Over the last few years, cryptocurrency has been one of the most beneficial investments out there. You may have found the concept alluring at one point or another because of a variety of reasons, be it the rapid increase in coin prices, the staking and farming options, or more.
But there are, of course, limitations to cryptocurrency. You can invest in specific tokens and always keep a sharp eye on the market. Think of it like riding an escalator from an entire ecosystem of escalators. You can ride only one at a time, and you never know when another one will start going upwards faster, or the one you are riding may even start going in reverse!
That’s where cryptocurrency index funds come to the rescue, helping you benefit from the entire ecosystem instead of just one currency.
In this article, we will discuss what cryptocurrency index funds are and the different options available at the time of writing to help you get the most out of your cryptocurrency investment.
What Is a Crypto Index Fund?
The primary idea behind an index fund is to create a single investment product that holds a variety of different assets in a single package. By investing in a single asset or currency, you ‘index’ the market, and instead of gaining or losing from one currency, your portfolio depends on how the entire market is performing.
Think of it this way; instead of just riding one escalator upwards, with the help of index funds, you get to have a stake in all of them at once. Should one stop performing or get damaged, your upward trend may continue because of how others are performing. Or you may just experience a rapid upward trend as all the escalators in the ecosystem start going upwards at once!
Cryptocurrency index funds – just like the index funds that represent the stock market – mimic the performance of specific financial indexes. While some only represent the largest currencies and their trade volumes, others may focus on the underdogs and more stable cryptocurrencies.
Cryptocurrency index funds, in general, have performed quite remarkably over the years. While the concept has become popularized fairly recently (and by popularized, we also mean introduced), since the cryptocurrency market, in general, has performed well, the index funds also reflect a similar upward trend.
How Index Funds Work
Just like in the financial market, cryptocurrency index funds are created by “fund managers” who buy a range of different currencies in relatively similar proportions. The number of coins included in one ‘unit’ or token of the index fund reflects how many coins of each currency the manager needs to purchase.
The idea is to present you with a conglomerate that would reflect the average performance of all the currencies within the said index. You won’t have to spend thousands of dollars and put in hours of work to buy individual coins, nor will you have to sleep with your eyes open to determine if a currency is tanking.
Cryptocurrency index funds automatically track each cryptocurrency on your behalf and showcase the overall return you are getting against the collection of coins. This may mean that you and other investors will ride the escalator to the top together or go down quickly and fall on top of each other – together.
Investing In Cryptocurrency Index Funds
Investing in cryptocurrency index funds is much easier and more cost-effective compared to buying index funds in the traditional stock market. For both these funds, you will need a brokerage account. However, getting these accounts for cryptocurrency index funds is much easier and only requires:
- Your email address
- Your wallet address
- Basic information.
There is no specific minimum investment requirement – only how much one token of the fund costs. In traditional index funds, there are usually caps to minimum investments, while the brokerage accounts themselves might come with a lot of hidden costs.
Yes, there are gas prices for index funds as well, but these are typically less than 1%. Some of the index brokerages include:
- Bitwise 10
- Coinbase Fund
- Cooperative Index Fund
- Crypto 20
- Cryptos Fund
- DeFi Pulse Index
- Icomony BLX
- Indexed Finance
You also have the option of creating your own index fund and managing it manually, but it may require quite a bit of effort on your part. Unless you are ready to put in the time and effort required and can weather the ups and downs (and we mean falling flat on your face) that come with creating the fund, we recommend riding an escalator the easier way.
Best Cryptocurrency Index Funds in 2022
- Bitwise 10 Crypto Index Fund (BITW)
The Bitwise 10 Crypto Index Fund is considered a pioneer index fund for crypto owners. It started off as a private index fund, being offered only to specific investors and funds, but now, anyone can buy it through a brokerage account. It is available under the BITW ticker symbol.
