Blockchain technology and cryptocurrencies have opened up the door of high finance to the masses. Traditionally, financial powerhouses offered index funds, mutual funds, and hedge funds, etc., to only a certain segment of investors. In today’s market, many of these same outfits now offer their clients a cryptocurrency index fund.
However, they are facing stiffening competition from startups who are developing unique crypto index offerings to the retail investor. With the transparency of financial data that is inherent with digital assets, we are seeing a big move towards personal portfolio management.
Some of these new retail index funds require only a small minimum payment, no investor accreditation, and vastly reduced fees. Not only that, there are platforms in operation today where you can even create your own crypto index with a corresponding fund/portfolio that manages your portfolio automatically.
Today we’ll first cover some background information on how a crypto index works. Then, we’ll introduce you to several platforms that enable retail investors to create a do-it-yourself cryptocurrency index fund.
But first: This is not investment advice; this article is for informational purposes only. Please get professional advice and do your own research before investing in cryptocurrencies. We also encourage all readers to visit the HedgeTrade blog for tutorials on trading topics.
Open public blockchains and cryptocurrency exchanges give the average Joe tools that can elevate their status as an investor. Some examples of this phenomenon include:
- Before blockchain tech, only accredited and select retail investors could participate in IPOs. Now we have ICO capabilities which enable many more people to buy in and potentially reap the rewards by investing in new startups.
- Real-time exchange and transaction data on blockchains are available for anyone to utilize for free, whereas with many legacy products, only verified clients can access the data by paying for it.
- We are moving away from the traditional index fund, which has been reserved for accredited and institutional investors, and towards a brighter future that excludes no one.
What is a cryptocurrency index?
A cryptocurrency index is a tool that measures and tracks the changes in cryptocurrency markets. Investors and fund managers can use the index to stay on top of market movements. Additionally, the index can help them target a specific set of assets, such as the top ten or twenty cryptocurrencies by market cap.
A cryptocurrency index gets its data by streaming exchange APIs from multiple crypto exchanges. By using the index data, investors and fund managers can go on to create a portfolio that matches the percentages of market dominance.
For instance, in a top ten crypto index, say bitcoin is at 69% market dominance, Ethereum is at about 8%, and so on. An investor could then create a portfolio to match those numbers and run corresponding trades automatically. So 69% of portfolio assets would be in bitcoin, 8% in ETH, etc.
How index funds address market fluctuations
An index fund is simply the portfolio that is set up in alignment with the index. While the indices themselves update about every second in real-time, the funds are usually rebalanced to reflect the most recent index data in a periodic manner. This can monthly or when a new asset is listed on an exchange. After rebalancing, the trades execute automatically according to the new index data.
In this way, crypto indices help investors move to passively managed portfolios, enabling them to automate their holdings with respect to the movements tracked by the index.
The importance of data
Crypto indices are important for several reasons:
- First, they represent a gateway for the retail investor into the world of self-directed investment funds.
- Secondly, they help investors and traders navigate the sometimes wildly volatile crypto market.
By having (and using) good data, and by building up historical performance records, savvy investors can potentially improve their portfolio performance. At the same time, they can free up time through the automation processes that indices enable.
Cryptocurrency index examples
Before setting up your own crypto index, let’s take a look at some indices in today’s market:
At CryptoIndex.ai, you’ll find their CIX100 index, which they refer to as a “digital expression of the 100 highest performing crypto-assets”.
The CIX100 crypto index includes market news and sentiment data on 100 cryptocurrencies that:
- Have a trade history of 3+ months
- Have been listed on one of the exchanges from which they collect data
- Are not fiat-backed stablecoins, or commodities.
- Are not in the news regarding a scandal or lawsuit.
For any cryptocurrency that does not meet these parameters, it will face delisting from the CIX100. When that happens, all those investors and fund managers will have the delisted coin removed from their portfolios upon the next rebalance period.
The CIX100 integrates with numerous crypto exchanges, including Binanic, Huobi, Bitstamp, and Kraken, etc. Its available to retail investors and is one of the platforms featured below that provides a ‘do it yourself’ option to creating an index portfolio fund.
