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What are Index-Based Crypto Assets?


blockster.com 28 September 2021 11:36, UTC
Reading time: ~4 m

Index funds are quite popular as an investment vehicle because they provide investors the exposure to the price movement of a basket of specific stocks or equity that might be related to each other in terms of industry, have a similar market cap, and the like.

While index funds continue to enjoy their fame, more so among investors who might not be risk-savvy, the concept of index funds in the crypto space is still pretty much in its infancy.

In this article, we will explore the variety of index funds that currently dominate the digital assets space, why they are popular, and how you can gain exposure to them. To highlight the differences, the crypto index funds have been divided into centralized and decentralized categories.

Let’s look at the top centralized crypto index funds.

Perhaps the most famous and trusted of all crypto index funds, the Bitwise 10 Crypto Index Fund tracks the performance of the top ten cryptocurrencies by market cap and offers the investors a secure method to get diversified exposure to bitcoin (BTC) and other major digital assets.

Essentially, the index fund tracks a collection of the 10 most highly sought-after digital currencies that are filtered and continually monitored for certain risks and weighted by market capitalization. Besides, the index fund is re-balanced every month so as to ensure that its constituents reflect the most profitable crypto assets in the period of time.

The Bitwise 10 Crypto Index Funds trades with the ticker BITW and is an attractive investment fund for people looking to gain exposure to the top-performing cryptocurrencies in terms of the market cap without necessarily juggling among them all.

As of August 2, 2022, the BITW is comprised of the following cryptocurrencies in the corresponding proportions based on their performance, price action, and other factors.

The BITW Fund promises to offer unmatched security as all digital assets are held in 100% cold storage wallets with multi-signature configurations. In addition, Bitwise leverages the services of a third-party crypto custodian and regularly works toward enhancing its security mechanisms.

Another crypto-based index fund from Bitwise, the Bitwise DeFi Crypto Index Fund aims to offer its holders direct exposure to the so-called blue-chip decentralized finance (DeFi) tokens that currently find utility across a spectrum of use-cases such as trading, securing loans, interest accounts, and more.

Bitwise’s DeFi-themed crypto index fund aims to provide direct exposure to the ballooning DeFi industry that is already worth more than $100 billion in total value locked (TVL) across different Layer-1 smart contract platforms such as Ethereum, Avalanche, Fantom, Solana, and others.

The holdings of the Bitwise DeFi Crypto Index Fund are filtered for significant risks, weighted by market cap, and witness monthly rebalancing. Notably, the formal index methodology of the fund is available publicly and is adjusted on an ongoing basis by the Bitwise Crypto Index Committee.

As of August 2, 2021, the DeFi-based crypto index fund comprises the following DeFi tokens along with their respective allocation.

Akin to the BITW Crypto Index Fund, this DeFi fund also offers unmatched security as the underlying crypto assets are custodied by the Anchorage Digital Bank.

The crypto industry stands for the ethos of egalitarian investing and democratization in decision-making and in that spirit, there are also several decentralized crypto index funds that can be traded by investors to gain exposure to a particular niche or a booming sub-sector within the wider crypto space.

The following are some of the leading decentralized crypto index funds in existence today.

Today, the DeFi landscape within the wider crypto industry is worth more than $84 billion and that is only when accounting for DeFi on Ethereum, according to data from DeFi Pulse.

While DeFi has established itself as a major force to reckon with and stands in direct competition with traditional banks and financial institutions, it might sometimes become a hassle to separate facts from the noise, i.e., identifying legit blue-chip DeFi coins and otherwise.

Catering to this need is DPI, the DeFi Pulse token with a market cap of more than $190 million launched by community-led crypto index funds project Index Coop.

DPI provides its holders exposure to all DeFi blue-chip tokens such as UNI, AAVE, MKR, COMP, SUSHI, SNX, YFI, and many more.

For a token to be included in DPI, there are a few criteria that it must meet which include its availability on the Ethereum blockchain, association with a DeFi protocol, assumed security by the corresponding authorities across jurisdictions, and others.

DPI is maintained every month in two phases, the determination phase and reconstitution phase.

The determination phase occurs during the 3rd week of the month when the changes needed for the next month are determined. Similarly, the reconstitution phase takes place on the first business day of the month whereby new index weights, additions, and deletions are incorporated into DPI.

To conclude, crypto index funds provide an attractive and relatively stress-free option to investors looking to gain exposure to a particular basket of crypto assets without directly holding the underlying assets. If you are not a seasoned crypto trader but hold a long-term bullish view on a specific crypto niche, consider purchasing a relevant crypto index fund.

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