5 Costly Mistakes That You Can Avoid By Investing In Crypto Index Funds

While writing his Master’s thesis on the topic of encryption, out of curiosity Kristoffer Koch decided to invest 150 kroner or approximately $27 in Bitcoin. A sum that can hardly buy you a t-shirt today, back then in 2009 was enough to get you 5 000 BTC. With the time passing by, Koch started to forget about his investments, until the day when cryptocurrencies started to become a main topic on the news. Needless to say, after figuring out what his wallet key was, he was pleasantly surprised to find out how wealthy he has become.

Crypto diversification

FOMO – identified for the first time in 1996 by Dr. Dan Herman, the fear of missing out describes the desire to remain connected with the things that other individuals are doing.

Unfortunately, for every Kristoffer Koch type of story, there are hundreds of others that end up with investors losing all of their invested capital due to the extreme volatility and unpredictability of the cryptocurrency markets. The reason for that, most of the time, is the so-called FOMO phenomenon. Although having a much more complex psychological explanation, the Fear-of-Missing-Out basically defines one’s striving to become a part of the mass and not get left behind. FOMO is usually associated with new and increasing addictions. In today’s world, cryptocurrencies are proving to be one of the most popular addictions.

A new asset class – the same old investing principles

The desire to generate wealth overnight makes investors focus on the search of the next cryptocurrency unicorn. This can prove costly if the individual acts rashly and lets himself be guided by emotions, rather than rationality. Although cryptocurrencies have transformed financial markets, they are not writing their own history or being entirely disruptive. The digital asset class remains dependent on basic economic theories and principles such as supply and demand, need of diversification, transparency and stability, etc. Even more – when investing in cryptocurrencies, due to the higher volatility and associated risks, individuals should pay greater attention to the way they manage their portfolio. The history has proved that neglecting basic investment principles may wipe out one’s portfolio in a matter of days.

5 costly mistakes that investors make when choosing ICOs instead of crypto index funds

The power of blockchain nowadays paves the way for companies to come up with innovative solutions, combining the digital coins’ high growth potential and the time-tested stability of more common investment classes. This brings an efficient way to navigate the cryptocurrency markets and helps investors avoid some of the most common mistakes.

1. Fail for the gigantic rewards that ICO projects usually promise.

The problem. In the face of ICOs, nowadays the digital economy offers the easiest way for investors to get funding. All that a project needs to attract investors’ interest is a promising idea, described in a white paper, uploaded on a website. Investors are often lured by the exorbitant profits that projects

That is why, for 2018 alone, there are almost 1 000 ICOs launched already with more than $20 billion raised. But the truth is that most of the ICOs fail. A research by the ICO advisory firm, Satis Group, reveals that just 8% of the ICOs with a market cap of $50m or more, end up being traded on an exchange, while only 3.8% of them are successful and use the raised funds to fulfil the idea behind the project. The disturbing fact is that 81% of all ICOs turn out to be scams which means that at no point had their owners have the intention to deliver what they have promised.

Furthermore, a Boston College study points out that 56% of all projects die within 4 months of their ICOs.The fact that currently there is no regulation that can protect investors from scam token sales, alongside with the desire to find the next BTC tricks investors to put their money in risky projects when they can turn their attention to more secure, yet profitable crypto asset classes.

The solution: Do a careful research and invest in time-tested instruments. Take into account the market indications and choose the coins with the biggest market caps. Although most of the large-cap coins have reached a state of maturity and may not offer you the same growth potential, you will still be able to take advantage of the benefits of cryptocurrency investing, without most of the associated risks. For example, crypto index funds provide the chance to get sector-specific exposure and generate high returns by taking advantage of the industry breakthroughs. Apart from that, by investing in established and time-tested coins, you avoid unproven and highly-risky projects, thus preserving your capital.

2. Put all your eggs in one basket.

The problem. Even if you believed that you have found the next “golden goose” of the cryptocurrency world, do not make the mistake to allocate all your capital to a single asset. Over the past 2 years, cryptocurrencies have proved to be the most volatile asset class. Although some investors focus solely on BTC, thinking that as a leading coin it will provide stability over the long-term, historical data points out that even the benchmark for all digital coins has a 30-day volatility estimate of 5.4%.

