A Guide to Cryptocurrency Index Funds

It can be time-consuming and challenging to zero in on a sound strategy for investment and balance the risks and returns, especially in emerging markets. Everyone now knows about cryptocurrencies and their potential to bring high returns despite the high risks. However, cryptocurrency technology is often underrated and misjudged, and you can quickly get yourself burned. 

You need to figure out the risk model and learn how the cryptocurrency index fund works to decide if it is right for you as an investment model. Fortunately, there are businesses like that can help you overcome the disadvantages of traditional crypto investment options. You need to understand what exactly you are investing in, though. 

The core philosophy of the cryptocurrency index fund is making high returns without the risks of handling individual cryptocurrencies. The fund tracks capitalization, price, and performance among other variables for several cryptocurrencies and uses the data to calculate the performance index of that group. 

What is an index fund? 

An index fund is a group of assets that the investor buys together. The assets will have something in common and will be rebalanced often. An index fund can come from a subsector. For example, the crypto world could be based on digital assets from sports, science, and technology, or even utilities and energy. 

When you own a share of a fund, you own the specific assets, cryptocurrencies, or stocks that make up the index. That way, the fund is a portfolio to allow you to invest in several assets. When some dip and some appreciate at any one given time, you are shielded from shocks from a single source. 

Generally, the goal of the index fund is to offer lower operating costs and diversified exposure. They rely on specific standards and rules to keep working in different market conditions. Index funds have proven to be effective long-term strategies for investment since they have low costs of management compared to mutual funds. 

Cryptocurrency index funds

The cryptocurrency market is dynamic. Even though the financial world is used to tracking Bitcoin prices, which swing dramatically throughout the day, investors can have a hard time doing this in real-time. 

The crypto index fund provides an easier way to invest in crypto assets, especially if you are not familiar with the nitty-gritty of cryptocurrency. The crypto market is only 11 years old, and you can be forgiven for not knowing all the factors that influence the price. 

When looking for a crypto index fund, look for the following characteristics:

  • Ability to track total market cap for the crypto market with a reasonable strategy
  • Sufficient liquidity for you to redeem underlying assets quickly and fast
  • Access to ordinary investors
  • An experienced team behind the index fund
  • Low fees
  • An ability to track the index
  • 100% of underlying assets held by independent and qualified custodians

How then does the index fund work? 

Investing in a crypto index fund is like buying shares. Fund managers will use their advanced algorithms or expertise in analytics to set rules and manage the fund for you. That way, you reduce the work you have to do and have a diversified portfolio to spread out risk. You protect your investment against market volatility. 

Advantages of crypto index funds

Reduced risks for investment – By making the investor’s portfolio diverse, crypto funds minimize exposure to market volatility. Index funds are also handled by experts, which translates to more favorable returns. 

Simplified investments – Index funds allow you to track performance for specific coins in the market based on research. The fund handles the complicated overhead for the investor. 

Low cost of investment – Crypto index funds are more active and larger than individual tokens. In the crypto market, investing for individual coins can incur hefty fees over time. Index funds provide low trading fees, leaving more of your money in the market. 

Disadvantages of crypto index funds

Barriers to entry – Traditional index funds limit access to accredited investors. Crypto index funds do not waive the requirement. A few have a minimum investment amount for the initial investment. 

Small returns in short timeframes – You should not jump into crypto index funds if you want quick returns to leave the market. They work better if you intend them to be passive long term investments. 

Price management – Index funds offer low management costs, but they still have a management fee. 

How to invest in index funds

Cryptocurrency index funds will vary dramatically in the structure of management, but they have some commonalities. When planning to make an investment, consult a specialist to know how different index funds work before investing, more so if you need a lot of starting capital. 

Investing in a particular fund can mean buying a token that encompasses all coins or picking stocks that match your portfolio preferences. When selecting an index fund, choose one that tracks the market cap closely. You need this information because the crypto market moves fast. 

Think about the liquidity as well. You should be able to redeem your underlying assets in value as soon as you can. If you made smaller investments, look for funds that offer non-accredited investor services. 

How index funds compare to mutual funds

Mutual funds and index funds are both investment fund types. An index fund is different from a mutual fund, though.

A mutual fund involves active participation. You make daily and other times, hourly investment decisions. Managers have to pick fund holdings actively. In an index fund, the process is passive. Sometimes there is no need for human involvement in determining what investments to use. Some funds are preset to track a number of cryptocurrencies and rebalance after every, say one month. 

Mutual funds try to exceed a related benchmark index. The fees will be high because the management is aggressive to get high returns. For index funds, the idea is to match the returns for a related stock market index. The fees are lower than those of mutual funds because there is a high automation degree, and the approach is passive. 


Crypto index funds work well for the investor who wants a passive income in the long term. Top index funds will help you reduce risk exposure and volatility and to gain a decent return in the long-term. However, no investment is risk-free. Crypto funds have different rules to meet various needs. Consult with a specialist if you are new. 

Myra M.

Experienced business writer with a solid track record of work in tech-related companies and online marketing.

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