I was thinking about writing more of these on diff topics (maybe even for trad fi too) - let me know if it's helpful or you have any questions...
WTF Are… Crypto Index Funds?
“Another benefit of using index funds is that it's time efficient. You can read books or go hiking in nature instead of studying sh\tcoin candlesticks.”*
- kas8, YouTube commenter
❓ WTF
Crypto index funds let you invest in the entire crypto market or sub sectors, rather than individual cryptos.
👎 Problem
95% of crypto day traders lose money trying to pick winning cryptos and time entry and exit from the markets (it’s a similar number for stock traders too).
👍 Solution
Invest in crypto index funds to passively capture the ‘average gains’ of the entire crypto market or sub sectors.
✅ Good
✅ Can be very diversified
✅ Fewer transactions means lower taxes
✅ Set and forget
✅ Do as well as the market (or sub sector)
✅ Exposure to top cryptos
✅ Usually collateralised
❌ Bad
❌ Average returns
❌ Won’t beat the market
❌ Longer term time horizon
❌ Exposure to underperforming cryptos too
❌ A bit boring!
🏀 Ballers
Platforms
🏀 Index Coop - actively managed crypto index funds with high Total Value Locked (TVL)
🏀 TokenSets - create your own crypto indexes and invest in community-created ones
🏀 Indexed - passively managed crypto index funds covering various risk levels and sub sectors
🏀 Enzyme Finance - actively managed crypto funds (or ‘vaults’) with open track records and strategies for different risk tolerances
🏀 Babylon Finance - ‘crypto investment clubs’ where people share profits, split fees and make investment decisions together
🏀 PieDAO - community-constructed indexes (or ‘pies’) of various cryptos to share in profits and split fees (also offers ‘vaults’ for generating yield)
🏀 Balancer - automated portfolio manager that rebalances portfolios to keep weightings at selected percentages
🏀 dHEDGE - ‘social asset management’ where you choose an investment manager and automatically follow their strategy
Indexes
🏀 Total Crypto Market Cap Token (TCAP) - single token that gives exposure to the entire crypto market
🏀 DeFi Pulse Index (DPI) - index of popular cryptos in decentralised finance space
🏀 Bankless BED token (BED) - ‘blue chip’ crypto index tracking Bitcoin, Ethereum, and DeFi Pulse Index (DPI) in an equal split (33% each), made by Bankless
🏀 Metaverse Index (MVI) - index of popular cryptos in Metaverse space (virtual reality, games, NFTs, etc.)
🏀 The Ethereum Flexible Leverage Index (ETH2x-FLI) - use your Ethereum as collateral to get 2X leverage (warning: high risk!)
🏀 Bankless DeFi Innovation Index (GMI) - index of smaller, newer, higher-risk tokens in defi space, made by Bankless
🏀 Scarala NFT Index (NFTI) - index tracking performance of popular ‘blue chip’ NFT projects (there’s JPG NFT Index (JPG) too)
🏀 Data Economy Index - index of big-tech disrupting data cryptos (boring but very important projects!)
🔮 Future
🔮 As crypto matures more money will go into crypto index funds (like stocks where indexes make up 40% of the U.S. stock market (page 49) and are predicted to overtake active funds by 2026)
🔮 More and more niche sub-sector indexes will become available, which is already starting with the likes of Metaverse Index (MVI) and Scarala NFT Index (NFTI)
🔮 Crypto indexes will continue to outperform stock indexes because crypto will continue to outperform stocks
🔮 Crypto indexes will be the go to for conservative traditional investors and retirement funds looking for crypto exposure (spoiler, it’s already happening!)