The solution. It was way back in 1952 when Harry Markowitz proposed the idea of the Modern Portfolio Theory, highlighting the importance of diversification. Ever since then, the concept of investing in more than one instrument to reduce risk and increase performance has been a mainstay in the world of finance.

Crypto index funds are designed with the idea of combining different cryptocurrencies to increase the performance of the portfolio, while at the same time ensure efficient diversification, minimizing the effect of potential losses on the overall value of the investment. Although most coins are linked to the price of BTC, it is always better to invest in an index fund of multiple cryptocurrencies, so that you can reap the rewards of coin-specific breakthroughs, leading to a better overall performance of the whole portfolio.

3. You are not entirely familiar with the type of the instrument you are investing in.

The problem. Investors often make the mistake to back projects only because of the potential demand for the goods or services that they are expected to provide. The main problem is that there are different types of tokens – utility, security, asset, reward and currency. If the investor does not do his homework, he may end up with tokens that have no investment application or such which price is heavily dependent on the issuer, like the utility or the reward ones. The utility tokens, for example, are also known as “app tokens” and can be used only internally – to buy a product or a service from the issuer on his platform. The case is quite similar with the reward ones as they are more of a gamification element, rather than having any real-life or investment application.

The solution. Investors that struggle to find information about a particular project is better to back off and find better alternatives. Instead of investing in a single project and hoping for it to not get bust within a few months, capitalize on the industry potential by investing in a crypto index fund. The proposed scenario has plenty of advantages – you benefit from a fully-diversified portfolio, ensure more stability and achieve better performance.

4. Neglect the need for transparency for that “disruptive” idea.

The problem. You will find lots of people on social media promoting coins and market moves that will result in exorbitant profits. Each and every investor is tempted by the idea of extraordinary returns. As human beings, it is in our nature to get obsessed with wealth. Such situations make us take rash decisions and suppress our rational thinking. And this is exactly what differentiates the successful from the unsuccessful cryptocurrency investor. The first seeks transparent and trusted projects to invest in, while the latter focuses solely on the potential of high returns. Financial crises and the one from 2008, in particular, have taught us that there is no such thing like extreme returns with low risks. Everything comes at a cost and, in the last few years, ICOs have proven to be very costly.

The solution. Focus on the transparency factor and don’t try to find the next crypto phenomenon as you will most probably end up disappointed and with a solid money loss. Successful investors seek instruments that allow them to keep everything on track and have total control. And total control equals transparency and trust. BitFinding’s crypto index funds, for example, are self-auditable and allow individuals to track the performance of their investments, as well as check the records and find out all information for every single trade that was executed.

5. Choose an investment based on its potential and neglect history.

The problem. Although in the ever-evolving financial world of today, estimations based on historical data may not be perfect, currently we do not have any better alternative. More often than not, historical data can help us derive accurate projections for the future performance of a certain asset. When it comes to ICOs, the lack of historical data leaves investors with one major factor less to take into account when making investment decisions. Combine that with the impulsiveness and the temptation of becoming the next Kristoffer Koch, and there is the perfect recipe for that 81% ICOs running away with investors’ money.

Investing in cryptocurrencies is usually considered a relatively risky decision. Add to that the element of reckless investment behavior driven by the projected rewards, while at the same time neglecting the need of doing a proper initial research, typical for our human nature, and the huge per cent of successful pump-and-dump schemes becomes quite reasonable.

The solution. Do not forget that the only guarantee is the one of the market itself. Find instruments with high market cap and combine a few of them to get larger exposure and reduce the associated risk. Go further and focus on backtesting. Nowadays, this is not that highly-complex, luxurious feature, accessible only to programmers or data scientists that it used to be. There are plenty of user-friendly solutions that help you test how your portfolio would have performed back in time. That way, based on the best-performing scenarios, you can find a ready-made solution or even tailor a personal one that will help you achieve your personal investment goals.

Conclusion

Making your first steps on the cryptocurrency market is a really important process. Tempted by the huge rewards potential, novice investors often pour all their capital on a certain promising idea. The reality is that nowadays investing in ICOs is no different from crowdfunding campaigns – investors are basically donating to a concept and hope for it to become a reality. Furthermore, statistics point out that more often than not, their capital is lost in the moment when it is invested. Allocating all your capital at a scam project and losing it can be very discouraging for younger investors.

