By Nathan Ferguson
Cryptocurrency is an emerging asset in the financial market, attracting investors from all around the world. At present, there are a number of investors already making great profits from this leading financial market, and many investors are ready to put in the capital as they observe an opportunity for growth. As the value of each crypto coin increases, more investment flows into the trading market, and investors are in search of new ways to invest in the cryptocurrency market. In such a scenario, cryptocurrency index funds come to the rescue where investors get a chance to grab a variety of valuable digital assets, increasing the window to earn profits while cutting down the risk.
If you are looking forward to investing in the leading market of digital assets, you must acquire an in-depth knowledge of cryptocurrency index funds. This article will provide you with all the necessary details that you should know as you begin to explore the cryptocurrency financial market.
Importance of Cryptocurrency
It is a naive question to ask. Cryptocurrency has gained so much fame that everyone must have heard about it. We all know cryptocurrency is a digital asset on blockchain technology that you can mine or purchase against fiat currency. It is a modern investment vehicle that offers great profits to investors. Experts still call it an emerging financial market with over 2000 cryptocurrencies and billion-dollar investments in the market. Its working and functionality are unpredictable, diversified, and have a lot of potentials to grow. It is the only financial market of recent time that does not restrict investors, and people can invest as little or huge amounts as per their comfort.
It is always difficult and tricky to start with the emerging markets. It takes time to process information coming from the live markets and calculate the loss or profit ratios. Processing becomes more complicated when there are a number of investment tools, and each seems to offer a good growth opportunity. To resolve this demanding task, investors must take time, develop expertise and research about each trading instrument and working of the financial market. All the hard work is worth it because, in the end, investors can make huge profits from the emerging investment vehicles. The approach must be careful when dealing with crypto assets.
Investing in the cryptocurrency market is easy. The market is approachable, and anyone can connect to it by creating a trading account at a cryptocurrency exchange using any device with an active internet connection. As this emerging technology offers easiness and comfort, one should not ignore the associated risks. Whether it is traditional investment or investment in cryptocurrency, there is a risk profile associated with it and it can be avoided, infact turned into greater profits if dealt with properly.
The cryptocurrency market has grown enough to draw the attention of businesses, investors, and institutions, and people are investing considerable amounts. They face difficulty with selecting the right digital asset. People felt unsafe at the hands of unregulated exchanges or middlemen and needed a safer place to invest enormous amounts and get hold of valuable digital assets.
What Is an Index Fund?
If you have been connected to the traditional trading markets, you must be familiar with the index fund. Still, suppose you are new to the investment industry. In that case, you need to familiarize yourself with index funds to earn profits cut down risks without gaining much information about the financial market.
A financial index fund was primarily introduced for trading in bonds or stocks. As per the famous definition, Index Fund is an investment product that is structured as a mutual fund or ETF (exchange-traded fund). It is counted as a single investment that carries a variety of assets in one “package.” in simpler words, the index fund is a collection of reputable trading instruments that are presented as a “deal” for investors.
When an investor invests in the index fund, he must collectively put his amount in all the assets presented to him in the deal. He cannot add or abstract any asset as per his choice. Usually, there is no need to alter the “collection” of assets as the index fund is designed using reputable and valuable trading assets. Investors can invest in a single index fund or a pool of index funds depending on their level of interest and the amount they want to invest in the financial market.
People prefer investing in index funds due to their advantages over other trading methods. Index funds are constructed using components of the financial market and present a diversified portfolio. They are prime to offer an impressive passive investment strategy. They are proven to offer broad market exposure, low portfolio turnover, and low operating costs. They are also ideal for use as individual retirement accounts as they provide excellent outcomes on saving when held for more extended periods.
Usually, index funds are available at lower fees. This is because an index fund allows investors to purchase more stocks and indices of leading companies at a lower cost as compared with the price when buying stocks of a single company. Index funds work on a theory that the financial market will grow in the long term, and the investor will earn good profits on every investment.