You can think of the Bitwise 10 fund as a variation of the S&P100 market index fund, except that it only invests in the top 10 most valued cryptocurrencies in the market. It uses a weighted market capitalization principle, hosting the following currencies:
- Bitcoin (~60%)
- Ethereum (~30%)
- Solana (~3%)
- Cardano (~3%)
- Polygon (<1%)
- Litecoin (<1%)
- Algorand (<1%)
- Chainlink (<1%)
- Bitcoin Cash (<1%), and
- Uniswap (<1%)
The index is rebalanced on a monthly basis, which means that these holdings may change with respect to market conditions.
While the BITW sounds like a great investment, it mimics the S&P100 investment model, i.e., it charges some of the highest gas fees and the token price. You can expect to pay 2.5% of your earnings, which makes it better suited for short-term investments.
The Crypto20 autonomous index fund is the first cryptocurrency index fund, opening a new road (or shall we say escalator) towards crypto investment possibilities. It is similar to S&P500 in the traditional financial market, tracking the 20 top-performing cryptocurrencies based on market capitalization.
Its token, CEF, automatically tracks the top 20 performers in the market on a weekly basis, rebalancing itself for more reliable returns. The profits are reinvested into the fund for better yields on a quarter, bi-annual, or annual basis.
The maximum weightage a single cryptocurrency can have in the fund is 10%, which may mean that the fund may need to sell off some currency upon rebalancing. The fund isn’t just made up of coins, though, but may also include exchange tokens and specialized digital assets to make up the index.
The C20, therefore, explores a wide range of blockchain-based assets, offering an inclusive investment strategy for the long term. Its low annual fee of 0.5% of your portfolio’s value also means that the returns and expenses are reliable over the short and long term alike. There are no exit, brokerage, or advice fees to worry about either with the Crypto 20.
As of the time of writing, the fund holds:
- Ethereum (~12.05%)
- Binance (~0.36%)
- Bitcoin (~10.09)
- Solana (~19%)
- Cardano (~9.19%)
- Terra (~11%)
- Avalanche (~5.83%)
- Polkadot (~5.02%)
- Dogecoin (~4.84%)
- Shiba Inu (~3.35%)
- Polygon (~2.92%)
- NEAR Protocol (~2.91%)
- Crypto.com Coin (~2.81%)
- Litecoin (~1.99%)
- Cosmos (~1.97%)
- Chainlink (~1.83%)
- Uniswap (~1.79%)
- TRON (~1.63%)
- Bitcoin Cash (~1.59% )
- FTX Token (~1.56%)
- DeFi Pulse Index
The DeFi Pulse Index is designed to track tokens’ performance based on the weight of the circulating supply, which makes it a much more dynamic token compared to others in this list. It tracks coins based on their usage, making it more of a ‘trendy’ index compared to those that rely on market cap.
The success of the $DPI index token has been accepted far and wide – to a point where more copycats are turning up in the market with the same investment model. The DPI portfolio includes roughly 131 unique tokens from time to time, with some of the most consistent ones being:
- Rari Capital
- Index Coop
Index Coop is referred to as one of the best crypto index products in the market because of the technology involved in its maintenance, governance, and rebalancing. Also known as Index Cooperative, the INDEX token is one of the first indexes that is led by the community for sustained growth.
The index has taken several initiatives from time to time, with many crypto experts and brands under its name. The DeFi Pulse Index was also governed by the Index Cooperative, marking one of its most successful primitives and initiatives to date.
The INDEX token is an Ethereum-based token that offers a unique advantage to holders compared to other index funds; that of ownership and governance. This means that you don’t own the token just to earn but are also appointed governance responsibilities. Of course, these responsibilities are purely optional.
Some of the more important decisions that you’ll have to make, should you choose to do so, include:
- Sourcing, developing and supporting index behavior and strategies
- Devise incentives to attract more investors, marketers, developers, and experts
- Controlling the fee configurations to achieve a balance between monetization and attractiveness
- Improving index performance via governance, staking, or lending.
- Allocating index assets for better influence, yield, and achieving specific community goals.
