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Lesson 25: Crypto Index

Lesson 25: Crypto Index

Crypto Index Funds are a popular way for investors to be exposed to some of the most cryptocurrencies and blockchain tokens.

The huge gap between traditional financial markets, and digital assets, has been shrinking over the past few years. Crypto index funds are helping consolidate the bridge between traditional investment markets and the crypto space. Initially, Bitcoin was viewed with suspicion and criticism, but it is now gradually opening the door to other digital assets and associated networks on trading platforms. As an asset class, cryptocurrencies have become extremely popular with retail investors.

There is quite a bit you should know before you start investing. If you want to invest in crypto index funds right away, here is a quick guide that can help:

  • Research your crypto indexYou can get exposure to indices that follow one of more top-performing cryptocurrencies.
  • Define your strategy Trading lets you speculate on the price movement; dealing lets you take direct ownership of the crypto index shares.
  • Take your position create an account with us to start trading or investing in crypto indexes.

What is a crypto index?

A Cryptocurrency Index is designed to serve as a benchmark for the performance of a selection of cryptocurrencies that are listed on recognized, open exchanges while meeting liquidity and market capitalization criteria.

The market cap represents the current market value of a particular cryptocurrency against the US dollar multiplied by the number of units in that coin. If a cryptocurrency's market cap increases, it will also increase, and the crypto index value will rise. Conversely, the crypto index value will drop if cryptocurrency prices fall against US dollars.

Tracking the performance of a selection of cryptocurrencies, including Bitcoin and Ethereum, the cryptocurrency indices are designed to bring transparency to this evolving, unique asset class.

Crypto index trading and investing tend to be more beneficial than trading cryptocurrencies due to diversification and cost-effectiveness. Crypto indexes also allow investors to trade and invest in one instrument rather than worrying about multiple assets at once. A crypto index can help spread your risk as you won't be exposed to one coin. Crypto indices can also be a popular way to give investors targeted exposure to emerging or popular crypto-economy trends. For instance, NFT projects are included in an NFT-centric Index.

The most popular Crypto Indexes

Here’s an overview of the cryptocurrency indices launched by prominent institutions.

NYSE Crypto Indexes

New York Stock Exchange Bitcoin Index (NYXBT) was launched in May 2015. It had 237.03 as its base level. This was because it wasn't rebased historically at any particular level. Thomas Farley, then President of NYSE Group, stated that “Bitcoin values are quickly becoming a data point that our customers want to follow as they consider transacting, trading or investing with this emerging asset class.”

The NYSE Bitcoin Index aims to represent the value of one Bitcoin in U.S. dollars (USD).

Nasdaq Crypto Indexes

The Nasdaq Crypto Index (NCI) was launched in February 2021. It is designed to measure the performance of a diverse pool of digital assets. The NCI is designed to be dynamic in nature, broadly representative of the market, and readily trackable by investors. As of October 2021, it included Litecoin (LTC), Chainlink (LINK), Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), Polkadot (DOT), Stellar Lumens (XLM), Uniswap (UNI), and Filecoin (FIL), Axie Infinity (AXS) and The Sandbox (SAND).

The NCI is dynamic and representative of the market. Investors can track it easily. The index was created on December 1, 2020, with an inception value of 1000. The index is rebalanced quarterly.

The NCI can be followed with an ETF. The Hashdex Crypto ETF was launched in 2021. It tracks the Nasdaq Crypto index on the Bermuda Stock Exchange (BSX). The ETF is not currently available for U.S investors. Victory Capital Management (VCTR) has an agreement with Nasdaq, and Hashdex and gives them exclusive rights to private placement funds and other vehicles that are based on the Nasdaq Crypto Index.

Nasdaq also launched separate Bitcoin and Ethereum reference price indices (NQBTC, NQETH) on June 9, 2021.

