What Is a Crypto Index Fund?

For a while now, the crypto industry sought to provide as many financial services to its users as possible. In fact, it wishes to mirror the traditional financial industry and offer a better version of its financial products. Thanks to the decentralized finance (DeFi) sector, that now includes even things like loans. However, in this pursuit, the crypto industry has mirrored many other aspects of traditional finance, including index funds.

This means that investors can now invest their money in a crypto index fund of their choice. This is generally considered safer than investing in a single digital asset or even a small portfolio. So, what is a crypto index fund? How does it work? That, and more, is what we will talk about today.

What Is a Crypto Index Fund?

Crypto index funds are similar to traditional index funds; only they use crypto markets instead of the stock market. 

This means that a crypto index fund contains a list of cryptocurrencies that you can invest in. It is a pool of specific crypto assets handpicked to make the fund as strong as possible. As such, it usually contains assets expected to see a high performance. The idea is to use safe assets that might see a strong price increase.

It represents a diversified portfolio created by expert fund managers. It is also considered safer than regular investing. Thanks to multiple crypto assets in the fund, even if some of them fail, others can still help you earn. Diversification helps to balance out the portfolio. That way, the best-case scenario brings you sizable profits, while in the worst-case scenario — you see neither profits nor losses.

The bottom line is that the crypto index fund allows you to invest in multiple digital assets at once. That way, you don’t have to diversify your portfolio manually, which helps save time. It also saves money, as you don’t have to pay fees for dozens or even hundreds of transactions.

How Does a Crypto Index Fund Work?

The concept behind crypto indexes is fairly simple. They are groups of assets whose price, market capitalization, performance, and other variables are tracked. This, and other financial data, allows expert fund managers to calculate the performance index of entire groups of cryptos. Most of this process is fully automated. That way, there is no room for manipulation or human error.

If an investor decides that the fund contains good, strong digital assets, they can invest in it. In return, they receive tokens that represent their share in the fund. It is worth noting that the index administration is centralized. It relies on a dedicated server using blockchain technology.

With the fund’s token in the investor’s possession, they need to wait for the fund's value to grow. The value of the fund grows when the assets contained within see price growth. If a fund contains 50 cryptocurrencies, and the majority of them see price growth, the value increases. Of course, the occasions where all assets contained within see price growth are rare.

Usually, some assets will see growth, while others will see drops. If the growth is larger than the drop, the difference represents the performance of the fund, as a whole. In the end, funds with assets that tend to grow quickly, easily, and a lot, are usually the most rewarding. However, as it is always the case — assets that see sharp growth usually don’t grow for very long. Sooner or later, a correction takes place, and a drop follows. Investors need to learn to recognize when the fund has reached its peak.

Pros and Cons of Crypto Index Funds

Like everything else, crypto index funds have their advantages and disadvantages. To start off, let’s discuss the positives first.

Crypto index funds are generally a great way to invest. They offer better long-term results compared to earnings from individual assets. They are also safer because the drop of one, or even multiple assets, can get nullified by the rest. Assuming that the rest are performing well, of course.

Crypto index funds can also help investors save money they would otherwise spend on transaction fees. Apart from being affordable, they are also easy to invest in. This tends to remove problems for those who are less tech-savvy. Not to mention that you can invest in a variety of assets that would likely require numerous wallets otherwise. This way, users do not have to worry about safely securing all the different coins and tokens. All they need to do is secure the tokens that represent their share of the fund.

And, of course, investing in a fund offers instant diversification. So, apart from saving money, you are also saving time and effort.

Unfortunately, there are also a few cons to keep in mind here. For example, funds are more likely to bring positive returns, but the gains are generally smaller. Each fund is bound to see some assets performing poorly, which drags your returns. 

Next, another downside is that you have less control over the assets involved. If you invested in assets manually, and one of them performed poorly, you could simply sell it. However, if the digital asset in question is a part of the fund, you cannot do anything about it. 

Lastly, there is something of an entry barrier that investors have to deal with. This is not true for all funds, but most do have minimum entry requirements. This minimum is sometimes quite sizeable, and that could scare potential investors who are not ready to commit.

How Do Crypto Index Funds Compare to Traditional Index Funds?

Traditional and crypto index funds share numerous similarities. However, there are also a few differences between the two. The main difference, of course, is the underlying asset. Traditional index funds mostly rely on the stock market, while crypto funds use digital assets. 

Another difference has to do with the nature of cryptocurrencies. Everyone who had any experience with crypto knows how much more volatile they are. In comparison, stocks do not see such aggressive price movement. As a result, the crypto index itself is a lot more volatile, so investors need to keep an eye on it. Aggressive price movement can lead to larger gains but also greater and sudden losses.

Another big difference is that traditional indexes have been around for ages. As a result, there are hundreds of them available, likely even thousands. However, when crypto indexes are relatively new. As such, there are not as many of them out there. 

Top 3 Crypto Index Funds for 2023

Several trusted crypto index funds are available today, but we will narrow it down to three.

  • eToro Smart Portfolios

eToro Smart Portfolios offers 14 crypto-based smart portfolios. They are professionally managed, and eToro is regulated by the U.S. Securities and Exchange Commission. Each portfolio has its own objectives, strategies, and more, to help investors make the right decision.

  • Fidelity Crypto Industry and Digital Payments Index

Fidelity has its own diversified index, which actually features crypto-centric stocks. The company believes investors are more comfortable with crypto-based stocks than cryptos. So, it created an index that offers stocks that operate in the crypto and blockchain industry.

  • BitWise DeFi Crypto Index Fund

Lastly, Bitwise offers a crypto index fund that focuses on DeFi projects. With many considering DeFi the future of finance, many call investing in this index “investing into the future.” The DeFi sector has certainly seen its fair share of popularity, so the Index attracted a lot of investors.

Is It a Good Idea To Use Crypto Index Funds?

Investing in a crypto index fund definitely has its advantages. Of course, it is worth remembering that it also comes with certain risks. Limitations when it comes to controlling the assets in the fund are not unique to crypto indexes. As such, they cannot be singled out as a downside of the crypto index fund alone. However, it is still a downside of investing in index funds, in general.

However, despite the downsides, investors are quite interested in crypto indexes, and more of them appear all the time. In the end, it all depends on what kind of investor you are. Whether or not crypto indexes are good is an individual decision. With that said, use the information we shared here to reach your own conclusion.


Does Vanguard Have a Crypto Index Fund?

No, Vanguard does not currently offer a crypto index fund. It acknowledged that these funds are seeing high demand and that they have an impact. However, it doesn’t offer one, and it is unknown if it will add it in the future.

How Do I Buy a Crypto Index Fund?

The easiest way to buy a crypto index fund is through a broker. All that you need to do is select a platform, deposit some assets, and select an index. After you invest your money, you will get tokens representing your share.

How Do Crypto Indexes Work?

Crypto indexes allow users to invest in a diversified portfolio of assets. In doing so, users are simultaneously investing in all the coins within the fund. This is beneficial because each asset performs differently, and if the majority sees growth, the index itself grows.

What Is the Best Crypto Index Fund?

There is no such thing as the best crypto index funds. All cryptocurrencies are volatile, and different funds have different combinations of crypto. Since no one knows which coins will go up and which will go down, it all depends on your prediction.

Should I Invest in a Crypto Index Fund?

Crypto index funds have their positives and their negatives. Generally speaking, investors do like them, and many choose to invest. However, each investor has to make their own decision based on a combination of research and what they believe.

Related articles
View more
View more