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Crypto indices: 5 reasons why you shouldn't miss out on 2020's hottest investment trend

04 Dec, 2020
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As if we needed further proof that the cryptocurrency world and the traditional finance sector are growing ever closer together, crypto indices have arrived on the scene to become a popular investment instrument in 2020. Regular stock indices, such as the S&P 500 or the Dow Jones, have long been a fixture of the stock market and a favourite of long-term investors looking for a low-cost, low-maintenance, 'safe' investment to grow profits slowly over the long term. Now everything old is new again as cryptocurrency assets are also offered as indices.

A traditional index is a collection of stocks or bonds representing multiple companies across specific financial and industrial sectors. For example, the S&P 500 is an index that represents around 500 of the largest US companies, including Apple, Amazon, Walmart, Microsoft and ExxonMobil. The Dow Jones Industrial Average is a smaller sample that measures the return of 30 large US companies.

Crypto indices are structured in much the same way. A crypto index is a consolidation of different digital assets (typically Bitcoin, Ethereum, Ripple, Litecoin and a selection of altcoins) designed to offer a safer investment in the market performance of a group of cryptocurrencies rather than a single coin.

The benefits of crypto index trading include:

1. Providing excellent risk management in a volatile market

"Don't put all your eggs in one basket" the old saying goes. Essentially, it means that relying on just one asset is very risky. The main advantage of an index is mitigating risk. Even if one cryptocurrency in the index goes up or down, the index will reflect the market performance of the combined assets. That means any unexpected dramatic shifts in any single asset won't affect the overall value of the index too much. Do you want to invest in the exciting possibilities of blockchain technology but are worried about the notorious volatility of the crypto market? Then a crypto index might be perfect for you.

It's common trading wisdom that a diversified portfolio is a key to long-term success. Over the years, a bundle of assets will perform better overall, growing as a group even if some instruments swing up or down in the short term.

2. Saving you time and effort

Building a crypto portfolio of individual assets can be a daunting task, even if you're already familiar with the blockchain community. There are just too many digital tokens out there. An investor has to research each cryptocurrency — use cases, background, historical performance, and future predictions — and then decide how much to invest in each asset. An index saves you time, and time saved is money saved (don't worry, indices do that, too!).

3. Offering a low-cost investment option

Many online crypto brokers are jostling to offer lower fees and commissions than their rivals. However, costs are still incurred whenever you buy an individual asset, e.g. a fee for your BTC, then another for your XRP, another fee for your ETH. Since an index is treated as a single instrument for trading, buying into a crypto index is a great way to benefit from several cryptocurrencies while saving plenty on commission.

4. Ready availability online

Several online brokers — like Iconomi, CMC and Bloomberg — have begun to offer crypto indices through their platforms. Notably, platforms specialising in cryptocurrencies, such as Bitpanda, Coinbase and StormGain, offer some of the best crypto-only packages around. This is easy to do on crypto-exclusive platforms, where indices should be listed as an option alongside individual assets.

5. More options than ever

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Crypto index options on the StormGain platform

Choosing to invest in an index doesn't have to be a completely passive experience. Even among individual brokerage platforms, you can make meaningful choices as to how much you want to diversify.

For example, StormGain, which offers some of the best index packages we've seen online, features several curated index options. One offers the top 3 cryptocurrencies (BTC, ETH and XRP), another features 10 cryptocurrencies, including popular altcoins, and a third is somewhere in between. With several options available from a reliable crypto broker, there's no reason not to stake a claim in the crypto index of your choice.

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