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What is a crypto index fund, and how to invest in it?

A crypto index fund is a type of investment fund that holds a basket of cryptocurrencies, similar to a traditional stock index fund.

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A crypto index fund is a type of investment fund that holds a basket of cryptocurrencies, similar to a traditional stock index fund.

While the COVID-19 pandemic’s long-term socioeconomic effects are yet to be known, most economies are still dealing with the effects of the global financial crisis. Moreover, millions of households are under or unbanked, and there are additional obstacles faced by people, including slow wage growth, skyrocketing property costs and government debt as more and more individuals are living hand to mouth.

After the global financial crisis of 2008, financial advancements like blockchain-based assets such as Bitcoin (BTC), Ether (ETH) and more cryptocurrencies emerged. However, they have been through roller coaster rides due to extreme volatility and mismanagement of businesses.

In light of this, tokenized securities backed by real-world assets such as real estate, commodities or company shares came into existence. Tokenized securities use blockchain for the issuance, representation and trading of an underlying asset, whereas cryptocurrencies like BTC are digital assets that are not backed by any physical assets and whose value is determined by market demand. On the other hand, tokenized securities derive their value from collateral.

Related: ICOs vs. STOs vs. IPOs in crypto: Key differences explained

This article will discuss cryptocurrency index funds, including how they work, their pros and cons, how to invest in decentralized crypto index tokens, and how they are different from crypto mutual funds and cryptocurrencies.

What is a crypto index fund?

In general, an index fund is a type of investment fund that aims to track the performance of a specific market index. In this context, a crypto index fund is a type of investment vehicle that aims to track the performance of a specific index of cryptocurrencies, such as the top 10 or 20 coins by market capitalization. 

Crypto index funds are similar to traditional index funds, which track the performance of a specific stock market index, such as the S&P 500. The S&P 500 tracks the performance of 500 large, publicly traded companies in the United States. 

Nonetheless, these funds are different from crypto exchange-traded funds (ETFs), which are similar to traditional ETFs in that they track a basket of assets (in this case, cryptocurrencies) and can be traded on a stock exchange. However, while traditional ETFs hold the underlying assets they track, crypto ETFs hold derivatives, such as futures contracts, that track the price of the underlying assets.

Examples of crypto index funds include Grayscale’s Digital Large Cap Fund, which tracks the top 10 cryptocurrencies by market capitalization, and Bitwise’s 10 Crypto Index Fund, which tracks the top 10 coins by market capitalization, weighting them by liquidity.

The main benefit of investing in a crypto index fund is that it provides investors with diversification. By investing in a basket of cryptocurrencies, rather than just one coin, investors are able to spread their risk across multiple assets. This can help to mitigate the volatility that is commonly associated with individual cryptocurrencies.

Another advantage of crypto index funds like Grayscale’s Digital Large Cap Fund is that they are managed by professional fund managers, who are responsible for selecting the coins that make up the index and rebalancing the cryptocurrency portfolio as needed. This can help to reduce the time and effort required for individual investors to research and select individual coins to invest in.

However, since crypto index funds are still a relatively new and rapidly evolving asset class, and the regulatory environment surrounding them is still uncertain in many countries, it is important for investors to thoroughly research their chosen crypto index fund before investing.

How does a crypto index fund work?

A crypto index fund provides investors with a diversified portfolio of cryptocurrencies, which can help mitigate risk because if one cryptocurrency performs poorly, the other cryptocurrencies in the fund may perform well, helping to balance out the overall performance of the fund.

As mentioned, a crypto index fund is typically managed by a professional investment manager who selects a diverse portfolio of cryptocurrencies that aligns with the index or basket being tracked. The fund’s performance is then closely tied to the performance of the underlying index or basket.

Investors can purchase shares in the fund, which gives them exposure to the underlying cryptocurrencies without having to purchase them directly. This can be ideal for investors who are unfamiliar with or uncomfortable purchasing individual cryptocurrencies. Additionally, index funds are generally considered to be a more passive investment strategy, as the fund manager is typically not actively buying and selling the underlying assets.