The asset index works differently than individual investments as instead of a fund portfolio manager involved in picking the stock or chasing the time in the market for profitable trading. The index fund manager creates a portfolio with holdings whose security reflects the index or its broader segment. Index funds are relatively common, and there is an index fund for every existing financial market.
The famous index funds include Wilshire 5000 Total Market Index, MSCI EAFE, Bloomberg U.S Aggregate Bond Index, Nasdaq Composite, and Dow Jones Industrial Average (DJIA). Each represents equities index, foreign stocks, total bond market, Nasdaq exchange, and 30 large-cap companies.
What Is A Cryptocurrency Index Fund?
Just like bonds, stocks, and equity indexes, cryptocurrency is also a trading instrument. The rules and procedure that follow for Index Fund of other trading instruments can also imply to cryptocurrency. The crypto Index Fund follows almost the same principles and presents investors a chance to invest directly into the digital assets or coins as a set and purchase shares in the fund. As cryptocurrencies are different than traditional investment tools, the cryptocurrency Index Fund follows a slightly distinct rule that we will discuss in the latter part of this article.
There are two most important factors to consider while understanding the cryptocurrency index fund. Firstly, there is a huge variety of cryptocurrencies in the financial market and secondly, there is little knowledge about this industry. Cryptocurrency Index Fund resent the safest doorway to investment in such a scenario. As the investors purchase shares in the fund, they get ownership of the most diversified portfolio of digital assets in one package. The experts design the index funds, and they are reflective of the experts’ knowledge and expertise. Experts collect cryptocurrencies in an index by researching their value in the cryptocurrency market. Hence, the cryptocurrency index fund presents the safest option to invest in this emerging market while investing a minimum amount and absolutely no effort.
A cryptocurrency index fund portfolio be made up of digital assets allocated in the corresponding proportion as in the index. This means the value of the fund collection closely copies the index value and performance. This permits the investor to believe in the performance of the index fund they own or the complete market performance.
As index funds were primarily introduced to allow diversification, provide a solid track record of transactions and market value, and offer a low cost of purchasing the trading asset, they naturally align with the offerings of blockchain technology. This technology is specifically designed to offer decentralization, transparency, security, and traceability of data. It is easier to create a new ledger on blockchain technology and above all, the record cannot be edited, thus providing unlimited benefits to the investors of the cryptocurrency market.
Who Can Invest in Cryptocurrency Index Fund?
Index Funds are highly priced, and when accredited investors present them to anyone for purchasing their designed funds, they look forward to selling them to people who meet certain financial requirements. It is necessary as the SEC has set the rule for financial requirements and non-compliance can lead to consequences.
The financial requirements are different for individuals or group investors. For individual investors, the financial requirements include a liquid net worth of a minimum of $1 million (excluding the value of the house they are using for a living) or an earned income of a minimum of $200,000 per annum for the past two years ($300,000 jointly with their spouse). They also have a surety that their income will not drop below this minimum threshold in the upcoming year.
The list of group investors includes non-profit organizations, accredited investors, banks, and multinational corporations. For investing in the Index Fund each group must have more than $5 million in assets. There is an exception to group investors that if the individual owners of the group are accredited investors, the group can be an accredited investor, too, without meeting the financial requirement.
How Can You Create a Cryptocurrency Index Fund?
Cryptocurrency Index Funds are becoming famous due to the advantages they offer for investors. It is a reliable way of investing in the volatile cryptocurrency market and earning sustainable profits over their investment. Creating a Cryptocurrency Index Fund is not rocket science. It requires some basic knowledge and analytical skills to record market fluctuations. Taking help of market signals and applying the information about index funds can help you to create a cryptocurrency index fund.
To create your cryptocurrency index fund, it is essential to understand that there are two types of index funds. Let us know the basic difference between them.
Price Weighted Index: it is presented as a mean among the individual prices of collective assets in the index. In the price-weighted index, the higher valued assets move the index more than those with lower prices.
