Index investing is one of the most important financial innovation of 20th century. It allows everyday investors an easy and accessible way to gage the market. In just one simple trade, investors are able to broadly put money to work on a targeted asset class.
Vanguard led the passive revolution showing investors that by just investing in the index, one can by and large beat active manager returns. For the last 10 years, between 75–95% of US stock mutual funds either closed or
failed to beat their benchmark index.
We believe the key characteristics of index investing that lead to mass adoption are:
- Diversification
- Efficiency
- Transparency
Diversification is a key principle and forms the basis of modern portfolio risk management. Moreover diversification lowers the volatility of portfolio when the underlying asset are sufficiently uncorrelated. We have shown this in all our Cryptomover indexes.
By following a rules based approach, investors not only see a level of transparency they otherwise would not see in an active managed fund, they are also able to, in general, lower cost and generate better results. Our index funds charge minimal fees and have no entry and exit fees when paying and receiving in Bitcoin.
The high volatility in cryptocurrency makes it difficult to invest. Furthermore, insider information can exist everywhere. By indexing a crypto portfolio, customers enjoy a more stable portfolio while reducing trading fees. Our index is designed to be as transparent as possible.
Our Indexing Construction ConsiderationsMarket Capitalization Weighted:- Most common practices, ex: S&P500, FTSE, MSCI, DAX, Hang Seng
- Index members are assigned weights based on their individual market value
- Enables investor keeping money on winners based on their value
- Most Optimal for crypto investing
Price Weighted:- This methodology is less common, ex: Dow Jones Industrial Average
- Each index members gets same number of shares
- The number of shares will play key role in portfolio formation
- Not optimal for crypto investing
Equal Weighted:- This methodology is less common
- Each index members gets equal weight in portfolio
- Creates bias against larger cryptocurrency in favor of smaller cryptocurrency
- Not optimal for crypto investing
Fundamental Weighted:- Weights are calculated based on fundamental metrics like earnings/sales etc
- Lack of fundamental data available in Crypto space
- Not optimal for crypto investing
Factor Weighted:- Weights are calculated based on specifics like value, volatility, momentum etc
- Due to high volatility in cryptocurrency might require active management
- Not optimal for crypto investing, might be interesting for active traders
Indexing that works in CryptocurrencyMarket capitalization weighted index design is the most optimal way of investing passively in cryptocurrency space.
Weights: As the coins are in the early innovative stage it is hard to predict success of any individual coin. While assigning the weights the index creator needs to optimize a problem of assigning weight based on present market value but again not giving it too much weight to bias the portfolio.
Liquidity: While deciding the members of an index portfolio one needs to ensure that the member has enough freely trading volumes. It helps in avoiding coins whose price is controlled by fewer owners and can get difficult to liquidate when price spikes or tanks.
Trading History: This is very important factor in designing a passive cryptocurrency portfolio. With the explosion of altcoins and mass adoption of ICOs, protocol tokens can have high price volatility due to the unknown success nature of the project. ICO have high price volatility.
Rebalancing: It is advisable to identify the optimal index rebalancing period by modeling the index returns and costs associated at different rebalancing time frames.
Options of Crypto Index funds in market?To cater the need of the market, Cryptomover introduced a family of index funds. The Cryptomover 10 Index (CM10) is an index with the top 10 most liquid cryptocurrencies weighted (with maximum weight of 25%) by market capitalization. The index covers more than 90% of the overall market cap with a face value 1000.
The index is rebalanced on a monthly basis so that investors can invest passively using CM10. CM10 has an amazing performance over the past 6 months
(Yield = +500%YTD) and it is a great choice for passive customers who want to participate in the volatile cryptocurrency markets. It is also an option for people who are new to the market and seeking for an entrance
Disclaimer: This information on this article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser. No material contained within this article should be construed or relied upon as providing recommendations in relation to any financial product.
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