On the other hand – crypto index funds are here to stay. Through diversification and individually-tailored risk preferences, they can ensure a steady and guaranteed performance, based on cryptocurrencies with a proven track record. Add to that the fact that there are no investment minimums and you have the perfect instrument for investors with less capital.

Index Funds In the World of Cryptocurrencies

10 years ago Satoshi Nakamoto proposed the idea of the first cryptocurrency. Way back then, a few people would have predicted the industry potential that was up there for the grabs and the way the sector was about to progress in the near future. With the course of time, the whole concept of a peer-to-peer digital version of cash started to evolve steadily. For its relatively young age, the cryptocurrency industry has already managed to leave its mark across the whole financial landscape. As the University of Cambridge’s Global Benchmarking Study points out, it has actively contributed to the establishment of related niche businesses like exchange services, wallet providers, payment-processing and mining companies.  

The fact that the blockchain technology is on the brink of completely transforming not only certain sectors but one of the most complex structures that we know, in the face of financial markets, makes its success truly remarkable. And the best thing is that this is just the start.  

The potential 

The birth of the cryptocurrency niche brought the much-needed revival of the financial industry. At first, investors were rather reserved and kept their expectations low, due to the complexity of the digital assets and the fear of the unexplored. But with the course of time, people began to change the way they perceive cryptocurrencies and realize their benefits. This has resulted in the exact opposite avalanche-effect as the masses started to experience the fear of missing out on the industry potential. The increased interest lead to a significant market expansion that helped the digital asset sector reach new heights. 

Nowadays there are more than 2000 cryptocurrencies and approximately 230 exchanges. One of the key drivers for the wide interest is the remarkable story of Bitcoin’s price increase at the end of 2017 when the market for digital assets skyrocketed and proved that it is capable of generating enormous profits. All this is noticeable from the statistics about the rise in the blockchain wallets throughout the last few years as well. 

Number of blockchain wallet users worldwide. Source: Statista.com

Since Q1, 2017, the number of blockchain wallets has more than doubled. At the end of Q3, 2018, there were more than 28 million digital wallets. Whether as a payment tool, or an investible asset with high-profit potential, cryptocurrencies have given investors something innovative and much needed. 

The problem 

The dominance of blockchain technology has the potential to bring us closer to a truly robust financial system. Nevertheless, when it comes to the purpose of investing, cryptocurrencies are yet to achieve wider adoption. The high volatility, resulting in wild price swings, has scared investors that put primary focus on preserving their wealth and seek ways to multiply it as a secondary goal. For the last year, for example, the price of BTC has surpassed $19 000- twice and the $7 000-mark three times, with current levels falling down below $4 500. As Bloomberg points out, over the past 2 years, cryptocurrencies have recorded bigger price swings than all traditional asset classes, including stocks, bonds, commodities, and FX.  

This makes cryptocurrencies a suitable choice for the more aggressive and adventurous types of investors. The fact that this new exotic asset class provides significant profit opportunities but at the expense of higher risk, limits its popularity among the more conservative investors. In order to attract the interest of market participants with lower risk tolerance, cryptocurrencies should aim to combine the high-profit potential with the ability to preserve their value.  

On the other hand – the common asset classes may offer a good shelter when markets go wild, but at the same time remain unable to achieve the massive growth, typical for the digital currencies. This leaves investors who want to benefit from both worlds with limited opportunities to choose from. At least before… 

The Birth of the Hybrid Instruments 

Today, the gap in the market for financial instruments that combine the advantages of common asset classes and cryptocurrencies is narrowing. The digitalization of the financial sector and the developments in financial engineering has helped in the process of designing new hybrid instruments. Their main goal is to satisfy the segment of investors that is aimed at preserving their wealth, while at the same time benefiting from the digital assets’ volatility. Or in other words – to achieve a better performance with less risk. And the best tool to do so has proved to be index funds. 

The benefits of index funds 

Index funds are one of the most popular investible instruments worldwide. They are renowned for their pretty low operating costs and portfolio turnovers. Index funds are strictly regulated and considered as one of the best passive investing solutions. In fact, even when compared to the most actively managed funds, they tend to provide a better performance.  