The Index Coop is, for all intents and purposes, a decentralized autonomous organization (DAO) with four primary investments. However, instead of relying on cryptocurrencies, it relies on two theme-based indexes and two leverage index tokens:
- The DeFi Pulse Index (DPP)
- Metaverse Index (MI)
- Bankless Bed Index (BBI)
- Data Economy Index (DEI)
All four of these ultimately help create value behind the cooperative index.
- Indexed Finance
Indexed Finance focuses on helping investors create a passive portfolio strategy under a single token suitable for long-term financial gains. As a token holder, you also take on the governance responsibilities, voting on key issues such as protocol updates, strategy management, fee structure, and more.
The fund is still in its beta phase, though, and is regularly being tweaked to create better value for investors. The index’s portfolio is very versatile and includes other tokens, indexes, and more. The multi-asset AMMs help generate revenue beyond the assets’ growth, helping cover the index’s fees for the users.
There are swap fees that users may have to pay, but there is no exit fee yet. We expect that an exit fee will be implemented, though, to generate revenue for the fund’s treasury. Its native token is NDX.
PieDAO is yet another DAO index fund that uses a market-cap-weighted portfolio to generate quarterly returns for holders. The PieDAO native token is DOUGH, a creative token that bases its portfolio on cryptocurrencies as well as traditional assets.
The pools are known as PIEs and are available throughout the world. PieDAO pools are well-known and used by users across the globe because of their availability and because they require no minimum deposit for you to become a token holder.
This makes the token a great cryptocurrency index fund for beginners. As a token holder, you have the option of governing weighting policies, risk, PIE fees, and more. There are two major PIEs in the market right now:
These pools are more suited to offering users a passive income, and the share within each pool can be redeemed at any given time for the underlying assets.
BasketDao is originally governance that has replaced DeFi tokens with their interest-bearing equivalents. These equivalents are derived from trusted protocols, such as Aave & Compound liquidity protocols.
It is an innovative index fund that is looking to change the overall cryptocurrency index fund infrastructure. The concept hasn’t been adopted as much, so its success is still under a microscope by experts. Its governance token BASK has been adopted fairly well, though, but whether the replacement with liquidity protocols pans out or not is still a question of debate.
It is quite ambitious as it is primarily trying to chip away at the dominance laid by DeFi Pulse Index (DPI). To achieve this objective, the fund is actively including a portfolio similar to DPI, except that BASK is trying to convert these assets into liquidity protocols.
- Iconomi – BLX
Iconomi adopts yet another unique approach towards cryptocurrency indexes by creating digital asset arrays (DAA) – another term for indexes. Instead of being passively managed, though, DAAs are actively managed by Iconomi to ensure lucrative returns and immediate reactions to market changes.
Despite what many say, Iconomi is actually among the pioneers of the cryptocurrency index fund community. It created one of the first cryptocurrency index funds, namely the Blockchain Index DAA (BLX).
The index offers a suitable investing environment for beginners and experts alike, with the BLX relying on market capitalization to create its portfolio. There is no barrier to entry for Iconomi’s assets, offering everyone a chance to learn the index fund ropes. Iconomi’s native token is the ICN, which gives you governance rights as well for the index fund and its constituents.
Is It A Bird? A Plane? Or A Cryptocurrency Index Fund?
There are several other index funds as well that you can invest in, such as the:
- Coinbase Index Fund
- Indexed Finance
- Cryptos Fund, and more.
The cryptocurrency world is rapidly evolving, and one of the most pressing matters that people are looking to address is the volatility and constant need for monitoring that comes with your portfolio. The more you own, the more careful and vigilant you have to be about market forces, risks, and more. But with reliable index funds backing you up, these risks can be reduced significantly and save the day for your portfolio.
Not only does it help diversify your investments, but it also helps you save up on costs. There is a certain allure to having your toes dipped in numerous ponds at once, and cryptocurrency index funds are the perfect way to do so!