Crypto indices are known as financial instruments that are used to appraise the performance of a portfolio of cryptocurrencies. These indices are developed according to a specific phenomenon and usually get the weightage based on Market Cap. For instance, an index can trace the top 20 crypto initiatives based on market capitalization or outline the leading DeFi projects in terms of market capitalization. Thus, the price performance of digital currencies inside an index decides the floating price of that particular index on a rolling basis. In simple words, the price of an index will rise or fall, relying on whether its constituent assets rise or fall in value over a given period.
Crypto Index Fund
It is a financial instrument in which investments are made in multiple cryptocurrencies in the form of groups. A cryptocurrency index fund consists of a pool of funds from the individuals to trade Bitcoin with Bitcoin Era who invest their money to make their portfolio diversified. You can consider the cryptocurrency index fund as a kind of mutual fund. In the case of mutual funds, all the funds from investors are pooled together and handed over to a specific person known as the fund’s manager, who then invests these funds into securities.
Like mutual funds, a crypto index fund does not have a fund manager. Instead, the investments are made in a particular stock market index. These market indices are the pools of securities that are delegators of the overall market. For instance, the S&P 500 refers to the market index of 500 large US companies. Since index funds do not have active management, they have lower fees as compared to mutual funds. You can call it a fund that invests in a selected index of digital currencies.
How Do Crypto Indices Work?
Each crypto index consists of a group of cryptocurrencies; that are pooled together and get weightage based on Market Cap. To compute the market capitalization of a cryptocurrency, all you have to do; is to multiply the number of units of that currency by its current market value against the USD. When the value of a cryptocurrency appreciates, its market capitalization rises, and resultantly the value of the crypto index also increases. Contrarily, when the prices of a cryptocurrency decline against the USD, the value of the crypto index also decreases.
It is crucial to know that speculative products like spread bets and Contract For Differences contain higher risk. Extreme fluctuations merged with leverage can result in massive losses. Like any leveraged product, both gains and deprivations are enhanced because they rely on the entire value of your position, not on the first deposit on a specific trade. You can earn rewards if the market adopts your direction, but you can also suffer a loss if the market goes against you, especially if you do not possess sufficient risk management in place.
In What Ways Crypto Indices Are Beneficial?
- Crypto portfolio trading is beneficial in many ways compared to the individual trading of multiple cryptocurrencies because you have to focus on all of them individually.
- Since you are not bound to a single coin, the crypto index also scatters your risk factor.
- Crypto indices provide efficient and economical trading of cryptocurrencies as they support investors to handle a single instrument instead of trading manually various assets in consecutive forms.
- In addition, crypto indices are also incredible ways for providing all types of investors with convenient, targeted portfolio exhibitions of famous or evolving crypto-economy trends such as Non-Fungible-Token projects in the case of the NFT-centric index.
- Another significant benefit of crypto indices is that they enable investors to simultaneously diversify risk over several assets, thereby reducing the chances of over-exposure to any other digital token later.
How Can You Make An Investment In Crypto Indices?
The investment options for putting your money in crypto indices are limited. Bitwise 10 Crypto Index Fund is a suitable option. Some examples of the top crypto indices are given below.
DeFi Pulse Index: It is developed for appraising the performance of leading tokens in the DeFi sector.
CRYPTO20: This crypto index aims to track the top twenty cryptocurrencies in terms of Market Cap. For example, Bitcoin is the top-ranked cryptocurrency according to its market capitalization and is effortlessly tradable.
NFT Index: This index is developed to track virtual assets that belong to the NFT industry.