Cryptocurrency Index Fund: how does it work?Endy Callahan
When it comes to investment portfolios, they are formed by the funds traded on cryptocurrency exchanges. That provides a large share of currency market. Such instruments are not used for active intraday trading, they are perfect for long-term investments with minimal participation of the depositor.
Types of cryptocurrency index funds
Selective or complete coverage of the market
Cryptocurrency funds invest the funds exclusively in cutting-edge coins and tokens. Others seek to fully embrace the market. Funds can select tokens in different ways: by liquidity, market capitalization or value.
Control type: manual or automatic
A number of crypto-currency indices allow users to manually select suitable coins, while others have the function of creating an investment basket based on forecasting income and their expectations.
Passive or active control
All index funds can be divided into active and passive. The first type specializes in active crypto trading, the second-on long-term investments in tokens or coins. You may read about the most promising instruments in "Best cryptocurrency index funds" article.
Benefits of using cryptocurrency funds
The advantages of organizations include:
- Easy to invest in digital coins. Active investments in the cryptocurrency market require serious attention. For example, you need to decide where coins will be stored (on the exchange, cold or hot wallet), what operations will be performed with them, etc.
- Low commission. These funds have commissions. However, with the increase in the size of the portfolio and the activity of its use, the amount saved increases.
- Reduce risk. The use of the index Fund allows you to diversify the set of tools: the acquisition of an extensive list of tokens and coins provides an opportunity to get protection from market volatility. When investing in one currency, you may get high profits, as well as lose everything. By using multiple assets, one may reduce the risks.
- The predictability of returns. The purpose of the crypto-currency Fund is to reflect the profitability of the market and redistribute investments in order to increase the profitability of the portfolio. Management is carried out not by one expert, but by special algorithms and a staff of professional traders and investors.
Disadvantages of the cryptocurrency index funds
It is important to understand there are no universal funds, which would perfectly suit anywhere. Thus, the strategy of some is based on obtaining long-term profits, others put liquidity at the forefront. The main disadvantages of index funds:
- Lack of liquidity, which complicates the funds withdrawal.
- Cost of services. Different companies may have a different price tag.
- Entry barrier. Some organizations have it set at $ 200,000, while others have it set at $ 1 million.
The existence of different types of cryptocurrency index funds will allow everyone to choose the best one for their goals. Before choosing an organization, it is important to study it in detail, including customer reviews, managers, etc. If you have the opportunity, be sure to try yourself in this interesting direction of investing in cryptocurrency.
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