It’s simple to see why the crypto industry is on investors’ minds nowadays. Many currencies’ prices have risen, making cryptocurrency one of the top-performing asset sectors in the recent decade. Furthermore, the blockchain technologies that underpin cryptocurrency have the ability to destabilize plenty of industries while also generating valuable entrepreneurial ideas.
The learning curve for cryptocurrency investing is steep. Many investors are understandably concerned because it is a fluctuating, extremely speculative investment. There will still be ways to invest in cryptocurrency, indirectly, for individuals who are fascinated by it but don’t want to buy and hold actual cryptocurrency. And you may already be familiar with cryptocurrencies without even realizing it.
But cryptocurrency has a flaw: you can’t actually “invest in cryptocurrencies” like you can with overall market index funds in the stock market. You must therefore invest in individual tokens like BTC, Ether, or Solana. Furthermore, holding diversified cryptocurrency assets in traditional trading accounts, for example, retirement plans, is problematic. All of this causes considerable friction, especially for beginners to the bitcoin realm.
There isn’t a crypto index fund in which you can invest in the whole cryptocurrency ecosystem in one go. Is that the case? This detailed guide will cover the concept of crypto index funds, including the current options as well as those that may become accessible in the near future. We’ll also talk about the possibility of manually creating your own cryptocurrency “index fund.”
What Is a Crypt Index Fund, and How Does It Work?
A cryptocurrency index fund is a financial instrument that allows people to invest in a diversified portfolio of cryptocurrency assets. Sadly, as of January 2022, there is no actual crypto index fund in the USA. Let’s start with a definition of an index fund to better comprehend the concept.
An index fund is a type of financial instrument that is organized as a mutual fund or an exchange-traded fund. It’s a unified investment that combines a number of assets into a single “package.”
The goal of index funds is to replicate the success of a specific financial index. The S&P 500 index, for example, covers 500 of America’s top publicly traded firms, and there are numerous index asset classes and exchange-traded funds (ETFs) that track it.
Each stock featured in the index is purchased in a certain proportion by the asset managers. The goal is to create an investment instrument that people can buy directly in order to achieve the same results as the index with no need to purchase hundreds of different stocks.
The majority of index funds invest in either stocks or bonds. Here are a few examples of popular index funds:
The S&P 500 Index Fund
The S&P 500 Index Fund invests in each of the United States’ 500 largest corporations. It’s made to follow the S&P 500 stock index.
Fidelity US Bond Index Funds
FXNAX invests in a diverse portfolio of governmental, corporate, and mortgage-backed securities bonds in the United States. The Barclays Aggregate Bond Index is the benchmark.
The Vanguard Developed Markets Index Fund
The Vanguard Developed Markets Index Fund invests in more than 4,000 equities from throughout the world, with a focus on mature economies (and excluding the U.S.). Its goal is to replicate the FTSE Developed Index.
In theory, a crypto index fund would monitor a certain “index” of crypto assets. It may, for example, track the top 10 cryptocurrencies, the leading 100, or the “whole market” for crypto assets.
There are currently no pure cryptocurrency index funds offered (as of January 2022). Although there is BITW, a top 10 index fund detailed further down, it is not the type of “whole market” index fund that many traders seek.
When it comes to stocks, there are hundreds of indices to consider in order to assess the entire market’s success. But what about cryptocurrencies?
We have several alternatives, but cryptocurrency indexing is significantly less reliable than stock indexing at the moment.
Cryptocurrency Indexes from S&P Dow Jones
S&P Dow Jones is the most authoritative indexing attempt for the crypto sector. It is the same firm that offered S&P 500.
The firm now has 8 different indices that track the cryptocurrency industry. The S&P Crypto Broad Digital Market Index, which covers over 250 leading currencies, is likely the most effective. The S&P indexes are only for educational purposes; there are no appropriate investment index funds that monitor these indexes.
The S&P cryptocurrency indexes merely track a few hundred crypto assets, despite the fact that there are well above 15,000 of them.
CoinMarketCap keeps track of the combined worth of all known digital currencies to create a global crypto market cap index. They also provide some history graphs showing how different cryptocurrency markets have performed over time. However, there is no way to invest straight in this “index” without acquiring each coin separately.
Today’s Crypto Index Funds
So far, crypto index funds appear to be purely theoretical. Is there anything currently offered that you can invest in right now?
