Some investors prefer what is seen as lower risk crypto index funds, but the truth is that by HODLing Bitcoin and Ethereum you will probably enjoy better returns.
Over the past two decades, index and exchange-traded funds (ETFs) have become some of the most popular forms of investing because they offer investors a passive way to gain exposure to a basket of stocks, as opposed to investing in individual stocks, which increases risk of loss.
This approach has been growing in the crypto system, with products like the Bitwise 10 Large Cap Crypto Index (BITX). The ability to access multiple top projects through one weighted average market cap index sounds like a great way to spread out risk and gain exposure to a wider range of assets, but do they offer you a better return in terms of profit and protection against volatility when compared with investing in the leading cryptocurrencies?
The results of a Delphi Digital research project into this topic showed that investing in Bitcoin was a more profitable strategy, even though BITX was slightly less volatile. This isn’t a surprise, because according to the report, “indices aren’t meant to outperform individual assets, they are meant to be lower-risk portfolios compared to holding an individual asset.”
The BITX index did offer less downside risk to investors as the market sold-off in May but the difference was “trivial” as “BTC’s max drawdown was 53% and Bitwise’s was 50%.”
Overall, the benefits of investing in an index versus Bitcoin or Ethereum are not that great because the volatile nature of the crypto market and frequent large drawdowns often have a larger effect on altcoins.
Delphi Digital said: ”Crypto indices continue to be a work-in-progress. Choosing assets, allocations, and re-balancing thresholds is a difficult task for an emerging asset class like crypto. But as the industry matures, we expect more efficient indices to pop up and gain traction.”