Crypto Index Investing: How It Can Benefit Passive Investors

A cryptocurrency index fund lets people invest in many different coins at once.

Cryptocurrencies are newer than stocks and bonds, so they can go up and down a lot more.

Source : Pexels

Index investing is one of the most popular approaches to passive investing. This approach is often used by investors who want to achieve long-term growth while minimising risk. While index investing is prevalent in stocks and mutual funds, it might be a novel technique in the crypto industry. Nonetheless, this approach can be a smart way to invest in emerging asset classes like crypto.

What Is Index Investing?

Index investing means buying a bunch of stocks that follow the performance of a certain group of stocks, called an index. An index fund is like a savings account where a manager invests your money in many different stocks. The difference between an index fund and a regular savings account is that index funds don't have a manager, which means they usually have lower fees.

In other ways, it invests in a group of assets representing a particular market index, like the S&P 500. Instead of trying to pick individual stocks, you invest in a group of stocks that mimic the index, so if the index goes up, your investment goes up too.

For example, investing in an S&P 500 index fund means that your investment is distributed across the 500 companies listed on the S&P 500 index, giving you exposure to the overall performance of the US stock market. Similarly, the Bombay Stock Exchange (BSE) Sensex and the National Stock Exchange (NSE) Nifty 50 are commonly used indices in India. These indices are a collection of companies listed on the BSE and the NSE.

What Is Index Investing In Crypto?

A cryptocurrency index fund lets people invest in many different coins at once. Cryptocurrencies are newer than stocks and bonds, so they can go up and down a lot more. This means that they can make you a lot of money but also make you lose a lot of money. If you only invest in one cryptocurrency, you'll only make or lose money based on that. But if you invest in a bunch of cryptocurrencies together, you can spread your investment and lower the risk of losing a lot of money.

The goal of index investing is to achieve a return similar to the overall market's performance rather than trying to beat the market by selecting individual assets. This approach to investing is based on the idea that the asset as a whole tends to go up over the long term. Therefore, investors can benefit from owning a diversified portfolio that mirrors the overall market. 

According to a report by CryptoCompare, in 2020, the total amount of money invested in cryptocurrency index funds rose from $130 million to $2.57 billion, almost 20 times more in just one year.

As the crypto industry heads towards mass adoption, investors seek better ways to get exposure to this asset class. Investing in individual cryptocurrencies can be risky and time-consuming. It requires extensive research and monitoring of the market. Hence, index funds are emerging as a preferred crypto investment method.

What Are The Benefits Of Investing In Crypto Index Funds?

Crypto index funds function on the same principles as traditional index funds and offer the same benefits.

Reduces emotional biases

Index funds can mitigate emotional biases and behavioural mistakes arising from active management, such as market timing or crypto selection based on rumors. This is because the passive approach of index funds adheres to a predetermined set of rules, enabling investors to make rational decisions.

Regular rebalancing

Regularly rebalancing a portfolio can counteract emotional biases. This entails modifying the allocation of assets by adding or removing cryptocurrencies and adjusting their weights in response to market conditions and asset performance. Through this process, the portfolio remains diversified and aligned with its initial risk-reward ratio, thereby avoiding excessive investment in any single asset.

Diversification

Investing in index funds offers a well-diversified portfolio of cryptos that follow a benchmark index, distributing risk across numerous investments and mitigating overall portfolio risk. By diversifying across a wide range of assets, the investor can avoid being excessively exposed to any individual cryptocurrency.

Risk-adjusted returns

Risk-adjusted returns mean the money you make from investing while also considering how risky the investment was. It looks at how much you gain compared to how much risk you took to get that gain. To make good risk-adjusted returns, you must spread out your investment over many different things. This helps reduce the chance of losing money if one thing doesn't do well. Index funds use diversification, rebalancing, and passive management to make good risk-adjusted returns.

As cryptocurrency gains more mainstream acceptance, index funds are becoming a top choice for seasoned and novice investors seeking exposure to this developing asset class.

(The author is the CEO and co-founder of Mudrex, a global crypto investing company)

Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP Network Pvt. Ltd. Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Cryptocurrency is not a legal tender and is subject to market risks. Readers are advised to seek expert advice and read offer document(s) along with related important literature on the subject carefully before making any kind of investment whatsoever. Cryptocurrency market predictions are speculative and any investment made shall be at the sole cost and risk of the readers.