How to Invest in Crypto Index Fund: A Beginner's Guide

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• Dec 01, 2023
How to Invest in Crypto Index Fund: A Beginner's Guide

Last update: July 15, 2024

With the approval of the first BTC and ETH ETFs in recent months, the interest in this new asset class has grown and investing in cryptocurrencies have become a popular choice among many investors, including institutional and retail investors. The most well-known cryptocurrencies are Bitcoin and Ethereum, but there are 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 investments and select the correct provider to start investing in this market.

In this paper, we will discuss why you should consider investing in a crypto index fund, how they work, and how they are different from traditional mutual funds. We will also guide you through the different steps of investing. 

What is a Crypto Index Fund?

A crypto index fund is a crypto basket that allows for advanced diversification, sound risk management, automatic rebalancing, and advanced trading strategies, commonly using alpha, beta, and smart beta models. For example, if you want to invest in a specific segment of the market, such as the AI sector, you can do it through a thematic crypto index fund. Using the Trakx platform, with our Crypto Tradable Indices (CTIs), it’s possible also to adopt more advanced strategies since the crypto index funds are automatically rebalanced every month based on predetermined parameters thanks to our Index Manager Tool, allowing systematic and strategic trading. That’s not all because, with Trakx Solutions, which is dedicated to institutional investors, KOLs, DAOs, and communities, we can create customized crypto index funds that meet your specific needs. But let’s continue our exploration and understand better how crypto index funds work.

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,  allowing to adopt sound risk management and reducing volatility. The S&P 500 is the main benchmark of the stock market, and tracks the performance of 500 large, publicly traded companies in the United States. Similarly, our Top 10 Crypto Index can be considered the main benchmark of the crypto market.

What kinds of Crypto Index Funds exist?

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. For this reason, we’ve built our platform to provide advanced crypto index strategies.

There are various types of crypto indices available, constructed in different ways, but they are all designed to track the performance of underlying crypto tokens. Some crypto index funds implement thematic diversification, focusing on specific crypto sectors such as Artificial Intelligence (AI) tokens, RWA (Real-World Assets) tokens, Memecoins, and more. This type of strategy can be useful to obtain a higher return (alpha) than the Top 10 Crypto Index, the main benchmark. Other crypto index funds are focused on advanced risk management and are more suited for conservative investors, such as the Bitcoin Control15 CTI, trying to obtain a lower beta (volatility) compared to the main benchmark, in this case, Bitcoin. That’s not all because some crypto indices are based on smart beta models, and aim to outperform the benchmarks while adopting sound risk management. The BTC Momentum CTI is an example of a Smart Beta model since it increases the exposure to Bitcoin during uptrends, while reducing it during downturns.

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 or adopt more advanced weighting models.

Our Crypto Tradable Indices are different from crypto exchange-traded funds (ETFs). Crypto ETFs, at the moment, focus on single cryptocurrencies, such as Bitcoin or Ethereum, they are tradable only during stock market hours, and often hold derivatives, such as futures contracts, that track the price of the underlying assets. In this context, ETFs are riskier than crypto indices, as they are linked to derivatives, and their value may depend on more variables. On the other hand, our crypto index funds allow you to own the underlying cryptocurrencies with a healthy fixed ratio of 1:1 and to implement advanced strategies, focusing on risk management and advanced diversification. Additionally, they are tradable no-stop 24/7.

How does a Crypto Index Fund work?

Investors can buy the crypto index funds, which gives them exposure to the underlying crypto basket with a single click, without the need to open various wallets and purchase them directly. But how are our crypto index funds built?

  1. Choose the components: When creating a crypto index, the first step is to decide its underlying crypto assets.
  2. Decide the percentage of each component: After selecting the cryptocurrencies of the basket, it’s necessary to decide the proportion of each asset in percentage.
  3. Implement a rebalancing strategy: To ensure sound risk management and effective diversification, we have to implement periodic and automatic rebalancing strategies defined on predefined parameters.

On Trakx, we already provide a wide range of Crypto Tradable Indices, based on thematic, risk-profiled, smart beta, and more strategies. And recently, with Trakx Solutions, we are allowing financial institutions, companies, KOLs, and communities to create their own custom crypto index funds using our compliant, secure, and scalable infrastructure. Contact the Trakx Team if you’re interested in creating customized crypto baskets.

Investing in Crypto Index Funds: What are the Main Benefits?

Advanced investment strategies adopted by professional investors focus on risk management and outperforming markets’ benchmarks through systematic trading and rebalancing on predetermined factors. With crypto index funds, it’s possible to implement advanced strategies based on alpha, beta, and smart beta models with a single click. But let’s analyze some advantages in more detail.