It may sound strange that funds that charge management fees and are run by professionals can’t beat the market, but results do confirm that. In the last couple of years, index funds have successfully outperformed most of the actively managed ones. After examining more than 4 500 active and passive U.S. mutual and exchange-traded funds, Morningstar concludes that just 36% of the actively managed ones beat the market in the year up to June 2018. 

The fact that fees for index funds are close to zero, while those of the actively-managed ones can go up to 1%, makes the results of the argument pretty clear. If actively managed funds struggle to keep up with their respective benchmarks, while at the same time keep offering high expense ratios, the only reasonable thing to do is to invest in index funds. Even according to Warren Buffet, index funds will perform well over time, while the actively managed ones will struggle to do so. 

“There is no better way for individuals to invest in the stock market and save for retirement.” 

– Burton Malkiel on investing in index funds
a WSJ article from June 6, 2017

Blockchain – bridging the gaps between the two worlds 

The benefits of the distributed ledger technology are numerous, which is why it has already been adopted in a wide variety of sectors such as healthcare, energy, logistics, law, etc. Because of the fact that the blockchain is capable of self-regulation and self-verification, it allows users to cut down the need of third-party intermediaries. And that is why it is now on the verge of completely transforming financial markets as well. Clearing houses, banks and other financial intermediaries are slowly being phased out. Even stock exchanges and the way they function is transformed. The adoption of blockchain reduces time lags and optimizes the trade processing services, while at the same time makes them cheaper and more efficient. Apart from all that, the distributed ledger technology is capable of minimizing the risk of clients being front-run, thus streamlining the investment process and actively contributing for bringing the much-needed transparency.  

Index funds enter the world of cryptocurrencies 

The distributed ledger technology is slowly becoming the new environment for data storage, transaction verification and trade execution. It also proves itself as a level-playing field and a base for financial markets to step up on and continue their development, strive for transparency and innovate. The adoption of blockchain technology paves the way for the financial engineering to come up with more efficient symbiotic instruments, a combination between the volatile cryptocurrencies and a time-tested asset class like the index funds.  

The need of a hybrid instrument that combines the huge profit potential of the crypto niche with the index funds’ history of a successful storage of value has paved the way for the birth of the cryptocurrency index funds. This new asset class is renowned for its ability to optimize investors’ portfolio performance while at the same time significantly reduce the associated risk.  

  • How does cryptocurrency index funds work? 

The cryptocurrency index funds work on the same principle as the traditional index funds. When investing, individuals are basically purchasing shares of the given crypto index fund. Each fund can offer an exposure to different cryptocurrencies, thus providing a broad range of investment opportunities. Some may hold positions in sector-specific tokens (IoT, distributed computing, energy, etc.), while others can contain the coins with the largest market cap or the most stable price. 

The performance of the cryptocurrencies within the given index fund dictates the changes in the investment’s value. John Bogle considered the father of index funds, points out that these instruments are capable of eliminating the risks of individual stocks, market sectors and the manager selection, thus leaving only the stock market risk. It is quite the same with the cryptocurrency index funds – the investor is protected against price fluctuations of individual cryptocurrencies which ensures an efficient hedge, vulnerable only to the risk of the market.  

  • What are their advantages? 

Cryptocurrency index funds act as a bridge between the digital assets and index funds, combining the positives of both. They have higher return potential than the index funds that can be fulfilled with lower risk when compared to investing in separate cryptocurrencies. Thanks to the diversification process, the investors’ portfolio gets a more efficient hedge against sudden drops in the prices of individual cryptocurrencies.  

Warren Buffet points index funds as a good investment choice because of the chance to invest in all companies, included in the S&P 500, instead of just one or two. Similar to stocks index funds, when the investor purchases shares of a certain cryptocurrency index fund, he buys all instruments included there. That way, the risk of the portfolio’s value being wiped out is minimized, while the profit opportunities are multiplied.  

