A crypto index, much like a stock market index, is a tool used to track the performance of a selection of cryptocurrencies. This index provides a snapshot of the overall health and trends of the cryptocurrency market, or a specific segment of it.
Here, you’ll learn some of the insights, benefits and disadvantages, as well as some of the differences between centralised and decentalised crypto index funds.
Selection of Cryptocurrencies
A crypto index typically includes a range of different cryptocurrencies. These are often selected based on specific criteria such as market capitalization, liquidity, or trading volume.
A popular practice for index allocation is market-capitalization-weighted formula.
Asset Weighting in DexFund = Asset market cap / Total of all market caps
This helps ensure that the index accurately reflects the broader market or a specific market segment.
Diversification
By tracking multiple cryptocurrencies, an index offers a more diversified view of the market compared to investing in a single cryptocurrency. This can potentially reduce risk, as the impact of any one cryptocurrency’s performance is balanced by the others in the index.
Can I invest in a Crypto Index Fund?
Some financial products, like index funds or Exchange-Traded Funds (ETFs), are based on crypto indexes. These products allow investors to invest in a range of cryptocurrencies without having to buy each one individually.
Are crypto index funds centralised?
Traditional Indexes like Nasdaq or SP Cryptocurrency Index offer a more traditional, regulated investment experience, while decentralised funds provide a new approach that leverages the benefits of blockchain and DeFi.
What’s the difference between a centralised and decentralised crypto index?
| Traditional Crypto Index | Decentralised Index |
| Controlled by a third party: Investors in traditional index funds have less control over their investments than those who own individual coins, as the fund’s managers make the decisions about what coins to hold. | Self-managed: Investors control their allocations and can edit, add or remove assets to an index by copying it and creating their custom decentralised fund (DexFund). |
| Management fees: Index funds often come with higher fees than buying individual coins, as there are costs associated with managing the fund. | Lower fees: Decentralised index funds are run automatically by public & decentralised contracts – which reduces the admin fees and offers a lower entry barrier. |
| Barrier to access: Countries without cryptocurrency exchanges, do not permit access to crypto index funds. | Easy to access: Decentralised index funds allow users to access the interface from anywhere in the world. |
| Lack of knowledge: Novice investors who lack the knowledge and expertise to pick individual coins may miss out on opportunities to invest in promising projects that are not included in the fund. | Fully editable: Users have full control over the index. Decentralised funds offer an index template and users can edit allocations, and add or remove tokens to a custom portfolios without affecting the original index. |
What are the benefits of crypto indexes?
Diversification: By investing in a basket of cryptocurrencies, index funds can help spread risk across different coins and projects.
Personal management: Index funds are typically managed by third parties who make decisions. DexFund can access the standard index as well as have full control over what coins to include in the fund and when to rebalance it.
Liquidity: Since all tokens in the index are traded on exchanges, they can be bought and sold like any other asset.
Flexibility: Users can top up their allocation at any time. Cashing out can be done either in full or partially by selling individual tokens.
What are the disadvantages of crypto indexes?
Education: Inexperienced investors might not understand or have knowledge about crypto indexes, their price and how to include it into their portfolios.
Reach: While there is a plethora of content about well established coins and tokens, crypto indexes are relatively new to the market and their impact is still being discovered by existing and new investors.
Purchase: Due to regulatory uncertainty, decentralised crypto indexes are only accessible by those users who already hold tokens (i.e. stablecoins).