Because crypto markets are so unpredictable, most financial products that use them are only for professional investors, or those with a considerably higher risk tolerance than normal investors. Because they give access to BTC, a rare asset whose price has surged in recent months, such products are generally pricey and sell at a premium.
Bitwise has also taken the tried-and-true path, with ETFs aimed at the same type of investor. This is, however, the firm’s first attempt at creating an investment vehicle directed at investment planners and, by extension, ordinary investors.
Financial consultants have been reticent to offer Bitcoin or cryptocurrency to their clients in the past, but Bitwise believes there is a reason for this. “Financial advisors are looking for a secure and straightforward approach to allocating to cryptocurrencies for clients,” said Matt Hougan, investment manager of Bitwise, who added that the fund’s diverse structure will allow investors to obtain exposure to currencies other than Bitcoin.
Bitwise 10 Cryptocurrency Index Fund is a mutual fund that invests in cryptocurrencies (BITW)
The Bitwise 10 Cryptocurrency Index Fund is the only publicly listed “index fund” in the crypto realm. This fund was first issued as a private launch, which meant it was only available to fund managers and authorized investors.
It is now traded publicly, which implies that anyone with a brokerage account can purchase it on the marketplace. The stock ticker for the fund is now “BITW.”
Other cryptocurrency index funds are available through Bitwise Asset Management, but only to professional investors. BITW seems to be the only publicly traded option that is open to the general public.
The Bitwise 10 Index Investors invest in the 10 leading most valuable cryptocurrencies, as its name suggests. The fund’s current holdings are as follows:
Bitcoin is a digital currency (roughly 60 percent of holdings)
Ethereum is a cryptocurrency (roughly 30 percent of holdings)
Solana is a character in the film Solana (roughly 3 percent of holdings)
Cardano is a cryptocurrency (roughly 3 percent of holdings)
Polygon (1percent of total holdings)
Litecoin (1percent of total holdings)
Algorand (1percent of total holdings)
Chainlink (1percent of total holdings)
Bitcoin Cash (1percent of total holdings)
Uniswap (1percent of total holdings)
Because the assets are rebalanced every month, this split is subject to change. Bitwise, for example, does not include stable coins and instead concentrates entirely on crypto coins. Stable coins are meant to maintain parity with the worth of the US dollar, which is a benefit for investors looking for long-term gains.
While BITW appears to be a decent idea on paper, there is one major flaw: It has a cost-to-income ratio of 2.5 percent (charged annually). This is a very expensive price that will have a significant impact on long-term performance.
BITW trades at a value that differs from its asset value or the aggregate value of its real holdings, in part due to the high charge. It is currently trading at a discount.
BITW does not closely track its fundamental holdings, which is due in part to investors assessing the long-term implications of its high-cost ratio.
So, while BITW isn’t ideal, it’s a decent start. The key advantage is that it may be purchased through a regular investment portfolio or even a retirement fund. You also won’t have to care about keeping track of your assets or cryptocurrency wallets.
But if you need more personalization, a wider range of options, or lower costs?
Creating Your Own Bitcoin “Index Fund”
Building your own “index fund” is an alternative to existing funds like BITW. This entails using an exchange to purchase cryptocurrency directly.
This strategy has both advantages and disadvantages:
- You are the sole owner of the crypto assets.
- You don’t have to pay any more management fees.
- In terms of how the index fund works in comparison to the underlying assets, there are no “tracking faults.”
- You have the option to customize your portfolio depending on your investment choices.
- It takes more effort, especially when rebalancing.
- To obtain all of the coins you desire, you may have to use various exchanges.
- You must manage and safeguard your possessions.
- It’s possible that tax reporting will be more difficult.
- There are still fees associated with buying and selling
How to Create a Crypto Portfolio of Your Own
How do you go about creating your own cryptocurrency-based “index fund”? Here are the fundamentals.
Join a cryptocurrency exchange.
Make a decision on how many digital currencies you’d like to invest in. A top ten coin index is a nice place to start.
Calculate how much of each coin you’ll be able to use. The correct method to emulate an “index” strategy is to use market valuation weighting.
Use CoinMarketCap’s charts to determine the market domination of each cryptocurrency you intend to invest in.
From the exchange, purchase the required amount of each cryptocurrency.
Rebalance as necessary, but keep in mind the tax consequences of asset sales. For this purpose, you should always consult with a tax consultant.
How do you calculate market valuation weighting for your own cryptocurrency index fund?