The fund typically charges a management fee for professional management, and some funds may also have an expense ratio. The management fee is the fee charged by the fund manager to cover the costs of managing the fund, while the expense ratio is a percentage of the fund’s assets that goes to cover other expenses, such as trading and custody fees.

Advantages and disadvantages of crypto index funds

Crypto index funds provide investors with a way to gain exposure to a basket of cryptocurrencies, rather than having to pick and choose individual coins to invest in. Some advantages of cryptocurrency index funds include:

  • Diversification: By investing in a basket of cryptocurrencies, index funds can help spread risk across different coins and projects.
  • Professional management: Index funds are typically managed by experienced professionals who make decisions about what coins to include in the fund and when to rebalance it.
  • Liquidity: Since index funds are traded on exchanges, they can be bought and sold like any other asset.
  • Tax efficiency: Index funds are tax-efficient and may even offer a tax advantage since only one index fund is kept rather than numerous individual equities, especially if they are kept in a taxable account.

However, there are also some disadvantages to consider:

  • Lack of control: Investors in index funds have less control over their investments than those who own individual coins, as the fund’s managers make the decisions about what coins to hold.
  • Higher fees: Index funds often come with higher fees than buying individual coins, as there are costs associated with managing the fund.
  • Barrier to access: Countries without cryptocurrency exchanges, which include many underdeveloped countries, do not permit access to crypto index funds. In addition, an underbanked or poor population cannot invest in index funds, even in nations with cryptocurrency exchanges.
  • Lack of knowledge: Novice investors who lack the knowledge and expertise to pick individual coins may miss out on opportunities to invest in promising projects that are not included in the fund.

How to invest in crypto index funds

Investing in crypto index funds is a way to gain exposure to a diverse range of cryptocurrencies without having to manually select and manage individual assets. Here are the steps to invest in crypto index funds:

Research

Begin by researching the different crypto index funds available. Look for funds that have a good track record and are managed by reputable companies. Check the fund’s historical performance and read reviews from other investors.

Choose a fund

Once you have identified a fund that you are interested in, you will need to open an account with the fund manager. This can typically be done online and may require you to provide some personal information and proof of identity.

Fund your account

After opening an account, a user will need to fund it with cash or cryptocurrency. The minimum investment amount may vary depending on the fund.

Buy shares

Once an account is funded, users can buy shares in the crypto index fund. The price of the shares will be determined by the fund’s net asset value (NAV), which is calculated based on the value of the underlying assets in the fund. An index fund’s NAV moves almost exactly in tandem with the index it follows.

Monitor your investment

After buying shares in the fund, a user will need to monitor their investment and make sure that it is performing as expected. Some funds may allow users to trade shares on a secondary market, while others may require them to hold their shares for a certain period of time.

Track your gains and losses

Finally, users may want to track their gains and losses in the crypto index fund. This can be done by checking the NAV of the fund and comparing it to the price they paid for their shares.

Therefore, a few considerations before investing in crypto index funds like Grayscale’s Digital Large Cap Fund involve the following:

  • Knowledge about Grayscale’s Digital Large Cap Fund and the cryptocurrency market in general: It is vital to understand the risks and potential returns associated with this type of investment.
  • Review the fund’s prospectus and other disclosure documents to understand the fund’s investment strategy, fees and other crucial details.
  • Open an account with a brokerage firm that allows you to invest in Grayscale’s Digital Large Cap Fund. This can typically be done online.
  • Fund your brokerage account with cash or securities. Be sure to check with your brokerage firm to understand its deposit requirements and any fees associated with funding your account.
  • Place an order to purchase shares in Grayscale’s Digital Large Cap Fund, which can typically be done online or over the phone.
  • Monitor your investment and consider a plan for selling or holding your shares in the future.

