In traditional markets, Boglenomics has long won the hearts of unsophisticated retail investors. Stay the course, goes the rhetoric started by John Bogle, the founder of Vanguard, and echoed by countless personal finance advisors since.
Bogle says, “Wise investors won’t try to outsmart the market. “They’ll buy index funds for the long term, and they’ll diversify.”
According to Bogle, you’ll never beat the elite hedge fund managers, financial analysts, and quantitative science nerds who spend their life on this stuff. Even most of them struggle to beat the market — what chance do you stand?
Far from cynicism, this advice has motivated and sustained the popularity of the index fund: a cheap, passive investment product that allows investors to invest in the entire market in one fell swoop. That said, here is everything you need to know about creating a diversified crypto portfolio with index funds.
Crypto diversifying risks
In the era of crypto finance, blockchain developers are replicating that strategy for their markets. But one question looms: are the risks really as diversified as they seem?
Some evidence would suggest that they are not. For starters, each company added to Fidelity’s S&P 500 tracker is regulated and must meet specific criteria.
The structure of a decentralized index fund is nothing like that of a conventional index fund. With Vanguard, an index tracker is passive, and even if Vanguard fails, you own the rights to the stocks contained within the fund.
But some crypto index funds sell you cryptocurrency tokens that track the price of other assets — you have no claim to the underlying assets if the synthetic tracker falls apart.
That risk turned into stark reality in 2021 when indexed, one of the leading decentralized index funds, crashed after someone manipulated the software that is used to track crypto prices, plummeting the price of its index tokens.
Shortly after, the project shut down, and many people who thought they were playing it safe with their crypto investments lost money.
Decentralized crypto index funds
Index Cooperative (also known as Index Coop) is one of the most prominent crypto index products. Its indices suck up most of the market for decentralized index funds. Here are some of the noteworthy indices that are definitely worth a mention:
- Defi Pulse Index.
- Metaverse Index.
- Data Economy Index.
- Bankless DeFi Innovation Index.
- ETH 2x Flexible Leverage Index.
- BTC 2x Flexible Leverage Index.
Index Cooperative allows token holders of various crypto indices to redeem the underlying assets that make up its indices. The index automatically rebalances as crypto prices change.
Often, the most significant profits have been made by early investors, not by rising values of existing projects. When a single token can rise by 10,000% within a year, perhaps “slow and steady” is perhaps the wrong attitude to have.
Still, the prospect of decentralized crypto asset management remains compelling for those without the time or knowledge to analyze crypto investments for themselves.
Like their traditional counterparts, crypto index investors are probably in it for the long haul. It could take decades to determine whether their strategy of “slow but steady” managed to beat those who sought to take advantage of the whipsaw ups and downs of the crypto market.