Crypto Index Fund

A crypto index fund is a type of investment that tracks the performance or behavior of a basket of cryptocurrency assets.

What Is a Crypto Index Fund?

A cryptocurrency index fund is a type of investment vehicle that tracks the performance of a specific index of cryptocurrencies. This index can entail the top 20 cryptocurrencies by market capitalization, DeFi sector, metaverse, or the overall crypto market.

Much like traditional market index funds that expose investors to shares from various companies, a crypto index fund exposes participants to a basket of cryptocurrencies without them having to own individual tokens. By investing in an index of cryptocurrencies, as opposed to an individual asset, a crypto index fund helps investors mitigate volatility risks by spreading the risks across multiple cryptocurrencies.

How Do Cryptocurrency Index Funds Work?

The professional or asset management firm that manages a crypto index fund is known as a fund manager and is responsible for carefully choosing the basket of cryptocurrencies to include in the fund. The performance of the fund is then linked to the performance of the underlying index of cryptocurrencies. To preserve that link, these funds abide by certain rules, including when to rebalance the fund to ensure continued tracking of the index.

Rather than creating diversified crypto portfolios themselves, individual shareholders purchase shares of the fund created by the fund manager. These shares represent a fraction of the underlying assets. This approach exposes investors to the underlying cryptocurrencies without buying them directly. Therefore, you can think of them as a more passive investment strategy. 

The fund managers charge shareholders management fees and, sometimes, expense ratio and performance fees. 

• Management fee – The fees a fund manager charges shareholders to cover the costs of operating or managing the cryptocurrency index fund. It is often expressed as a percentage of the assets in the fund.
• Expense ratio – Some funds may charge shareholders fees associated with operating the fund, such as administrative costs, custody fees, and trading fees. The expense ratio is expressed as a percentage of the assets in the fund.
• Performance fees – The additional fees some funds charge for outperforming a specific set benchmark, often between 10-20% of returns above a certain threshold.

Generally, cryptocurrency index funds do all the heavy lifting for investors, allowing them to invest in a range of digital assets. It is also best suited for investors unfamiliar with or hesitant about buying cryptocurrencies. Of course, that means index funds do not offer shareholders the same benefits that come from the self-custody of crypto.