🔮 Widespread adoption of crypto indexes in easy to use apps like Argent will open up crypto index funds to new demographics
🔮 Developments of ‘layer 2’ technologies will reduce already low index transaction fees even more
🔮 The most popular indexes will become blockchain agnostic and be transferable across different blockchains (dHEDGE is already active on Ethereum and its Polygon and Optimism sidechains)
💡 Ideas
💡 Pair with DeFi yield-generating projects to create a crypto version of the traditional bonds and stocks portfolio (could use: Total Crypto Market Cap Token (TCAP) and PoolTogether)
💡 Use ‘blue chip’ indexes as stable base for your crypto portfolio (could use: Bankless BED token (BED))
💡 Help build a crypto index fund by voting on investments and share in the profits (example: Babylon Finance)
💡 Create your own bespoke crypto indexes for personal use or to promote to others (could use: TokenSets)
💡 Use auto-rebalancing protocols to make a long-term ‘set and forget’ portfolio you never have to look at (could use: Balancer)
💡 Invest index tokens into yield generating defi projects to earn extra profit (example: “Scenario 3: Yield Farming” in this article about Total Crypto Market Cap (TCAP))
💡 Invest in an index that covers a sub sector you’re interested in to save time researching individual coins (could use: Metaverse Index (MVI))
☠️ Risks
☠️ Project gets hacked
☠️ Index stops tracking market
☠️ Insufficient liquidity to maintain value
☠️ Underlying collateral loses too much value
☠️ Bugs or other technical failures in code
☠️ Government regulators make new rules (for example, requiring all crypto indexes to be over-collateralised)
☠️ Some underlying index mechanisms could trigger taxable events
😁 Peeps
😁 @MikeTaormina - works at Index Coop and general DeFi preacher
😁 @CryptexFinance - company behind Total Crypto Market Cap Token (TCAP) (they make some fun animations)
😁 @BanklessHQ - tweet about their Bankless BED token (BED) and other crypto opportunities
😁 @bublieth2 - community manager for Index Coop and other Decentralised Autonomous Organisation (DAO) projects
😁 @Scalara_xyz - good insight into philosophy behind crypto index investing
❤️ Fanatics
❤️ “Another benefit of using index funds is that it's time efficient. You can read books or go hiking in nature instead of studying sh\tcoin candlesticks.”*
- kas8, YouTube commenter
❤️ “I would like to add some exposure to the wider crypto market (in particular certain themes) but I don't really want to dedicate time needed to make decisions on individual cryptos. Therefore, I’ve started to look for index tokens that provide either broad market exposure or exposure to specific themes.”
- ozaz1, Reddit comment
❤️ “I'd recommend this, especially the indexes built by Index Coop. The protocol is pretty stable and has a huge amount of value locked in it.”
- crypto-devk, Reddit comment
😠 Grumps
😠 “Hmm I prefer picking the 2 or 3 winners from the top 20 and you're ready! (it's not so difficult) :)”
- NaughtyJackal, YouTube comment
😠 “That could be something for the future. But I think the market is too young and volatile at the moment.”
- TabletopThirteen, Reddit comment
😠 “If we ever got to the point where Vanguard made a crypto index fund, I'd believe they had a real future. So far, no one has managed to convince me they aren't purely speculative.”
- Misnamed, Reddit comment”
🔗 Links**
🔗 📺 Building A Decentralised Blackrock - Bankless and Index Coop discuss indexes and their Bankless BED token (BED)
🔗 📺 Creating A Crypto Index Fund With Set Protocol - watch a developer make their own crypto index fund step by step
🔗 📖 The Little Book of Common Sense Investing - Jack Bogle - about stock index investing but same ideas can be applied to crypto
🔗 📺 Why are people switching to index funds? - great introductory video to stock index investing, which can also apply to crypto
🔗 📱 Reddit user experiment where they invested $1,000 in top 10 cryptos in 2018 - interesting experiment where someone just buys and holds the top cryptos and reports their results
🔗 📜 Tokenized index funds: A blockchain-based concept and a multidisciplinary research framework - research paper exploring crypto (or “tokenized”) index funds as a solution to ongoing problems in the traditional financial space
