate by investing USDc in flexible terms US treasury loans.

Guide to Crypto Index Trading: Choosing the Right CTIs for You

Crypto index trading offers investors a convenient and strategic way to gain exposure to the cryptocurrency market while managing risk and maximizing returns. With a diverse range of Crypto Tradable Indices (CTIs) available, selecting the most suitable index for your investment goals and risk tolerance is essential. Now, we will explore key factors to consider when choosing a CTI that aligns with your investment strategy and preferences.

1. Define Your Investment Objectives

Before selecting a CTI, clearly defining your investment objectives is essential. Are you looking for long-term growth, capital preservation, income generation, or a combination of these? Understanding your investment goals will help narrow down the options and guide your decision-making process.

2. Assess Your Risk Tolerance

Consider your risk tolerance when choosing a CTI. Are you comfortable with higher volatility and potential fluctuations in portfolio value, or do you prefer a more conservative approach with lower risk? CTIs vary in risk profiles, ranging from balanced to growth-oriented or conservative strategies. Select a CTI that matches your risk tolerance and investment preferences.

3. Understand the Index Methodology

Each CTI follows a specific index methodology that determines its composition, rebalancing frequency, and selection criteria. Understanding the underlying methodology of the CTI you're considering is essential, including how index components are selected, weighted, and rebalanced over time. Ensure that the index methodology aligns with your investment objectives and preferences.

4. Evaluate Sector Exposure

Different CTIs focus on specific sectors or themes within the cryptocurrency market, such as decentralized finance (DeFi), gaming, artificial intelligence (AI), or proof of stake (PoS) projects. Evaluate the sector exposure of the CTIs you're considering and assess whether it aligns with your investment thesis or areas of interest. Choose a CTI that provides exposure to sectors you believe have long-term growth potential.

5. Consider Diversification Benefits

One of the primary advantages of crypto index trading is diversification. CTIs offer exposure to a diversified portfolio of cryptocurrencies, reducing concentration risk and enhancing portfolio resilience. Evaluate the diversification benefits of the CTIs you're considering and assess how well they align with your portfolio diversification goals.

6. Review Performance History

While past performance is not indicative of future results, reviewing CTIs' historical performance can provide valuable insights into their risk-return characteristics and volatility. Analyze CTIs' performance history under various market conditions and assess their consistency, volatility, and drawdowns. Choose CTIs with a track record of delivering stable returns and outperforming relevant benchmarks.

In any kind of investment, having clear objectives and a clear understanding of the investments you make is indispensable. Each person has different financial and time objectives and different risk tolerances. No financial product is right for everyone; you must make your own decisions based on your needs. After DYOR (Do your own research), integrate technical and fundamental analysis: With careful consideration and due diligence, crypto index trading can be an effective tool for building a diversified cryptocurrency portfolio and achieving your long-term financial objectives. At Trakx, we are here to assist you and provide you with the largest, safest, and most advanced collection of crypto index funds.

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