Index funds, since their advent, have proven to be better and safer investment options for newbies in the stock market. Tokenization of index funds like ETFs of S&P 500 have further revolutionized the way investments work for people, eliminating the risks of dramatic volatility and price fluctuations of a single stock. Tokenization of a particular asset class means virtually breaking down an asset to form fractional units which represent a percentage of ownership of the asset. The tokenization of index funds introduces a new asset class that represents the whole index, which also provides the liberty to buy low price stocks that mirror it.
Crypto’s investments work more or less like stock markets, and it brought the idea of index funds in crypto. Warren Buffett, one of richest persons on the planet, himself vouches for index funds. He stated,
The trick is not to pick the right company. The trick is to essentially buy all the big companies through the S&P 500 and to do it consistently.
What is an index fund?
An index fund is a list of a number of stocks. The performance of an index fund depends on the average of the weighted sum of each individual stocks, for example, a higher market cap company would naturally have a higher percentage in the fund.
For crypto, an index fund would keep track of the performances of the top (or any) cryptocurrencies. Morgan Creek’s digital index fund contains Bitcoin (72.1%), Ethereum (14.8%), Litecoin (3.3%), EOS (3.2%), Bitcoin Cash (2.5%), Dash (1.0%), Monero (0.9%), Zcash (0.8%), IOTA (0.8%), Ethereum Classic (0.6%). Similarly, other index funds might track other cryptocurrencies. Startups like Iconomi and Crypto20 have even tokenized their index funds to make it easier to invest, simulating an ETF or a mutual fund for the index.
Crypto market has been deep in the bear market for a while now, the volatility has stripped away most of the market cap which has worried the investors. The huge negative returns have pushed the investors to retain their investments for a while and wait for the bull run. Alternatively, if the investments are diversified, the risk automatically drops significantly. If Bitcoin is dropping significantly, Ethereum might not fall, saving the overall percentage return of a diversified investment in Ethereum and Bitcoin.
Following the trends of the market, and taking into account the volatility of the currencies due to low trading volumes, it is pretty hard to pinpoint a single currency that would promise stability or high returns. On the other hand, diversification through an index fund can do the job.
Index funds can either prove to be investment advice for diversification, or they can prove to be great investment vehicles if tokenized. Crypto20, the crypto startup, has tokenized their index which keeps track of the top 20 cryptocurrencies and their token can be found on various crypto exchanges globally. Similarly, Iconomi has made investments easier for new investors by providing different portfolios (or indexes) with graphical representations of its performance to date. Experts have made their own indexes, or portfolios, on the platform. Investors can even make their own portfolios with their choice of currencies by passing through a series of steps. Investors can look at the previous record and performance graphs of these portfolios and choose where to invest. Shown below, is the performance chart of a portfolio named BLS on the Iconomi platform, which contains Ethereum (92%) and Bitcoin (8%).
Morgan Creek, has announced a bet that the crypto’s market would outperform the S&P 500 in the next 10 years. According to them, they are ready to bet $1M, and the bet starts from 1st January 2019 to 2029. Their bet is mostly centered around their own index fund which contains the aforementioned currencies.
Considering the credibility of the company and Anthony Pompliano, as a host of the famous crypto podcast “Off the Chain“, crypto influencer and strong proponent of digital currencies, it might be easy to say that these index funds are actually going to yield huge returns for their investors, also considering the fact how Warren Buffett has vouched for index funds and how they have worked out for the stock market (S&P 500 has an average return rate of 6.73% per year). If not considered credible by any, or “someone who is bullish on the S&P 500, or someone who thinks cryptocurrencies are worthless or overvalued” can always take the bet of $1 million (Tweet to Pomp, he’d respond). Seems like a win-win situation.