Cryptocurrencies are the hottest investment vehicle right now, and their popularity has been increasing exponentially in recent years. In turn, the cryptocurrencies themselves have increased manyfold, and it is no easy feat to track which of these currencies have the potential to spike in value and which do not. For that reason, there is a dire need to diversify one’s investments when it comes to investing in this market. Enter crypto indices and ETFs.
Definition of terms
In crypto, an index is an investment vehicle that is intended to give investors exposure to a diversified basket of these digital assets. By investing in a single index, these investors can hold several of these currencies at once, which serves to reduce their risk exposure.
Traditionally, indices track the performance of a certain market. For instance, the S&P 500 tracks the performance of the 500 largest publicly-traded companies in the US. By buying into this index, you get exposure to the performance of these companies as opposed to buying hundreds of individual shares. This is the same case with crypto indices. These may track the performance of the top 10 coins by market cap, the top 50, or even the whole digital assets market. Unfortunately, there is currently no index that tracks the total crypto market.
A crypto ETF, on the other hand, tracks the price of one or more of these digital assets. In the US, the SEC has been reluctant to approve any ETFs physically backed by cryptocurrencies. Instead, residents can trade ETFs backed by futures of their most popular coins. Additionally, some ETFs invest in stocks of blockchain-based companies, as opposed to tracking the digital assets themselves.
Top crypto indices and ETFs in 2022
Nasdaq Cryptocurrency Index (NCI)
This is an index that was established in 2021 and tracks a variety of digital assets. As of press time, this index tracks 8 USD traded cryptocurrencies. Their weightage leans heavily towards Bitcoin and Ethereum, at 62% and 35%, respectively. The remainder is distributed amongst Litecoin, Chainlink, Uniswap, Bitcoin Cash, Stellar Lumens, and Filecoin.
For a digital asset to make it into this index’s portfolio, it must be traded on at least three major exchanges. The constituents of NCI are also rebalanced after every quarter.
S&P Dow Jones
S&P Dow Jones is home to the aforementioned S&P 500 index and the Dow Jones Industrial Average Index. In 2021, they forayed into crypto with a series of indices. The first was the S&P Bitcoin Index (SPBTC), which was engineered to track the performance of the top crypto by market cap. The second is the S&P Ethereum Index (SPETH), which tracks the number two cryptocurrency in market capitalization. They also launched a third index, the S&P Cryptocurrency MegaCap (SPCMC), which was designed to track the performance of both BTC and ETH.
Bitwise 10 Crypto Index Fund (BITW)
This is an ETF that began as a private placement fund, meaning only hedge funds and accredited investors could join this fund. However, it just as soon went public and is now sold to anyone over the counter. As its nomenclature would suggest, it invests in the top 10 digital currencies by market cap. Since the market cap fluctuates as prices shift, the fund is rebalanced each month to account for these changes.
However, thus far, Bitcoin and Ethereum have managed to hold the top two spots by this measure. Therefore, they make up the bulk of this fund’s portfolio, accounting for 61% and 28% respectively. Notably, its expense ratio is a bit high, coming in at 2.5%.
Proshares Bitcoin Strategy ETF (BITO)
This is a Bitcoin ETF that was launched in 2021. Soon after its launch, it managed to accrue $1 billion in assets under management. The fund is not physically backed by the #1 cryptocurrency. Instead, it is backed by Bitcoin futures, and as such, its performance differs slightly from the spot prices of this coin. However, the fund is allowed to invest in foreign ETFs that are physically backed by BTC. Its expense ratio is a competitive 0.95%, which means $9.5 is deducted as expenses for every $1,000 investment.
Amplify Transformational Data Sharing ETF
This is one of the biggest ETFs in the crypto space, having reported a total AUM of $1.07 billion in February 2022. However, this fund does not directly invest in the digital assets themselves. Instead, it invests in stocks of companies that are providing innovative blockchain solutions or those that are involved in one way or another in the production of these digital assets.
Currently, it holds stocks of around 45 of these companies. Notable mentions include Coinbase Global, which is home to a popular crypto exchange platform, and Nvidia, which is a semiconductor manufacturer that produces mining equipment. There are also several mining companies such as Hut 8 Mining and Hive Blockchain Technologies. Another honorable mention in their portfolio is MicroStrategy, a firm that has the majority of its holdings in Bitcoin.
This fund boasts an expense ratio of only 0.71%, meaning for a $1,000 investment, you would only have to pay $7.10 in expenses. Since some companies in its portfolio hold large amounts of Bitcoin, investing in this fund would give an investor exposure to the price increases of this top crypto coin.
In a nutshell
A crypto index is an investment vehicle that tracks the performance of a basket of digital assets. An ETF, on the other hand, tracks the performance of a variety of cryptocurrencies, but since physically backed ETFs are not yet approved by the SEC, these funds tend to track the futures of these coins instead. However, rather than track these futures, some ETFs will invest in stocks of companies that are involved in blockchain technology or those that have the majority of their holdings in crypto.
Though Indices and ETFs offset the risk of investing in the digital assets themselves, they are still speculative assets. As such, they still carry significant risks. Therefore, any recommendations in this article should not be construed as investment advice.