BitFinding – the answer to cryptocurrency index funds investing 

Although cryptocurrency index funds are renowned for the plethora of advantages that they provide, investors nowadays are often struggling to get started. BitFinding’s platform provides an efficient solution, aimed at satisfying the needs of all types of investors – from novice to experienced ones. Apart from that, it helps tackling the most common issues, by providing: 

  • An easy account set-up for professional investing 

BitFinding’s platform does not require any overcomplicated procedures. The most crucial part is to find a proven and transparent exchange and deposit funds there. Then, in order to take advantage of BitFinding’s cryptocurrency index funds, all the investor has to do is to generate a trading API and add his exchange keys to the platform. The account set up is simplified and the user can start investing quickly, easily and with access to professional tools.  

  • Automated investing with little-to-non human intervention 

Nowadays, due to the fear of missing out (FOMO), some investors have become very cautious to not miss the next Bitcoin. Others, who also want to take advantage of the cryptocurrencies’ growth potential, just don’t have the time needed to track each token on the market, which is why the automated investing became so popular.  

BitFinding simplifies the investing process by providing the user with the opportunity to choose a ready-made solution or construct his own index fund. After that, the platform takes care of the portfolio by automating the investment process and acts in compliance with the investors’ preferences. BitFinding does not hold any funds. Instead, the platform constructs the fund according to the investor’s pre-defined goals and requirements and then trades via his preferred exchange. By being linked with the trading venue, the automated assistant then rebalances the users’ portfolio and captures the profits automatically, without the need for constant monitoring. 

“BitFinding is like having a personal professional fund manager with the difference that it is better, faster and more cost-efficient.”

  • Algorithmic trading for everyone 

Algorithms have established themselves as the common force in the investing world nowadays. Yet, the process of development of a propriety algorithm is expensive and requires a lot of expertise. By setting up an account with BitFinding, users get hands-on access to specially-designed, high-performing algorithms that automate the trades execution process and improve the performance of the investors’ portfolio. BitFinding’s algorithms are backtested with data from the leading cryptocurrency exchanges for a period of more than 5 years. 

  • Zero investment minimums 

Some cryptocurrency index funds require massive initial investment minimums up to $50 000. This usually prices common investors out of the game. The truth is that cryptocurrencies are about to become the next mainstream investment, while index funds are known to be one of the most cost-efficient and affordable tools for the masses. That is why BitFinding does not set limits. Everyone can decide on the sum he wants to invest and what are the most suitable instruments for that. 

  • A wide range of investment solutions 

Novice investors are often confused which cryptocurrencies to include in their index funds. Most of the time they lack experience or are unable to construct their own tailored solution. That is why, the platform offers more than 50 pre-defined index funds, developed in accordance with the most common investment philosophies. From high market caps, through stable-priced coins and sector-specific tokens, to those with the highest growth potential – BitFinding is capable of satisfying the needs of all types of investor profiles. 

When it comes to the more experienced market participants, the truth is that nowadays they are not satisfied with pre-defined solutions. They want to have the chance to construct exotic instruments that can replicate their individual goals and which will allow them to apply their expertise. For all of them, the platform offers the chance to customize an own fund with hand-picked assets and individually-tailored allocation. This makes BitFinding the perfect environment for building propriety automated cryptocurrency index funds. 

  • Advanced backtesting features 

Each index fund’s performance can be tracked back in time with the advanced backtesting features. That way investors can find the perfect allocation to help them achieve their long- and short-term goals. BitFinding’s backtesting features do not require complex programming or in-depth statistical knowledge. Moreover, they are user-friendly and easy-to-navigate even from investors with little-to-none experience. Everyone is free to experiment with different cryptocurrencies and explore various allocation scenarios to come up with the perfect strategy to construct the best-performing index fund and maximize their returns. 

Conclusion 

Today, investors are standing on the borderline between the old-school financial system and the blockchain, as the market landscape of the future. This is the perfect moment in time when we can take what works from the old world and bring it into the new one.  

Index funds have proven to be that universal asset class that can ensure stability, performance and low-cost investing opportunities. If Warren Buffet, John Bogle and Burton Malkiel are all rooting for index funds’ advantages, then no other sign is needed to realize that investing in this type of instruments has a bright future.  

What BitFinding does is taking index funds and enhancing them with the high-growth potential of cryptocurrencies. The result of all this is a form of passive investing that is capable to continue outperforming most forms of active money management. Because cryptocurrency investments are for everyone.