Investing in and trading crypto assets tend to be associated with unmatched profits, but high risk levels, which prevent many potential investors from starting their journeys. However, what if there was a way to possibly lower that scary risk factor with a technique that index funds, one of the world’s most popular forms of safer investing, use? In this article, we’ll explain how you can give it a try.
Many believe that investing in cryptocurrencies is simply not for them, as it carries risks that can’t be overcome, or are too high. The truth is, cryptos are not that different from conventional stocks, ETFs, or other types of digital assets. Price volatility, what most people claim to be the ultimate drawback of cryptocurrencies, is actually very similar to other kinds of securities. Simply put, the ups and downs are part of every market nowadays, and they are not something to be afraid of in the long run, if one knows what to do.
So what are index funds, or exchange traded funds (ETFs) anyway? The first of these unique types of digital assets was actually started in 1976 by Vanguard Group; the rest is history. Index fund investing has become one of the ultimate forms of hassle-free, long-term investing, that many consider to be synonymous with passive income nowadays. The reason behind this might be surprising, but is quite straightforward: the S&P 500 following index fund continuously outperformed the vast majority of actively managed funds over its lifetime.
How is this possible? It must surely be something sophisticated, or that most of us won’t even understand, right? Well, not quite.
Index funds have one main principle, that is, they follow an index, like the S&P 500, and invest in all the companies that are included in it proportionally to their inclusion. This is normally based on overall market cap, meaning if 1% of the S&P 500 is Apple stock, and 0.3% is Tesla stock, that’s because Apple has three times the market cap of Tesla. Now, the S&P 500 is made up of the 500 biggest market cap U.S. companies, which means that if you invest in an S&P 500 index fund, you’ll get a little piece of every one of those 500 firms. This is, in fact, the core of the technique of index funds: diversification. Now let’s see how you can apply this while investing in cryptocurrencies.
Anyone can start by simply creating their own little index fund when investing in cryptocurrencies. Doing that is fairly simple: take a look at the market cap of the top five, ten, twenty, or more crypto assets, add up their total market cap, and see their proportion to the overall number. Once you have the figures, you could allocate your funds in this order, and by doing so, you’ll diversify like an index fund. Repeat this process each month, and you have your own little dynamic fund.
Let’s see an example (as of May 8th, 2022):
Bitcoin: $655B market cap (655/1,033 x 100=) 63%
Ethereum: $300B market cap (300/1,033 x 100=) 29%
XRP: $27B market cap (27/1,033 x 100=) 2.6%
Solana: $26B market cap (26/1,033 x 100=) 2.5%
Cardano: $25B market cap (25/1,033 x 100=) 2.4%
Investing in anything carries a certain level of risk, and no results are guaranteed, but there are specific techniques that can greatly increase your chances of success. Leveraging the concept of index funds is a strategy that many investors use, and you could also give it a try to see whether it’s something that secures you your fair share from the market.
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