Index Funds In the World of Cryptocurrencies

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.