S&P Crypto Indexes

S&P Dow Jones made a splash in the crypto world in May 2021 with the launch of a new series of digital asset benchmarks, and it has been adding more crypto indices ever since.

The S&P Bitcoin Index is an index that tracks the performance of Bitcoin. The index's first data value and base date have been set at January 1, 2014. It has a base value of 100.

The S&P Ethereum index is based on Ethereum, the second crypto based on market capitalization. The index's first date and value data are January 1, 2016, with a base price of 100.

S&P Cryptocurrency MegaCap Index (CMC) is designed to track the performance of the digital assets Bitcoin and Ethereum.

S&P Cryptocurrency Broad Digital Market Index (BDM) is designed to track the performance of digital assets listed on recognized open digital exchanges that meet minimum liquidity and market capitalization criteria. This crypto index is meant to reflect a broad investable universe.

Crypto Fear and Greed Index

Alternative.me also publishes a crypto fear-and-greed index. According to the website, crypto markets behave just like traditional markets. When the market is bullish, people can feel the Fear Of Missing Out (FOMO). When the markets turn bearish, people often sell their coins to escape irrational reactions to seeing red numbers.

If the VIX "fear index" shows "extreme fear" (an index value below 0), this can indicate that investors are too concerned. However, it could also be an indicator that investors are more relaxed. This could be considered a buy signal. If the index indicates that investors are becoming "extremely greedy" (an index value of 100), it is a sign that a market correction might occur.

Alternative.me's crypto fear and greed index uses the following inputs (at each of the following index weights:

  • Price volatility over the past 30 and 90 days (25%)
  • Market volume and momentum (25%)
  • Social media mentions on Twitter and Reddit (15%)
  • Surveys of crypto community members (15%)
  • Bitcoin market cap dominance (10%)
  • Google trends data (10%)

What is a Crypto Index Fund

A crypto index fund is a type of financial instrument that invests in cryptocurrencies that are listed in a crypto index. Its performance will be nearly identical to the performance of the crypto index. Many exchange-traded funds (ETFs) and mutual funds have started to track crypto indexes.

Before we dive deeper into crypto indices, let’s talk about index funds in general. An index fund is a type of mutual fund that is made up of a group of investor funds. The fund manager invests in securities. An index fund does not have a manager like a mutual fund. Instead, it invests in a specific stock index. These market indices include groups of securities that are part of the overall market. The USA 500 index includes 500 large U.S. corporations.

Index funds tend to be cheaper than mutual funds because they are passively managed. The expense ratio is the fee charged by each fund, and it is a percentage of assets under management.

A cryptocurrency index fund, as the name suggests, is a fund that invests only in one specific type of cryptocurrency. Crypto index funds are mainly theoretical at the moment but are starting to pick up as more inventors are interested in them. Creating a traditional investment tool that tracks multiple cryptocurrency types is not an easy task, but efforts are made.

Cryptocurrency vs. stock vs. bond index funds

You can invest in cryptocurrency, stock, or bond index funds. The difference between them is simply the type of asset each one invests in:

Due to the different investment options, your risk level and potential return heavily depend on which type you choose.

The volatility of cryptocurrency is greater than that of stocks and bonds. A cryptocurrency index fund will experience greater price movements than either a bond or stock index fund. You could make much bigger profits, but there's also the possibility of much greater losses.

This could be a good thing or a bad thing, but it is more detrimental for an index fund. One reason to invest in an index fund, after all, is to diversify and reduce risk. You're still placing your money in a highly risky market, even if you can invest in many cryptocurrencies using a crypto index fund.

The selection of funds you must choose from is another major difference. There are few.

>> Discover our range of ETFs

Is there a cryptocurrency index fund?

Two publicly traded cryptocurrency index funds are currently available: the Bitwise 10 Crypto Index Fund (BITW) and the ProShares Bitcoin Strategy ETF(BITO).

Why aren't more publicly traded crypto index funds readily available? Although attempts have been made over the years to create crypto funds, the SEC has not approved most of them.

