Interest continues to grow in bringing traditional financial products into the blockchain space, and pressure is mounting on governments across the globe to regulate and grant legitimacy to blockchain assets. Although recent news has focused on the continued stalling of financial regulators to permit the creation of cryptocurrency exchange traded funds (ETFs), index funds are already available, and competition is increasing among providers. These funds provide a unique investment opportunity, yet also highlight the difficulties that legacy financial institutions will have in providing worthwhile cryptocurrency investments.
Index funds are financial instruments that contain a number of investments in a specific sector. They have been offered in the legacy financial space for many decades, and have been available for crypto investors since 2015. Crypto index funds can be tokenized, and traded on cryptocurrency exchanges, or managed by investment professionals.
Tokenized index funds include Crypto20, which contains the biggest twenty cryptocurrencies by market cap, routinely re-balanced to reflect changing values. Crypto20 uses an Ethereum-based token called C20, which is openly traded on a number of exchanges. Other similar index tokens include the VOC25, which holds the top 25 platforms by market cap, and the BIT10, which is available via the wallet app ABRA and holds the top 10.
Non-tokenized index funds are emerging as well, most of which are targeted at large cap and institutional investors. Coinbase, for example, offers an index fund under its subsidiary, Coinbase Asset Management. Another is managed by Morgan Creek Capital Management, and has been established via a partnership with Bitwise. In addition to buying and holding the client’s assets, these funds manage tax records, and offer insurance against theft or accidental loss. Funds such as these generally charge a fee of between one and two percent, and are not available to casual investors.
Crypto index funds are intended to appeal to investors that lack the technical skills to purchase individual coins, or prefer to have their cryptocurrencies managed by professionals. Although these services are considered valuable for traditional investments such as stocks and bonds, they may be more difficult to justify in the crypto space. For example, investing in cryptocurrency may appear complicated for beginners, but the process is relatively easy to learn and open to anyone with access to a computer or smartphone. As for asset management, crypto security rests with the encryption of private keys, which crypto advocates advise against allowing third parties, such as financial institutions, to hold.
Thus, cryptocurrency’s open and decentralized nature enables it to be acquired and held without the need for third party intermediaries. Nevertheless, cryptocurrency is such a unique asset, it is reasonable that options will exist for those wishing to have a broad ownership in the space, managed by professionals. Whether or not investors will consider the fees charged by index funds worth the convenience that they offer remains to be seen.
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