Investing in crypto index funds: why is it profitable?
Cryptocurrencies have already become a global phenomenon, and their popularity is growing day by day. Although digital assets are no longer a new thing, there are more and more questions in the context of investment. Digital money opens up new alternatives for investment, trade, storage, and wealth growth. Index investing is one of the most effective and sought-after approaches to investing in traditional financial and equity markets. Especially if we take into account that the losses of hedge funds in 2022 alone amounted to almost $125 billion. And over the past few years, it has gained more and more popularity in the cryptocurrency market.
What is the index?
In the traditional financial world, an index is an indicator that tracks the behavior of a certain group of assets and helps investors quickly assess the situation in the market as a whole. The S&P 500, for example, tracks the stock value of the 500 largest U.S. companies. Thus, a crisis or success affecting one company does not have a significant effect, and global processes covering the entire stock market build a trend.
What is index investing?
Index investing is an investment in a portfolio of assets that repeats the structure of an index. In 2017, prominent investor Warren Buffett struck a dispute with Protege Partners, one of the largest capital management firms on Wall Street. Buffett’s position relied on the view that investing in the S&P 500 without any effort or management forms a greater return than investing in a portfolio of five hedge funds that are actively managed by professional managers. The result of the bet was an unconditional victory for Warren Buffett: from January 1, 2008, to December 31, 2017, investments in the S&P 500 brought + 125.8%, and in hedge funds + 36.3%. Thus, the index confidently bypassed the best capital managers in the market and showed itself on the beneficial side.
How does index investing in cryptocurrencies differ?
Index investing in cryptocurrencies is a way to invest in the entire cryptocurrency market, and not in individual assets. A distinctive feature of index investing is the set of cryptocurrencies. In this way, you diversify the risks by distributing capital between different digital assets, which reduces the likelihood of losses. Also, you do not need to spend time learning and gaining specific knowledge about the technical nuances of cryptocurrencies or conduct complex market analysis.
At the moment, the cryptocurrency market is at the final formation stage and very soon it will continue its rapid growth. As cryptocurrencies expand, they will receive more capital from other markets due to the growing popularization among companies and private users. According to Beyond Market Insights, the global cryptocurrency market was estimated at $4.40 billion in 2021, and according to experts, by 2030 the figure will reach $12.10 billion. Every day the number of companies accepting payment in cryptocurrencies is increasing. At the moment, you can get services and goods from about 15,174 business organizations in the world by choosing Bitcoin or other digital money as a payment method instead of traditional ones. Such companies include Microsoft, Starbucks, Rakuten, PayPal, and others. Therefore, if we compare index investment in cryptocurrencies and traditional markets, then the prospects for profitability in the former are much higher.
Index investing in cryptocurrencies gives you access to a whole portfolio of cryptocurrencies, not just one particular one. This substantially minimizes the risks associated with choosing a particular cryptocurrency in the context of loss of value and profit. In addition, the index fund consists of cryptocurrencies with the largest capitalization and liquidity, which also increases income in the long term.
The benefits of index investing in cryptocurrencies
The benefits of index investing in cryptocurrencies include:
- Diversity of investment portfolio. A drop in one particular currency in the index minimizes the overall damage.
- Ease of use. Index investing is suitable for those who do not want to study the market and individual assets.
- Selection of cryptocurrencies. Unreliable digital currencies do not fall into the index: they do not pass the initial valuation filter.
- Easy tracking. An investor can quickly assess the situation in the market without wasting time and effort tracking dozens of currencies.
- Minimum entry threshold. Index investment in cryptocurrencies is available even with little starting capital.
Index investing allows the investor to grow with the market, as the composition of the index fund is periodically updated following changes in the cryptocurrency market. And with automatic rebalancing, you can increase the effectiveness of this type of investment. Read more in our article about rebalancing. In addition, this type of investment is characterized by low commissions and soft investment requirements, which makes it available to a wide audience of users.