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A cryptocurrency index fund is a financial tool that invests in a group of digital currencies. It has a pool of funds from the investors who put their money in the index funds for the purpose of diversified portfolios. The most convenient way to understand digital currency index funds is, to begin with, the idea of index funds as a whole. An index fund is a form of a mutual fund, which is a basket of investor funds that the fund manager makes investments in securities.
While a mutual fund includes a fund manager, an index fund does not. Instead, it makes investments in a specific stock market index. These market indexes are baskets of securities that portray parts of the complete market. For instance, the S&P 500 is a market index of 500 large U.S. entities.
Because index funds offer passive management, they tend to have lower charges compared to mutual funds. The charges for every type of fund is known as the expense ratio, which the fund takes as a percentage of the assets that are under management.
To put it all together, a cryptocurrency index fund is a fund that makes investments in a specific index of digital currencies. Presently, crypto index funds are generally theoretical. There have not been many successful attempts to construct traditional investment tools that track various types of cryptos.
Cryptocurrency Vs. Stock Vs. Bond Index Funds
One can make investments in stock, cryptocurrency, or bond index funds. The difference among them is simply the type of asset every one invests in:
- Crypto index funds invest in digital currencies.
- Stock index funds make investments in stocks.
- Bond index funds make investments in bonds.
Because of the variations in those forms of investments, the level of your risk and potential returns highly depend on which one you select.
Digital currency is much more fluctuating compared to bonds and stocks. An investment in an index fund for digital currency will have much higher price shifts compared to a bond or stock index fund. The investor could make bigger profits, but there is also the chance of much greater losses.
Even though that could be bad or good, it is more of a negative for any index fund. One purpose to invest in an index fund, after all, is to reduce risk and diversify your portfolio. Even if you are able to invest in a variation of digital currency with a crypto index fund, you are still putting your money into a highly risky market.
Another important difference among these types of funds is the choices you will have available. There are hardly any digital currency index funds at the moment, while there are numerous stock and bond index funds.
Is There A Cryptocurrency Index Fund?
There is presently one publicly traded cryptocurrency index fund which is the Bitwise 10 Crypto Index Fund (OTC:BITW). Re,leased in 2017, it was primarily only available to accredited investors, but it is now available to everyone. Bitwise also has various digital currency index funds that are available mainly to accredited investors.
The Bitwise 10 Crypto Index Fund tries to follow the 10 biggest digital currencies based on their market cap, not comprising stablecoins which are digital currencies created to follow the value of another asset like the U.S. dollar. Even though the number of cryptos it follows is a benefit, this fund has a pricey 2.5% expense ratio.
To be fair, most exchanges take fees for digital currency trading, so it can be understood why a crypto index fund would have a greater expense ratio. But 2.5% is inclined on the higher side. One advantage of the best index funds is that they generally have low fees, and it is mainly recommended to stick to funds that take no more than 1%.
So, why aren’t there more publicly traded crypto index funds widely available? Even though there have been aims to release crypto funds over the years, the SEC has not authorized the vast majority.
It is worth stating that the S&P Dow Jones Indices have formed the digital currency indices. The S&P Cryptocurrency Index Series consists of various varied indexes created to track the activities of major digital assets. You cannot invest in these indexes, but we could see index funds that abide by them in the future.
How To Build Your Own Cryptocurrency Index Funds?
There are also DIY choices. You could purchase the digital currencies you want and easily make your own variant of a digital currency index fund. Here’s how to do this:
- Sign up for any account with a crypto exchange.
- Pick out the forms of crypto that will construct your index fund.
- Decide how much you are going to invest in each of them.
- Make the buys.
The main benefit of creating your own crypto index fund is the cost and that you have complete control over it. Since you are purchasing the digital currencies yourself, you do not pay any sort of expense ratio. However, crypto exchanges do charge any trading fees, so it is crucial to compare top digital currency exchanges and select one that is affordable.
If there is one big disadvantage with this method, it is the time associated. It takes more time when you are purchasing several digital currencies, mainly if you plan to rebalance your portfolio based on their price shifts. The time commitment makes it very hard to do this with a huge number of digital currencies.
The Bottom Line
Taking into account how famous digital currencies are, we will likely see more cryptocurrency index funds in the coming future. For the time being, most crypto investors will likely find there are better options to invest in crypto, that include purchasing individual digital currencies or shares of crypto stocks.
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