Capital-Weighted Index: Instead of focusing on individual prices of all the assets in an index fund, these assets present an amount proportional to their market capitalization. In this type of index fund, the assets with the highest market cap will affect the overall price of the asset, does not matter if the individual asset price is low or not.
Each of these types has its own pros and cons. When you have decided the type of cryptocurrency index fund you will create, you also need to focus on some other details that will help you create an indexing strategy that will directly impact the profitability and sustainability of your digital asset index fund.
Asset selection:
Asset selection is the most crucial step of creating the index fund. All the game is based on the selection of the asset so, it is advisable to spend time evaluating the market status to select the valuable assets. The best way to assess the value of assets is by calculating the market cap of each asset and selecting the topmost assets in your asset index list.
Inclusion Criteria and Exclusion Criteria:
When you customize an index fund you get a chance to include and exclude assets as per your preferences. If you are making an index using the top 10 cryptocurrencies in the market, you can add the one on 13 number or drop the 6th cryptocurrency based on your preference or evaluating its market position.
Buffer Zone:
The threshold point where you decide whether to include or exclude an asset from the list is referred to as the buffer zone of the asset. The buffer zone guides the investors when to add the asset on your list to obtain profits and when to get rid of it so that your profit scale remains unaffected by its devaluating market position.
Allocation Distribution
After the careful selection of your digital assets, it is essential to know the position of each asset in the index. You can calculate allocation distribution either by market cap weighted, the square root market cap weighted, the event weighted, maximum or minimum weighted strategy for your ease.
Now, automated index fund strategy developers and AI-based index fund creators are also available in the market that you can use to ease the index creation process.
What Are the Famous Available Cryptocurrency Index Funds?
The most famous cryptocurrency index funds include:
Bit20
Coinbase Index
CRYPTO20 (C20)
Bitwise Hold 10
Binary financial fund.
The list of Indexes include:
TaiFu indexes
Bloomberg Galaxy Crypto Indexes
Lykke Cryptocurrency Index (LyCI)
BitPanda Crypto Indexes
Huobi Index (HB10)
How Cryptocurrency Index Fund Are Profitable For Investors?
Index Funds in the cryptocurrency market are profitable for investors for many reasons. We will discuss the three most important features of the cryptocurrency index fund for investors.
Firstly, there are a variety of cryptocurrency coins in the market, and none of them have spent a big time in the financial market. There is no record for any cryptocurrency that could represent its value for over a decade and help investors decide where to invest their capital. In such a case, Index Fund offers a collection of various cryptocurrencies, diversifying the investor’s portfolio in the cryptocurrency financial market.
It has been an issue with cryptocurrencies that they are highly volatile, and it is hard to predict their market value for long-term investment. It is wise to switch from one asset to another. When you hold a cryptocurrency index fund, your fund manager takes care of all these liabilities and makes sure that your assets get the best possible price from the financial market, so you get to enjoy good profits without facing any hurdle.
Cryptocurrency is a decentralized asset- that means the controlling and decision-making authority is distributed to a number of people in this distributed network. As the cryptocurrency index fund is a mutual fund, this decentralization gives authority to various holders of the fund to keep a track of all the transactions happening with the cryptocurrencies in the index fund. Investors can compare the price of purchase with the value of the asset and estimate the ratio of profit on their own.
Last, transparency and security of assets. Transparency in blockchain technology is impeccable. Each investor putting capital in the cryptocurrency index fund knows the information enclosed in each block and can keep a track record to prove the authenticity. It also helps to observe the market value of their digital asset. Stealing digital assets is almost impossible as all the information is stored in the blocks of the growing chain.
Conclusion:
The cryptocurrency index fund is a smart way to invest in the cryptocurrency market. It is more profitable than trading in individual digital assets as it presents a way to cut down risks, increase profit ratio and diversify the investor’s portfolio. An investor can create his customized cryptocurrency fund or become a part of already existing cryptocurrency asset indexes from the market. People can invest in cryptocurrency index funds individually or in groups if they meet the minimum financial requirements to use the funds.