Portfolio Diversification

By investing in a basket of cryptocurrencies rather than just one coin, investors can spread risk across different coins and projects, reducing the impact of a possible single cryptocurrency’s collapse. This can help mitigate the volatility that is commonly associated with individual cryptocurrencies while seizing the opportunities of the crypto market effectively. If one cryptocurrency performs poorly, the other cryptocurrencies in the fund may perform well, helping to balance out the overall performance of the funds. That’s not all because crypto index funds allow for thematic and specific diversification, easily focusing on specific segments of the markets.

Experienced Managers and Advanced Algorithms

Experienced fund managers created advanced rules to rebalance the crypto index funds effectively based on predefined parameters. Advanced algorithms 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 while having a portfolio always updated based on market and crypto trends. The fund’s performance is then closely tied to the performance of the underlying index or basket.

Cost Efficiency

If you want to diversify effectively in Web3, you need to open and manage various types of wallets, based on several blockchains, doing a lot of transactions and paying notable gas fees. Additionally, if you want to trade actively or rebalance periodically, you need to spend time and transaction fees to do it effectively. With crypto index funds, all these problems disappear: With just a single purchase, you can gain exposure to a specific crypto basket, reducing costs for wallets, deposits, transactions, trades, and rebalancing. That’s not all, because you also save time on tax reports and expenses.

Liquidity & Tradability 24/7

Unlike crypto ETFs, which are tradable only during stock market hours, our crypto index funds (Crypto Tradable Indices) are available 24/7, no-stop. With ETFs, you don’t own the underlying assets and they focus on individual cryptocurrencies, limiting the possibility of diversification and risk management. Furthermore, they are often backed by derivatives and do not have a 1:1 ratio with the underlying assets, which increases risk. With crypto indices, on the contrary, liquidity is never a problem, since they are backed 1:1 with the underlying assets and they are always available for trading.

 Automatic Rebalancing & Peace of Mind

Since crypto index funds are based on predefined allocations and parameters, they can implement both easy and sophisticated rebalancing methods. It means that every month, most of the crypto index funds are rebalanced automatically by our Index Manager Tool based on predefined parameters. Moreover, it allows the implementation of more advanced crypto index trading strategies such as momentum and sector rotation, while ensuring peace of mind and no actions required.

Advanced Crypto Trading Strategies

Through automatic weighting and rebalancing based on predefined parameters, it’s possible to implement more advanced crypto trading strategies that would not be possible by trading manually. In recent years, the most advanced strategies are based on Alpha, Beta, and Smart Beta models, aiming to outperform a specific benchmark and enhancing sound and healthy risk management. Some strategies based on positive alpha may be more risky, since they are mostly focused on outperforming a benchmark. On the contrary, passive beta models allow for more effective risk management and volatility reduction. Smart beta strategies, instead, are the most sophisticated models and are based on momentum, value, and more.

Different Ways to Invest in Crypto Index Funds

Some companies are starting to provide some crypto index funds, but at Trakx we’re currently offering the wider selection of crypto indices, and we’ve the most scalable proprietary infrastructure. We provide solutions both for retail investors, through our Crypto Tradable Indices, and for institutions, customizing the baskets through our Trakx Solutions program.

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 in 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 have to open an account, 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 Crypto 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!

Trakx Sign up guide - Step 1

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.

Trakx Sign up guide - Step 2

Step 3: Mail Confirmation

Access your email to verify your account.

Trakx Sign up guide - Step 3

Step 4: Confirm Account

Confirm the verification of your account.

Trakx Sign up guide - Step 4

Step 5: Protect Your Account

Conduct the 2FA verification to add an extra degree of security to your account.

Trakx Sign up guide - Step 5

Step 6: Individual or Business?

Select whether you are operating as an individual or as a business.

Trakx Sign up guide - Step 6

Step 7: Onboarding

Enter your details to start operating as an individual.

Trakx Sign up guide - Step 7

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.

Trakx Sign up guide - Step 8

Step 9: Professional Status

Select your professional status.

Trakx Sign up guide - Step 9

Step 10: Wealth

Select your annual revenue and liquid net worth.

Trakx Sign up guide - Step 10

Step 11: Signing to Continue

Proceed to digitally sign the document to start operating on the platform.

Trakx Sign up guide - Step 11

Step 12: Start Trading

Congratulations on the registration of your account. You can now start trading on Trakx!

Trakx Sign up guide - Step 12

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.

Trakx Sign up guide - Step 13

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.

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