Bloomberg’s BGCI Index
The Bloomberg Galaxy Crypto Index (BGCI) tracks the largest cryptocurrencies by market cap. For a crypto to be included in the index, it must also meet certain criteria:
- Trades in USD
- Has at least two pricing sources that meet due diligence requirements
- A 30-day median value trading at $2 million (across approved pricing sources)
- Free-floating pricing, meaning not a stablecoin or asset-backed digital asset
- The number of assets in the index is limited to the top 12 by market cap
Additionally, the BGCI index constituents spread across different types of digital assets, including:
- Stores of value
- Privacy coins
- Mediums of exchange
- Smart contract protocols
Unlike the CIX100, which makes its index data transparent to the public, the BGCI index is available only to Bloomberg trading desk clients.
Platforms for retail investors
Now that you’ve got a feel for two different crypto indices, it’s time to take a look at how investors can create their own cryptocurrency index and use it to passively manage their own portfolio. Two such platforms are Shrimpy and Iconomi.
Shrimpy provides a platform for investors who want to “index the market”. Not only that, the user interface is super intuitive with all the right helping tutorials in the right places for a seamless setup.
The way it works is that traders synch their crypto exchange accounts with their Shrimpy.io account. Once the exchanges are linked and you’ve selected your portfolio, Shrimpy will automatically trade to construct that portfolio.
You don’t have to go through the AML/KYC process since the eligible exchanges have already taken care of that. With just a few simple steps, you can access the API keys of the exchanges you use to link them to Shrimpy. Additionally, since your funds stay on the exchanges, Shrimpy does not take ownership or hold those crypto assets.
The steps to building your customized index fund
Step 1 – Sign up with your email and get a verification link to open up the dashboard. Click to the Portfolio tab to “Create New Portfolio”. This will bring you to the “Allocations” screen.
Step 2 – Select what allocations you want in your portfolio. When done, select “Index” and then “Create Index”.
Step 3 – You’ll now see a pop-up that allows you to configure your index. You can determine how you want to set the parameters for:
- Weighting: Choose by market cap or evenly distributed.
- Number of Assets: Choose between 1 and 30.
- Minimum percentage: Choose the minimum % weight for each asset. This minimum asset allocation sets a minimum limit to the percent of a portfolio that can be allocated to a single asset.
- Maximum percentage: Select a percentage that all allocation percentages must stay under, i.e. a 50% maximum bitcoin allocation.
- Exclude: Determine which assets you don’t want in your fund (i.e. stablecoins like Tether, etc.)
- Exchange(s): Choose which exchanges you want to include in your cryptocurrency index. For each exchange, you will need to follow specific steps in order to integrate to that exchange. This includes visiting your dashboard at these exchanges and acquiring the API keys. Shrimpy provides assistance for each exchange for you to easily go through this process.
Step 4 – Once you’ve integrated the exchanges with your Shrimpy account, click “Apply” and save the portfolio.
Additional considerations with Shrimpy
After creating the cryptocurrency index fund (portfolio), traders can then set up the rebalance frequency. Rebalancing can take place anywhere from every hour to as long as once a month and traders choose the frequency. Shrimpy recently added an advanced method of threshold balancing so traders can put in place a deviation threshold to trigger rebalancing when the portfolio misaligns with the selected target allocations.
If you have assets which aren’t on an exchange, you have the option to add them in the “Cold Storage” feature which allows Shrimpy to include those balances into your portfolio for consideration during the calculation of trades.
At any time, you can add additional funds to your account by depositing them to your linked exchange account. Shrimpy will automatically pick up those funds and add them into your portfolio during the next rebalance. That way, your index portfolio always matches your desired allocations.
The exchanges supported by the Shrimpy platform are CoinbasePro, Binance, Bittrex, KuCoin, and Poloniex.
The Iconomi platform enables investors to create and manage their own crypto index funds. They allow investors to choose from 70 cryptocurrencies and start out with a minimum of 100€.
The Iconomi platform enables users on the platform to set up indices and funds that others can participate in. Likewise, you can set up your own fund and earn by inviting others to invest in it.
Investors earn by determining a management fee and when investors sign-on, they earn via these fees. This adds a unique layer of social trading to the do-it-yourself crypto index market. On this platform, you will need to go through the verification process before setting up your fund.
We’ve had a look at two innovative crypto projects that widen the scope of opportunities for retail investors. Many more are sure to hit the crypto airwaves as we are only in the nascent stages of this emerging market.