How to Invest in Crypto Index Fund: A Beginner's Guide
With the success, the up and down of digital assets in recent months, the interest in this new asset class has grown and investing in cryptocurrencies have become a popular choice among many investors. The most well-known cryptocurrencies are Bitcoin and Ethereum, but there are now thousands of different crypto and tokens available. Most of them have been through roller coaster rides due to extreme volatility and mismanagement of businesses, reinforcing the need for investors to diversify their investment and select the correct provider to start investing in this market.
In this paper we will be discussing why you should consider investing into a crypto index fund, how they work, how they are different from traditional mutual funds and guide you through the different steps of investing.
What is a Crypto Index Fund?
A crypto index is an investment product that tracks the performance of a group of cryptocurrencies, such as the top 10 or 20 coins by market capitalization. Just like traditional index funds, such as the S&P 500 or the Dow Jones Industrial Average, a crypto index gives investors an exposure to a diversified crypto basket rather than investing in individual cryptocurrencies. The S&P 500 tracks the performance of 500 large, publicly traded companies in the United States.
Stock picking individual cryptocurrencies can be challenging and risky, especially in this fast-evolving market where crypto asset fundamentals are very different from the traditional stock market.
There are various types of crypto indexes available, constructed in different ways but they are all designed to track the performance of underlying crypto tokens. Some crypto indexes track a specific number of cryptocurrencies, while others track a wider range. Some indices may be market-cap weighted, meaning that the weight of each cryptocurrency in the index is based on its market capitalization, while others may be equally weighted.
These funds are different from crypto exchange-traded funds (ETFs), which are similar to traditional ETFs in that they track a basket of assets (in this case, cryptocurrencies) and can be traded on a stock exchange. However, while traditional ETFs hold the underlying assets they track, crypto ETFs hold derivatives, such as futures contracts, that track the price of the underlying assets. In this context, ETFs are riskier than crypto indices, as being linked to derivatives, their value may depend on more variables. On the other hand, crypto indices allow you to own the underlying cryptocurrencies with a fixed ratio of 1:1.
How Does a Cryptocurrency Index Fund Work?
Investors can purchase shares in the fund, which gives them exposure to the underlying cryptocurrencies without having to purchase them directly. This can be ideal for investors who are unfamiliar with or uncomfortable purchasing individual cryptocurrencies. Additionally, index funds are generally considered to be a more passive investment strategy, as the fund manager is typically not actively buying and selling the underlying assets. In essence, crypto index funds offer investors a well-structured and professionally managed gateway to the dynamic world of cryptocurrencies. The proportional backing, periodic rebalancing, volatility mitigation, and strategic diversification collectively make cryptocurrency indices an enticing option for those seeking a balanced and diversified entry into the evolving crypto market.
Investing in Crypto Index Funds: What are the Main Benefits?
Investing in a crypto index brings in some advantages:
By investing in a basket of cryptocurrencies, rather than just one coin, investors can spread risk across different coins and projects. This can help to mitigate the volatility that is commonly associated with individual cryptocurrencies. If one cryptocurrency performs poorly, the other cryptocurrencies in the fund may perform well, helping to balance out the overall performance of the funds.
They make decisions about what coins to include in the fund and when to rebalance it. This can help to reduce the time and effort required for individual investors to research and select individual coins to invest in. The fund’s performance is then closely tied to the performance of the underlying index or basket.
The fund typically charges a management fee for professional management, and some funds may also have an expense ratio. The management fee is the fee charged by the fund manager to cover the costs of managing the fund, while the expense ratio is a percentage of the fund’s assets that goes to cover other expenses, such as trading and custody fees.
Since index funds are traded on exchanges, they can be bought and sold like any other asset.
Differents Ways to Invest in Crypto Index Funds
There are many crypto index funds in the market, including Grayscale’s Digital Large Cap Fund, which tracks the top 10 cryptocurrencies by market capitalisation, and Bitwise’s 10 Crypto Index Fund, which tracks the top 10 coins by market capitalisation, weighting them by liquidity. Each crypto index fund contains a selected basket of digital currencies at various weights.
Before choosing an index from the many available options you first need to evaluate your risk / return appetite and decide on the allocation you’re ready to invest into crypto. You can then start your own market research as, with the right information at hand, you will be able to pick an index that matches your investment objectives and risk appetite. When you’ll have chosen a platform that enables you to invest in the index of your choice, you’ll have to open an account and provide some personal information and verify your identity.
If you are looking for an efficient way to start investing in crypto indices, Trakx is the right platform for you. In the next chapter, we will guide you step-by-step through opening an account and the first purchase of a crypto index fund.
Step by Step Guide: How to Buy your First Crypto Tradable Index
At Trakx, we have built a range of thematic indices called CTIs (Crypto Tradable Indices) that allow investors to choose a specific sub-segment of the market, such as DeFi, lending, ESG, NFT-Metaverse protocols, and so much more. Top 10 Crypo is our flagship product and, as the name suggests, tracks the 10 largest cryptocurrencies by market capitalisation.
With our CTIs you can automatically invest in small segments of the entire crypto market and reduce your exposure to volatility. They are proprietary crypto baskets built with the largest and most liquid digital assets. How to buy a Crypto Tradable Index?
Step 1: Sign up
Sign up on our platform to start trading with Crypto Tradable Indices!
Step 2: Email and Password
Register with your email, and create a secure password. Be sure that the password is unique and contains special characters and numbers.
Step 3: Mail Confirmation
Access your email to verify your account.
Step 4: Confirm Account
Confirm the verification of your account.
Step 5: Protect Your Account
Conduct the 2FA verification to add an extra degree of security to your account.
Step 6: Individual or Business?
Select whether you are operating as an individual or as a business.
Step 7: Onboarding
Enter your details to start operating as an individual.
Step 8: Verify your Identity
Proceed in providing the necessary data to be able to operate in the platform by adhering to the regulatory standards.
Step 9: Professional Status
Select your professional status.
Step 10: Wealth
Select your annual revenue and liquid networth.
Step 11: Signing to Continue
Proceed to digitally sign the document to start operating on the platform.
Step 12: Start Trading
Congratulations on the registration of your account. You can now start trading on Trakx!
Step 13: Fund your Account
To start buying crypto indices, you can easily make a deposit in both fiat currencies and cryptocurrencies in the 'Assets' section.
Crypto Industry: What are the Risks Associated?
Investing in digital assets is a high-risk investment. The value of crypto is very volatile, often fluctuating by huge amounts within a short period.
Since crypto index funds are still a relatively new and rapidly evolving asset class, and the regulatory environment surrounding them is still uncertain in many countries, it is important for investors to thoroughly research their chosen crypto index fund before investing.
The level of volatility in the crypto market is much higher than in most other financial areas bringing either potential high returns or high losses over shorter periods of time than comparatively less volatile assets.
It's important to remember that investing in any type of asset, including cryptocurrency, comes with risks. Make sure you do your own research and understand the risks involved before investing. It's also a good idea to consider diversifying your portfolio with other types of investments to mitigate your risk.