Nevertheless, BITO's approval marks a significant milestone in the ETF industry.

It is worth noting that the S&P Dow Jones Indices have created several cryptocurrency indices. The S&P Cryptocurrency Index Series contains several indexes that track the performance and value of digital assets. In the future, we could see index funds following them.

ProShares Bitcoin Strategy ETF

Crypto Index
Source: CAPEX WebTrader

The ProShares Bitcoin Strategy ETF (BITO) was launched in October 2022 and is the first ETF that provides investors with exposure to Bitcoin futures.

The first thing you should know is that BITO doesn't invest in Bitcoin directly. It instead invests in cash-settled Bitcoin futures with the shortest maturity time. This gives you as much exposure as possible.

The Commodity Futures Trading Commission regulates futures contracts in which BITO invests. These futures contracts can only be traded on the Chicago Mercantile Exchange. They are also subject to the CME rules.

ETFs can also invest in U.S. Treasury Bills and Repurchase Agreements for short-term cash position investments, and it can also use leverage.

Investors who are looking for context need to know that BITO will be more similar to the United States Oil Fund (USO), which also invests in futures but does not accurately track oil prices. BITO is not like the SPDR Gold Shares (GLD), which directly invest in the underlying asset and provides more accurate price tracking.

Bitwise10 Crypto Index Fund

The Bitwise10 Crypto Index Fund (BITW) is currently the only publicly traded cryptocurrency index fund. It was initially only open to accredited investors but has since been made available to all. Bitwise also offers several cryptocurrency index funds, which are only available to accredited investors.

The Bitwise 10 Crypto Index Fund aims to track the ten most valuable cryptocurrencies according to market capitalization, excluding stablecoins. This fund charges 2.5% per annum, which is expensive for cryptos.

How to build your own cryptocurrency "index fund"

There's also the do-it-yourself option. You could invest in the cryptocurrencies you want and effectively make your own version of a cryptocurrency index fund. Here's how to do this:

  • Sign up for an account with a cryptocurrency exchange or online broker.
  • Pick out the types of cryptocurrencies that will make up your index fund.
  • Decide how much you're going to invest in each of them.
  • Make the purchases.

When creating your own crypto index fund, you maintain absolute control over the included assets while also managing the cost. You don't have to pay any expense ratio because you are buying and trading cryptocurrency yourself.

However, the major drawback of creating your own crypto fund is that it requires time. You will need to spend more time buying multiple cryptocurrencies, especially if your goal is to rebalance your portfolio according to their price movements. It is very time-consuming to manage a list of all cryptocurrencies and update your crypto price predictions frequently.

We will likely see more cryptocurrency-index funds in the future, considering how popular cryptocurrencies have become. For now, investors will find that there are other ways to invest in cryptocurrencies, such as buying cryptocurrencies, shares of crypto stocks, and crypto ETFs.

How to invest in Crypto indices

There are two routes to investing in crypto indices: speculating on their prices using CFDs or buying the assets in the hope they increase in value.

Trade CFDs on Crypto indices

A CFD is a contract in which you agree to exchange the difference in the price of a cryptocurrency from when you first open your position to when you close it. You are speculating on the price of the market rather than taking ownership of the crypto index shares. If you open a long position and the cryptocurrency or crypto index does increase in value, you’ll make a profit, but if it falls in price, you’ll make a loss – the opposite is true for a short position.

Before starting to trade cryptocurrencies and crypto indices, you would need to open a CFD trading account.

Buy Crypto Index Funds

This means that you take ownership of a portion of the fund outright, with the intention of holding it with a brokerage and profiting if it increases in value.

Before you can start, you would need to open an investing account with a broker like CAPEX.com.

Each investor should research the available ways to invest in index funds before deciding what’s the best option for their situation. Remember that cryptocurrencies and their assets are volatile, and you shouldn’t invest more than you are willing to lose.

