Cryptocurrency Index Automated Funds

January 28, 2020   Bitcoin

Many traders and investors involved in cryptocurrency industry directly manage their digital financial assets through various exchangers, data storage systems, hardware wallets and much more. This process makes managing a diversified cryptocurrency portfolio extremely difficult due to a wide selection of tools applied and technical difficulties.

Therefore, index funds are one of the fastest growing cryptocurrency portfolio management services. They were created in order to simplify the life of a novice cryptocurrency investor.

What is a cryptocurrency index fund?


In traditional financial market, an index fund is a portfolio of financial assets that mimics something called an “index.” It is usually obtained from a variety of different parameters, such as past asset performance, total market capitalization, current trading volume or price. Well-known indices include S&P500, NASDAQ Composite and DJIA.

Cryptocurrencies are a new class of financial assets that create a growing demand for new financial products that meet the specific needs of the crypto ecosystem.

Such products as crypto portfolio management systems, rebalanced automated trading and tracking are on the rise. Cryptocurrency index funds provide investors with the possibility to create their own portfolio or track the index. Thus, they get more opportunities for this new and volatile asset class.

This tool is a simple method based on minimal costs. It allows an investor to maximize the use of high profitability in the cryptocurrency market without the risk of processing individual cryptocurrency funds.

It tracks altcoins’ price, capitalization, performance, trading volume, and many other cryptocurrency group variables in the same way that the S&P500 index tracks stocks.

How automated index funds deal with market fluctuations


An automated index fund is simply a portfolio created in accordance with the index. Although the indices themselves are updated approximately every second in real time, the funds are usually rebalanced to periodically reflect the most recent index data. This can happen on a monthly basis or when a new cryptocurrency asset is listed. After restoring the balance, transactions are automatically made in accordance with the new index dat.

Thus, cryptocurrency indices help investors switch to passively managed portfolios, allowing them to automate their assets in relation to movements tracked by the index.

Crypto indices are important for several reasons:

  • Firstly, they represent a gateway for a retail investor in the world of independent investment funds.
  • Secondly, they help investors and traders to navigate the sometimes extremely volatile cryptocurrency market.

With reliable data and historical performance reports, experienced investors can potentially improve their portfolio. At the same time, they can free up invertor’s time using automation processes that indices can offer.

Pros and cons of index funds


Automated Index Funds have a range of benefits

  • Reduced risk. Automated Cryptocurrency Index funds can diversify investors’ portfolios. Holding different altcoins minimizes exposure to cryptocurrency inherent volatility. Its working principle is almost identical to the logic of using mutual funds (funds for professional investment management). Like investing in one company, investing in one altcoin increases the risk of financial losses. On the contrary, investing in diverse assets reduces the possibility of losses.
  • Simplified investment. Intelligent investments in dynamic cryptocurrency space require constant attention to the market situation and crypto industry research. Reliably storing assets in “hot” and “cold” wallets, on exchanges or outside them, as well as monitoring their performance, also takes a lot of effort and time. Automated Crypto index funds can handle most of these tasks easily.
  • Predictable asset performance. Like any pool of financial assets, Index Funds specialize in tracking market performance and redistributing investments to enhance crypto portfolio returns. Rather than resorting to the time and resources of one person, they are an institution with personnel and algorithms that tack market data.
  • Less trading fees. Although Automated Index Funds require fees, the larger and more active an investor’s cryptocurrency portfolio, the more cost-effective a specialized service can be.

The disadvantages of this product include:

  • Lack of liquidity. Although crypto automated index funds differ from one another with regard to liquidity, a widespread criticism is that withdrawing funds is not so simple. Sometimes, investors are obliged to invest in an altcoin, which is traded on a low-liquid cryptocurrency platform and with low trading volume.
  • Pricing. Automated index funds have different levels of control, but they may be paid. For example, Bitwise charges 2.5% of the annual management fees, which a great deal depending on the size of the investor’s crypto portfolio.
  • Low profitability. Due to the high correlation of altcoins’ price and performance with Bitcoin, the main objective of the product - risk diversification - is not fulfilled -, which leads to a neutralization of the positive effect and the preservation of increased risks of investing in cryptocurrencies.

Results of the best crypto-index funds


Cryptoindex

CryptoIndex (CIX100) is a digital currency index fund tracking the Top-100 altcoins selected by Zorax technology. Allegedly, the AI algorithm uses more than 200 factors to refine the rating and altcoins’ selection. The CIX100 automatically changes balance every month and has a built-in function to detect coins that are artificially inflated. The CIX100 also includes industry-specific indexes across industries such as advertising, supply chains, and storage.

The chart above shows that at the beginning of the year 2019 the index level was 0.3711. At the moment, it is equal to 0.5130. That means that during the year we can talk about an increase of the index by 38.24%.

If you look at the Bitcoin chart, then over the same period, its growth amounted to 88.76%, which is more than double the growth of the CIX100 index.


Bitwise

Bitwise is one of the leading suppliers of crypto-index funds. Having first appeared in the field of cryptocurrency management, Bitwise has created one of the world's first cryptocurrency index funds called “Bitwise 10 Private Index Fund”. With well-diversified risk, this fund tracks the 10 largest cryptocurrencies, weighted by a 5-year diluted market capitalization, and the fund is rebalanced every month. Bitwise pays great attention to security and privacy. All coins are securely stored using multi-sig technology.

The graph shows the dynamics of Bitwise 10 for 2019. It can be seen that the growth was 47.5%, which is generally better than the results of CIX100, but still lower than the results of Bitcoin dynamics in 2019.


Crypto20

Crypto20 (C20) is one of the first tokenized crypto index tools. The C20 works as a model of the traditional market for index funds, making it easier for experienced investors and traders to enter the cryptocurrency market without exploring each individual asset. This is a portfolio of the top 20 cryptocurrencies that are predefined and cannot be changed by each individual investor. They also have an established strategy for distribution management and rebalancing.

In the chart above, we see that the value of the Crypto20 index has even decreased compared to the beginning of the year - 0.36 against 0.37, which of course does not play in favor of this tool.

Conclusion


Crypto-index funds are just one example of financial applications currently available to a retail investor. For all its attractiveness, this product does not fulfill its main function - risk diversification. The analysis showed that the indices offered on the market lose in their results to the simple holder of Bitcoin, which indicates that they are ineffective in terms of redistributing the partnership and management strategies. At the same time, a strong correlation of all cryptocurrencies with Bitcoin nullifies the main advantage of index funds - diversification of investments. In fact, the risks of investing are comparable to the purchase of Bitcoin, and the return on these indices is even less.

Author: Kate Solano for –°rypto-Rating.com
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