Along with the above points, it is important to understand that Grayscale’s Digital Large Cap Fund is an investment in a trust that holds a basket of digital assets, and it is not an ETF, so users must be aware of the differences before investing. Here are a few ways in which crypto index funds and crypto ETFs differ:

Crypto Index Funds vs. Crypto ETFs

Related: Cryptocurrency tax guide: A beginner’s guide to filing crypto taxes

Crypto index funds vs. traditional index funds

Crypto index funds and traditional index funds are similar in that they both track a basket of assets and provide diversification for investors. However, there are some key differences between the two types of funds.

For instance, one major difference is the underlying assets that the funds track. Traditional index funds track stocks, bonds and other securities listed on traditional exchanges, while crypto index funds track cryptocurrencies listed on digital asset exchanges.

Another difference is the level of volatility and risk. Cryptocurrencies are known for their high volatility, meaning that their prices can fluctuate significantly in a short period of time. This makes crypto index funds riskier than traditional index funds.

Additionally, traditional index funds are regulated by government bodies, such as the Securities and Exchange Commission in the U.S., whereas crypto index funds are not yet fully regulated, which can pose additional risks for investors.

Crypto Index Funds vs. Traditional Index Funds

Are crypto mutual funds the same as crypto index funds?

Crypto mutual funds and crypto index funds are both types of investment funds that allow investors to gain exposure to the cryptocurrency market, but they have some key differences.

For instance, a crypto mutual fund is a type of investment fund that pools the money of multiple investors to purchase a diversified portfolio of cryptocurrencies. The fund is managed by a professional manager who makes decisions on what cryptocurrencies to buy and sell and when. The fund aims to provide a return on investment that is higher than the overall market.

On the other hand, a crypto index fund is a type of investment fund that tracks the performance of a specific index or benchmark of cryptocurrencies. The fund is passive and aims to replicate the performance of the index or benchmark it tracks, rather than attempting to outperform it. The fund is typically rebalanced periodically to ensure that it continues to match the performance of the specific benchmark.

Are crypto index funds good for investment?

Cryptocurrency index funds can be included in an investment portfolio by individuals who want to gain exposure to a broad range of digital assets, but don’t have the time or expertise to select individual coins. Index funds are also considered a more passive investment strategy, as they are designed to track the performance of a particular market or index, rather than trying to beat it. 

However, the cryptocurrency market is highly volatile, and there is a high risk of losing money. There are several risks associated with investing in crypto index funds, including lack of transparency and liquidity, risk of hacking, and limited regulatory oversight. 

For instance, some crypto index funds may not disclose their holdings, making it difficult for investors to assess the risk of their investments, while others may be difficult to buy or sell, leading to illiquidity. In addition, cryptocurrency exchanges and wallets are vulnerable to theft and hacking, which can result in the loss of funds. Moreover, the cryptocurrency market is largely unregulated, which increases the risk of fraud and other financial crimes.

The future of crypto index funds

Crypto index funds are likely to see continued growth as more investors become interested in the cryptocurrency market and as the industry matures. Moreover, the increasing institutional interest in the crypto market is expected to drive the development of more sophisticated and diverse index funds and increased regulation in this area. 

Additionally, the use of index funds could help to increase transparency and liquidity in the cryptocurrency market, making it more accessible to a wider range of investors. Overall, the future of crypto index funds depends upon the maturity of the cryptocurrency industry and, thereby, inclusion of such funds in an investment portfolio.

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Walmart Hits Record High After Earnings Beat, Despite Soft Guidance, Warning About “Choiceful” Consumers Spending Less

Walmart Hits Record High After Earnings Beat, Despite Soft Guidance, Warning About "Choiceful" Consumers Spending Less

Walmart shares hit…

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Walmart Hits Record High After Earnings Beat, Despite Soft Guidance, Warning About "Choiceful" Consumers Spending Less

Walmart shares hit a new all-time high after the largest bricks and mortar retailer reported earnings that beat expectations despite providing guidance that was marginally softer, as choosy shoppers nevertheless kept buying in its stores.