You can manually compute it by dividing the market valuation of each cryptocurrency coin by the entire cryptocurrency market value. Alternatively, you can utilize CoinMarketCap’s graphs, which compute the “market dominance” of each of the top 10 cryptocurrencies.
You’ll have to figure out your own percentages if you want to eliminate stable coins such as Tether and USD Coin.
You’ll also have to compute everything separately if you choose to invest in cryptocurrencies that aren’t in the top 10.
For example, if you wish to buy in Chainlink (LINK), a stock that isn’t in the top ten, you’d calculate the percentage as follows:
On CoinMarketCap, you can get the most up-to-date information on market prices.
Calculate the LINK market valuation ($8 billion, for instance)
Subtract that from the entire market capitalization of all cryptocurrencies ($2.1 trillion, for example).
To find the percentage, multiply the value by 100.
In this scenario, you would put 0.38 percent of your money into LINK to approximate the market valuation allocation.
“Half and Half” Approach
What if you could have the most of both worlds by combining direct cryptocurrency ownership with ETF-style investments?
Bitcoin ETFs are becoming more widely available, and Eth ETFs are likely to follow suit in the coming years. For traders, this is a fascinating opportunity.
Bitcoin ETFs could be purchased in retirement funds or taxable broker accounts, while other cryptocurrencies could be purchased directly on exchanges.
This strategy allows investors to reap the tax benefits of storing cryptocurrency in the tax-advantaged account while also investing directly in a wider range of currencies.
For example, if you decided to put $10,000 into the cryptocurrency market, you could:
In your Roth IRA, purchase the ProShares Crypto Strategy ETF for $4,200. (42 percent of investment).
In your Gemini trader account, purchase $2,200 in Ethereum (22 percent of investment).
In your Gemini account, buy the remaining $3,600 in a range of other cryptocurrencies (36 percent of capital), with allocation depending on each coin’s market valuation.
As you can observe, you can make this unique indexing strategy as sophisticated or as basic as you like.
This tailored method may be the best alternative for seasoned cryptocurrency investors until we have good alternatives for actual crypto index funds.
Don’t want to make things too complicated? Bitcoin and Ethereum account for more than 60% of the overall market valuation of all cryptocurrencies, and the percentage is much higher if stable coins are excluded.
Thus, merely investing in BTC and ETH provides you great exposure to the whole cryptocurrency world, while lesser allotments to the rest of the top 10–15 cryptocurrencies can round out your portfolio if you’re prepared to put in the effort.
Other Options For Investing In Cryptocurrency
Are you dissatisfied with the current crop of cryptocurrency index funds? However, there are now a plethora of options for purchasing crypto assets. Here’s a quick rundown.
Purchasing Crypto On An Exchange Directly
Purchasing coins personally from a reputable crypto exchange offers you access to a lot of tokens (most exchanges have 50 or more) as well as the advantage of full ownership.
Exchanges now offer the most diverse, as they enable you to trade in a larger range of tokens and build your own crypto portfolio in the style of an index fund.
Gemini, Coinbase Pro, Binance.US, and Crypto.com are some of the most popular cryptocurrency exchanges.
These platforms act as a middleman between you and other cryptocurrency holders, allowing users to buy, sell, and exchange cryptocurrencies. They can also keep your money for you or send them to a cryptocurrency wallet if you choose.
Costs for purchasing and selling are charged on exchanges, but there are usually no continuing fees for maintenance or depository services. If you’re new to cryptocurrencies, learn more about how exchanges function by your own research DYOR before doing placing money in it.
Investing In Cryptocurrency ETFs And Mutual Funds
Crypto ETFs and cryptocurrency mutual funds are now available to investors. These funds are almost entirely focused on Bitcoin as of January 2022, therefore they are not a broad index-style investing prospect.
Moreover, as more funds receive regulatory permission from the Securities & Exchange Commission, we should expect to see more funds open in the years ahead.
Investing In Crypto Based Equities
Do you prefer to invest in publicly traded firms? This strategy allows for more stringent regulation while still allowing for some indirect access to crypto.
Stocks in cryptocurrency exchanges (Coinbase is publically listed), Bitcoin miners, and other crypto-related industries could be purchased by investors. A few crypto-related equities ETFs, like BITQ, BLOK, and SATO, are also available.
A real crypto index fund is still unavailable to investors as of January 2022. This could alter in the next months or years as cryptocurrency becomes more widespread and investor demand increases. For the time being, the best options are to invest in cryptocurrency ETFs and mutual funds or to create your individual diversified cryptocurrency portfolio.