The global financial crisis that occurred in 2008 led to the emergence of financial advancements such as crypto assets, including Bitcoin and Ethereum, among others. But these assets are highly volatile because the market demand determines their value and are not backed by anything.
To shield investors from high volatility, tokenized securities have come into existence. They are backed by real-world assets like commodities, company shares, and real estate. That said, the value of tokenized securities is derived from the collateral instead of relying on market demand.
This article discusses crypto index funds, from how they work to how you can start investing in them.
What’s a Crypto Index Fund?
Simply put, a crypto index fund is an investment vehicle tracking the performance of a particular index of crypto assets, like the top ten cryptocurrencies by market cap.
We can compare crypto index funds to traditional index funds like the S&P 500, which tracks how the 500 largest publicly traded US firms perform.
Bitwise’s Ten Crypto Index Fund and Grayscale’s Digital Large Cap Fund are among the many crypto index funds available. These two track the top ten crypto assets by market cap.
How Do Crypto Index Funds Work?
Crypto index funds offer investors diversified portfolios of crypto assets, shielding them from the risk of investing in one coin. The idea is that when one crypto is performing poorly, the others may be performing well, thus helping cover the losses.
Investors do not directly purchase these crypto assets. Instead, they only buy shares in the crypto index funds. This investment strategy is ideal for people not well-versed in cryptocurrencies or who don’t like the idea of holding them.
Most crypto index funds charge management fees to cover expenses incurred when managing the funds, including custody and trading fees.
Pros and Cons of Crypto Index Funds
Diversification: Crypto index funds spread risk by investing in multiple cryptocurrencies. Therefore, the chances of investors losing all their money are minimal.
Professional management: Crypto index funds are run by qualified individuals who make informed decisions regarding what cryptocurrency to add or remove from the fund.
Lack of Control: Since the management of an index fund makes all the decisions, the investors are not in control of their investments. They only have to trust that the fund managers are competent enough to make the right investment decisions.
Higher fees: It is cheaper to buy individual coins directly on an exchange than investing through an index fund due to the regular managing fees incurred.
Lack of knowledge: Inexperienced investors who don’t have the expertise to select individual crypto assets may miss the opportunity to inject money into a promising project not included in an index fund.
How Do You Invest in a Crypto Index Fund?
Crypto index funds allow investors to gain exposure to crypto assets without necessarily owning them. Here is how you can invest in index funds:
Research: This step involves exploring the various crypto index funds in the market. Always check whether the index fund is managed by a reputable company. In addition, read reviews to find out what other investors say about the fund.
Choose a fund: The next step is to set up an account after identifying the right fund. Most index funds have provided a simple way of registering an account. You are required to submit your personal information and a document showing proof of identity.
Fund your account: Once you have opened an account, you will need to deposit some crypto or cash. Note that crypto index funds have varying minimum deposit requirements.
Buy shares: After funding your account, you can now purchase shares in the index fund to start your investment journey.
Monitor your investment: Keeping an eye on your investment is key. This helps you to determine whether it is appreciating or depreciating.
Some crypto index funds let investors trade their shares on the secondary market if they are no longer interested in investing.