Here is what the company report for the final quarter of 2023:

  • Adjusted EPS $1.80 (excluding impact, net of tax, from a net gain of $0.23 on equity and other investments) vs. $1.71 y/y, beating estimate of $1.65
  • Revenue $173.39 billion, +5.7% y/y, beating estimate $170.66 billion
    • Total US comparable sales ex-gas +3.9%, estimate +3.2%
    • Walmart-only US stores comparable sales ex-gas +4%, estimate +3.12%
    • Sam's Club US comparable sales ex-gas +3.1%, estimate +2.99%
  • Change in US E-Commerce sales +17%, beating estimate +15.5%
  • Adjusted operating income $7.25 billion, beating estimate $6.79 billion

Of the metrics reported, however, the most important one is that Walmart’s same-store sales (ex fuel), rose 4% YoY for US stores (of which net sales was 3.% and eCommerce added 17%). Wall Street was expecting 3.1% so the number was clearly a beat and was driven by "strength in grocery, health and wellness, offset by softness in general merchandise", and was the result of higher transactions (+4.3%) offsetting average ticket prices, which dropped 0.3% YoY. Still, the number is a far cry from the 8.3% comp sales a year ago.

In keeping with the noted softness in general merchandise, the world’s largest retailer delivered softer guidance for the current fiscal year, as it expects consumers to be selective in their spending:

  • For full-year 2025, WMT sees
    • Net sales +3% to +4%, slower than growth from the prior year, and adjusted EPS $6.70 to $7.12, slightly disappointing vs the median consensus estimate of $7.09
    • Capital expenditures approximately 3.0% to 3.5% of net sales
  • For Q1, 2025, WMT sees sees adjusted EPS $1.48 to $1.56.

Discussing the quarter, CEO Doug McMillan said that "we crossed $100 billion in eCommerce sales and drove share gains as our customer experience metrics improved, evenduring our highest volume days leading up to the holidays"

Commenting on customer "selectivity", CFO John Rainey said that “they are being choiceful" as consumers continue to spend less per trip but have been shopping frequently, adding that the company expects some resilience to continue for the rest of the year.

There was more good news: Walmart is gaining share in nearly every category, according to Rainey, with e-commerce among the factors driving growth as the company trims losses associated with handling online orders. Furthermore, while deflation is still a possibility, the company expects it to be less likely based on what it observed during the latest quarter.

That said, while grabbing more spending with low-priced groceries and other basics, Walmart has been cautious in recent months about the health of the consumer amid persistent inflation and higher interest rates. As noted above, US consumers have been buying cheaper products and seeking value, as they pull back from discretionary products like general merchandise. That has resulted in softer sales for some retailers, including Target Corp. and Home Depot Inc. Other big-box retailers are set to report their quarterly earnings in the coming weeks.

As Bloomberg notes, the recent moderation in inflation is another challenge for Walmart and other retail operators that have passed down price increases to consumers over the past few years. This has contributed to higher dollar sales for companies, followed by an uptick in revenue during the pandemic when people bought more groceries and home goods. Such increases are slowing overall, though inflation remains stubborn in some areas like groceries and shelter.

Similar to all of its major competitors, Walmart has been beefing up automation in warehouses and stores in recent years, while remodeling locations to make them more modern. Pickup and delivery businesses continue to expand, driving share gains among upper-income households and fueling growth of the Walmart+ membership program.

Separately, Walmart said it agreed to buy smart-TV maker Vizio Holding Corp. for about $2.3 billion. The deal would accelerate the retailer’s advertising business, called Walmart Connect, and help Walmart and its advertisers engage more with customers. Walmart has been expanding Walmart Connect and other nonretail businesses that have faster growth and better margins. The deal announcement confirmed a Wall Street Journal report from last week. Vizio shares soared 15% in Tuesday premarket trading.

