Cryptocurrency index portfolio

A cryptocurrency index portfolio follows a set of rules to decide what and how much of each asset goes into the portfolio.

Prashant Rajkhowa • 15 Sep, 2020
Last updated: 24 Mar, 2022
Cardano coin as a physical coin.

A cryptocurrency index portfolio follows a transparent and rules-based methodology and a passive investing strategy similar to index investing through ETFs in the stock market.

Cryptocurrency index portfolio: Methodology

A cryptocurrency index portfolio follows a rules-based methodology to establish an eligibility criteria and investing strategy. Unlike active portfolio managers that bring a supposed "secret sauce," a cryptocurrency index portfolio is transparent to its users.

In an active portfolio, assets might be selected based on anything from past performance and future potential to hype, speculation or personal favours. A cryptocurrency index portfolio, on the other hand, follows a a set of rules and requirements, with no exceptions.

Some of these set rules might look like:

Be a cryptographically-secure digital asset:

In other words, the cryptocurrency must…well, be a cryptocurrency by the commonly accepted definition. A cryptocurrency index portfolio, therefore would not make a cryptocurrency eligible just because some programmer called Adrian swears that he made a cryptocurrency.... and that it's going to be the next big thing.

Have a freely-set price, not pegged to another asset

So “stable coins” wouldn't be eligible because they are pegged to stable assets like the US Dollar. This A cryptocurrency index portfolio rule might follow the thesis that if someone would like to invest in the US Dollar, that we would invest in the US Dollar and not on a digital asset pegged to the US Dollar.

Be freely tradable and storable

A rule like this would ensure transparency that the token is freely available for sale and therefore the cryptocurrency index portfolio would be able to buy and store them for you.

Trade on more than one of the biggest exchanges

A rule like this would be based on the fact that the large exchanges carry out their own due diligence before listing a cryptocurrency. So the more exchanges that list them, the more inherent trust there is in that cryptocurrency.

Moreover, it might be important that the assets that form the cryptocurrency index portfolio are available on the large Australian exchanges like BTC Markets and Swyftx, thereby ensuring that they follow local regulations.

Has no known security or vulnerability issues:

It’s the responsibility of the cryptocurrency to ensure that they fix security holes. If someone else finds a security hole or a problem, it’s already too late for them.

Cryptocurrency index portfolio: Investing strategy

Similar to traditional index-investing, a cryptocurrency index portfolio might follow the following strategies:

Diversified index-based portfolio

One of the more popular allocation strategies is to define a diversified cryptocurrency index portfolio by the market capitalisation of eligible cryptocurrencies at the time of launch.

For example, let’s say at the time the entire world of cryptocurrencies is worth $100 and all the Bitcoin in the world is worth $60. Therefore, if you have a cryptocurrency index portfolio, you would invest 60 cents into Bitcoin for every $1 invested.

Passive investing

The most popular strategy with index portfolios is the classic adage: It’s not about timing the market, it’s about time in the market.

The followed method is to invest small amounts of money regularly instead of waiting for that one big win. This ensures that users are building wealth constantly regardless of prices.

Long term perspective

Investing in a cryptocurrency index portfolio assumes that you would not obsessively watch the fluctuating prices of cryptocurrencies.

Instead, by targeting a long term wealth-building goal, you are able to build positive habits through sustainable investing.

Invest in a cryptocurrency index portfolio

Currently there are over 11,000 cryptocurrencies that you can invest it. Like with the stock exchange, rather than having to research every stock and trying to figure out how to place them in your portfolio, it’s a lot easier to invest in a range of cryptocurrency assets as part of a cryptocurrency index portfolio.

This makes it easier to continue investing – making it easier to therefore stick with the habit. And by investing in a range of cryptocurrencies, you spread out the risk of putting all your eggs in one – or two – baskets.

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