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The cryptocurrency industry is already on a steady rise. The beauty is that despite the lack of regulations (which we all hope will come in very soon), overwhelming concepts, and concerns from some traditional investors, cryptocurrency has emerged as a popular asset class. With brands like Tesla endorsing Bitcoin, crypto assets are getting mainstream acceptance. However, some pundits feel that the absence of traditional products holds up the sector. Cryptocurrency index funds emerge as a popular solution in the crypto world. Read the full article to know more.
What is a cryptocurrency index fund?
There is hardly any difference between cryptocurrency index funds and regular index ones. By defining the latter, the former shall become implicit.
So, what is an index fund? An index fund is a passively managed fund that imitates a market index. When we say we passively managed funds, they don’t need managers to make decisions; rather, they follow the market index.
A market index is a basket of assets available in the financial market, designed as a benchmark to evaluate a sector’s performance, often reflecting financial trends. For example, NIFTY 50 is a benchmark index representing the top 50 largest Indian companies’ performance. By extension, a NIFTY 50 index fund mimics the NIFTY 50 index and thus will be similar.
Cryptocurrency index funds, on the other hand, track cryptocurrency indexes. Cryptocurrency indexes are designed as a benchmark of the performance of the entire sector.
Weighing Methodologies for cryptocurrency index funds
The majority of the indexes shall fall under one of the two categories based on their construction.
- The price-weighted index gives equal weightage to all the assets present. Simply put, adding the price of all assets and dividing it by the total number of assets will give you the performance.
- The capitalization-weighted index gives relative weightage to assets based on their market capitalization. So, assets with a large market cap will greatly affect the market even if their individual price is low.
Famous cryptocurrency index funds and indexes
Indexes
- Bloomberg Galaxy Crypto Index is a benchmark index that measures the performance of the largest cryptocurrencies traded in US dollars. It is weighted based on the market cap of the constituents. Bitcoins and Ethereum are the top constituents weighing 30 percent each.
- TaiFu Index is a market-cap-weighted index that tracks the 30 largest cryptocurrencies of a day.
- Lykke Cryptocurrency Index(LyCI) consolidates the top 25 cryptocurrencies, weighted by respective market cap. However, this is for information purposes only. LyCI 2.0 is likely to arrive soon so that investors can directly buy the LyCI over individual assets.
Funds
- Bitwise Investment Funds: One of the well-known crypto index funds. The managing company, Bitwise Asset Management, is also the creator of the world’s largest crypto fund worth $800 million. These funds invest in their indexes like Bitwise 10 Large Cap & Bitwise 100 total market. Very recently, the company has also launched DeFi (Decentralised Finance) Crypto Index Fund.
- Crypto20: It is the first tokenized crypto-only fund that uses seed funding to buy the underlying assets. It represents the relevant top 20 largest cryptocurrencies. The list itself is periodically reviewed. This index fund is preferred for its autonomous and transparent nature.
- Grayscale Digital Large Cap Fund: These funds comprise digital assets that collectively make up about 70 percent of the market. As of now, the components are Bitcoin (80%), Ethereum, Bitcoin Cash, and Litecoin. These funds are very secure as they are stored in cold storage with a trusted custodian, Coinbase.
Index Funds: A big leap in the Crypto Industry
Here’s how index funds can impact the crypto industry.
Offer diversification
Crypto asset price prediction is challenging. Period. Cryptocurrency index funds give users exposure to diversification. Analyzing the performance of individual crypto assets and then allocating capital involves a lot of work. Rather one can buy a variety of assets in a single purchase.
It allows them to build diversified portfolios of crypto assets and thereby increase their capital. With automated tracking, they can be assured that their assets are safe and follow the indexes, making it somewhat beginner-friendly.
Attract new investors
Many people are keen to buy cryptocurrency in India and other emerging economies. Yet, they are doubtful about the technology and safeness of the venture.
Crypto index funds will be a plausible reason for new investors who are skeptical. Yes, the industry is still going to be volatile and susceptible, and highly risky. But investors need not analyze and confuse as to which assets to invest in. Rather than worrying about buying Bitcoin or Ethereum in India, users will be exposed to a wide variety of crypto assets in a single fund. This will make it easier for investors.
