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Ever since the introduction of Bitcoin in 2009, cryptocurrency has steadily grabbed more and more interest from investors. While it is an incredibly volatile asset class, some investors believe that they can either accurately predict the movement of a specific coin. In reality, the majority of investors cannot accurately say what a cryptocurrency will do, as the asset is meant to be volatile by nature.
However, volatility can be managed with cryptocurrency just as it can be managed with the traditional stock market. One of the best ways to do this if you’re looking to add crypto into your portfolio is to consider investing in a crypto index fund.
What is a Crypto Index Fund?
Learning the basics of a crypto index fund starts with learning what an index fund is in general. An index fund is either a mutual fund or exchange traded fund (ETF) and is a type of portfolio that is structured to match the performance of certain financial indexes. Regardless of the overall state of economy and market, these funds are designed to follow their respective indexes.
Index funds can be comprised of stocks or bonds and are typically restructured on a quarterly basis to add or remove certain assets in the fund.
A crypto index fund is quite similar to a traditional index fund, with the primary difference being the assets included and what the index is meant to mirror the performance of. Given that there is no overarching crypto index, a crypto index fund is simply meant to mirror the performance of the largest cryptocurrencies on the market at a given time.
Crypto funds are often restructured to ensure the top performers are included. This is a unique way to consider diversifying a portfolio to include crypto, but it doesn’t come without its pros and cons:
Pros of a Crypto Index Fund
- Exposure to multiple cryptocurrencies by owning a single token
- Ability to partially own many high-cost coins
- Increased level of diversification for investors
- Ongoing management fees will be minimal to none
- Reduced risk of media hype price movement
Cons of a Crypto Index Fund
- The majority of cryptocurrency assets mirror Bitcoin, meaning reduction of volatility may not be as much as one is looking for
- Very little flexibility with the assets included in the portfolio
- For non-accredited investors, there may not be as many options out there
Benefits to Building Your Own Crypto Fund
It can seem difficult choosing the right cryptocurrency index fund to throw money into. If you can’t settle on a specific fund, you may have decided that you just want to build your own. Assuming this is the path you’ve chosen, there are some unique benefits that you may get:
- Absolutely no management fees
- Freedom to research and add your own investments as you see fit
- Full control over the total cost of your own unique fund
The above benefits can certainly make creating your own fund appealing. If you choose to do so, here are the five steps it will require:
- You need to sign up for an account with a cryptocurrency exchange of your choice
- Choose the types of cryptocurrency coins you want to make up your index fund, which are ideally uncorrelated
- Decide the exact amount you want to invest into each
- Start dollar-cost averaging in
- Repeat
General Tips for Investing in Cryptocurrency
Cryptocurrency is an exciting asset class that changes on a daily basis. Due to this, however, it’s crucial to remember a few long-term general investing tips that can save and make you money:
- Only invest what you are able to lose
- Never buy when you hear about the media hype, as it’s already too late
- Understand that investing is a long-term game
- Research any investment before putting money into it
- Build a strategy for your investment, rather than winging it
- Only put small amounts of money into your portfolio at any given time to reduce the effects of price swings
Investing is always risky, but the above tips can help you save a little money, and maybe potentially even make some.
Build an effective crypto portfolio by diversifying assets
In reality, volatility can never be completely avoided. There will always be risk when investing your money, regardless of the asset. With that said, choosing to put your money into a crypto fund, as opposed to manually picking coins you believe will succeed, can take the effort and complexity out of crypto investing. Remember, as with any investment, to only invest what you are able to lose.