Some of the most popular crypto investments are crypto-linked ETFs and stocks because these investments do not require investors to get involved in the blockchain space. Another advantage when investing in crypto stocks and funds is that you can also use U.S. Dollars instead of cryptocurrency.

Getting Started with CAPEX.com

Here is how to invest in crypto index funds with an international, highly regulated broker like CAPEX.com:

  • Choose which type of account you want to use. Your first concern should be your risk appetite and time horizon. If you want to buy and hold crypto index shares, open an investing account. If you want to speculate on price movements (including falling prices) with zero commission and leverage, open a CFD trading account.
  • Create an account. Regardless of your chosen account, you need to register and complete the KYC process to verify your identity.
  • Fund your account with fiat money. Before buying and trading any crypto index fund shares, you need to fund your exchange account with U.S. dollars, Euros, or other currencies.
  • Select your crypto index. It’s time to decide on your first crypto index fund investment. We strongly recommend that you thoroughly research the assets included in these funds. Alternatively, investors can buy shares in crypto ETFs that invest in crypto-related companies.
  • Place a buy order for your chosen crypto index share. Follow the steps required by the crypto trading platform to submit and complete a buy order for one or more crypto index shares.

When trading crypto index shares, the CFDs (contracts for difference) are stored in your account and are far more liquid. However, you should be aware that CFD trading is fast-moving and requires close monitoring. As a result, traders should be aware of the significant risks when trading CFDs. There are liquidity risks and margins you need to maintain; if you cannot cover reductions in values, your provider may close your position, and you'll have to meet the loss no matter what subsequently happens to the underlying asset.

With CAPEX, you can trade CFDs on +2.000 stocks and invest in +5.000 stocks with ownership.

Summary of crypto index funds

Although cryptocurrencies can be subject to extreme price volatility and regulatory uncertainty, among other problems, they have attracted the attention of large numbers of investors. At this point, it is impossible to ignore the crypto market.

Given the popularity of cryptocurrencies, there will likely be more cryptocurrency index funds in near future. As more crypto indices are created, it will allow investors to follow crypto products and expand their presence in the traditional financial system. However, for the time being, investors will find that there are other ways to invest in cryptocurrency. Some of the most popular alternatives to crypto index funds are crypto stocks and blockchain-linked ETFs that provide indirect exposure to the highly volatile and unstable cryptocurrency market

FAQs

Is there a Bitcoin index?

This S&P Bitcoin Index tracks the performance of Bitcoin. However, there is only one publicly traded cryptocurrency index fund – the Bitwise 10 Crypto Index Fund (BITW). The BITW was initially only open to accredited investors, but it is now available to all.

Can you buy the Bitcoin index?

There are very few options available if you want to invest in crypto index funds through a brokerage account. The Bitwise 10 Crypto Index Fund (BITW) is the only one available to investors. The BITW is publicly traded and available for purchase by anyone with a brokerage account.

What is cryptocurrency index trading?

Cryptocurrency index trading allows investors to purchase, sell, or swap a set of cryptocurrencies in one click. This replaces the tedious process of purchasing and selling each individual coin separately. By investing in a crypto index, inventors can also quickly diversify their cryptocurrency portfolio. The crypto index is adjusted regularly to reflect the most current market information.

Can you buy crypto indices?

Yes, you may buy the Bitwise 10 Crypto Index Fund (BITW) through a brokerage account. This crypto fund follows the top ten best-performing crypto assets based on their market capitalization.

What is the Crypto Fear and Greed Index?

The Fear and Greed Bitcoin Index measures the fear and greed of investors when it comes to investing in Bitcoin. The index analyses market sentiment and provide valuable insight into whether investors are bullish, bearish, or neutral on Bitcoin. The index is updated every day and displayed as a simple number between zero and 100.

The information presented herein is prepared by CAPEX.com and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only and as such it has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.

Therefore, Key Way Investments Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.
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