Increase popularity
Many financial institutions have foreseen the potential of cryptocurrency. They have taken progressive steps to venture into this new space. For instance, S&P Dow Jones is launching its own crypto indexes. The blockchain-based digital currency can gain further popularity as a transparent option against manipulative & inflationary assets.
Crypto index funds are indeed selling crypto assets as tractableasset classes. With Parliaments and financial organizations already speaking about standards and benchmarking, you can expect cryptocurrencies to become more accessible investor-friendly.
Frequently Asked Questions
Is Cryptocurrency Legal In India?
In India, cryptocurrencies are legal; anyone can purchase, sell, and trade cryptocurrencies. They are currently unregulated; India does not have a regulatory framework in place to regulate its functioning. According to the Ministry of Corporate Affairs (MCA), companies must now declare their crypto trading/investments during the financial year, according to the Ministry of Corporate Affairs (MCA). Cryptocurrency transactions have been taxable in India when people receiving such gains are Indian tax residents or where the crypto is considered to be domiciled in India
How Many Cryptocurrencies Are There?
There are over 5000 other digital currencies available on the internet in addition to Bitcoins. The only problem is that they haven't gotten the users' attention. Besides Bitcoins, a few other digital currencies have gained popularity among users. It's been more than ten years since Bitcoins were first released, and now they've achieved new heights thanks to their phenomenal success.
How To Invest In Cryptocurrency?
There are two ways of investing in cryptocurrency, mining and via exchanges. Cryptocurrency mining is considered the procedure of verifying and adding transactions to the blockchain public ledger. Another option is via cryptocurrency exchanges. Exchanges generate money by collecting transaction fees, but there are alternative websites where you can interact directly with other users who want to trade cryptocurrencies.
What Is Cryptocurrency?
A cryptocurrency is a digital currency secured by encryption, due to which chances of activities such as counterfeiting and double-spending taking place get close to impossible. Cryptocurrencies get created on blockchain technology ( a distributed ledger enforced by a distributed network of computers). Cryptocurrencies are unique in that they do not get issued by any central authority. The term "cryptocurrency" comes from the encryption techniques used to keep digital currencies and the network safe.
How Cryptocurrency Works?
Cryptocurrencies use cryptography technology to keep transactions and their units (tokens) secure. Cryptocurrency works via a technology called the blockchain. A blockchain is a decentralized technology that handles and records transactions across numerous computers. The security of this technology is part of its value.
Which Cryptocurrency Is Best To Invest In 2021?
Many altcoins are flourishing to invest in. Some cryptocurrencies with great potential are Ether, Ripple, Tron, and more. Investors are trying to diversify their portfolios and are flocking to the leading cryptocurrencies. Many growing businesses are already accepting cryptocurrency as acceptable payment methods.
How Safe Are Cryptocurrencies?
Cryptocurrencies can be safe, but your crypto wallets can be hacked if proper security steps are not performed.There are also dangers and uncertainties associated with investments, and we cannot declare any virtual currency investment risk-free. Buying and selling cryptocurrencies does not have to be dangerous if the trader is well-versed in the market and treats his coins with care.
Is Bitcoin And Cryptocurrency The Same Thing?
Bitcoin is a cryptocurrency that was designed to facilitate cross-border transactions, eliminate government control over transactions, and streamline the entire process without third-party intermediaries. The absence of intermediaries has resulted in a significant reduction in transaction costs. Satoshi Nakamoto, the creator of Bitcoin, created the first cryptocurrency in 2008. It began as open-source software for money transfers. Since then, plenty of cryptocurrencies have emerged, with some focusing on specific fields.
How To Invest In Cryptocurrency Stocks?
Cryptocurrency can be purchased in two ways: through mining or exchanges. The process of confirming and adding transactions to the blockchain public ledger is known as cryptocurrency mining. Cryptocurrency exchanges are another option. Exchanges make money by charging transaction fees, but there are alternative platforms where you may communicate directly with other cryptocurrency traders.
Is Pi Cryptocurrency Safe?
Pi Network (PI) is the newest digital token to catch the cryptocurrency community's interest, even before it has wholly debuted. Some users see it as a chance to get engaged in a cryptocurrency from the beginning and profit in the future, similar to how early Bitcoin adopters made huge profits by mining and keeping the coin. Other users have compared Pi to a worthless multi-level marketing (MLM) scheme.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