As for WMT, the Bentonville, after the stock gained 16% over the past year, it jumped another 5.7% on Tuesday rising to a new all time high as investors were clearly satisfied with what they saw.

Full investor presentation below (pdf link)

Tyler Durden Tue, 02/20/2024 - 10:17

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Estimating US Recession Risk Using Economic Data For States

What are the choices for monitoring and estimating recession risk? Slightly lower than the number of stars in the universe. Ok, I’m exaggerating, but…

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What are the choices for monitoring and estimating recession risk? Slightly lower than the number of stars in the universe. Ok, I’m exaggerating, but not much. The good news: the search for robust, relatively reliable indicators narrows the field dramatically. But there’s always more to learn, in part because the supply of data sets is vast, increasingly so. Which brings me to another indicator that looks promising: state coincident indexes.

Every state’s economy is, in some degree, unique, although the gravitational pull of the national economy casts a long shadow. Tracking each state economy separately, and then aggregating the results, provides a different spin on the US business cycle compared with national indicators. Think of it as a bottom-up model vs. the standard top-down approach via US retail sales, industrial production, etc.

Conveniently, the Philly Fed publishes monthly coincident indicators for each state. Aggregating the 50 signals into a composite index provides a somewhat different view of the US business cycle vs. traditional top-down metrics. There are several ways to process the numbers – my preference, shown in the chart below, is a 3-month-change model. If a state’s 3-month change is negative (positive), the signal is negative (positive). Summing the negatives and positives provides a national profile. The current reading is 0.48 — in other words, 48% of the states are posting negative 3-month changes for their respective coincident indicator. As shown below, the composite reading maps fairly closely with NBER-defined downturns, and so the current signal is issuing a warning, albeit a warning that has yet to provide what might be thought of as passing the point of no return. But it’s close.

The readings vary from 0 (no negative 3-month changes) to 1.0 (all 50 states are reporting negative 3-month changes). A quick review of the historical record suggests that the US is on the verge of slipping into recession.

But before we ring the alarm bell, there are some caveats to consider. First, a similarly high reading 20-plus years ago turned out to be a false signal. The next couple of months will likely determine if a repeat performance is brewing, or not.

Second, no one indicator is flawless, as we’ve learned over the last couple of years – especially in recent history, when pandemic-related events have created no shortage of macro surprises.

Another reason to reserve judgment, at least for now: a range of other business cycle indicators tracked in The US Business Cycle Risk Report (a sister publication of CapitalSpectator.com) continue to show a clear growth bias. But as reported in this week’s issue, there are some nascent signs of softer economic activity and so it’s possible that the coincident state indicators are an early warning that the tide is shifting.

The most reliable methodology for estimating recession risk in real time is building an ensemble model that combines various modeling applications that are complimentary. Although any one model will excel at a given point in time, quite often the best-performing indicator changes through time. To minimize the risk that’s inherent in any one signal, The US Business Cycle Risk Report crunches the numbers on multiple indicators, which has proven to be close to optimal for balancing the need for timely signals that minimize false signaling.

Despite the caveats, the coincident state model adds another dimension to the mix and provides some complimentary input to The US Business Cycle Risk Report’s existing suite of indicators. Accordingly, I’ll be adding the composite state coincident data to the newsletter’s weekly updates.

The next batch of coincident state updates for January is scheduled for later this month. Meantime, I’ll be carefully reviewing the incoming data for fresh clues that support or reject the suggestion that trouble’s brewing via the state coincident indicators.


How is recession risk evolving? Monitor the outlook with a subscription to:
The US Business Cycle Risk Report


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Air Canada Says Freight Demand Beginning To Improve

Air Canada Says Freight Demand Beginning To Improve

By Eric Kulisch of FreightWaves

Air Canada expects the slow recovery in cargo volume…

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Air Canada Says Freight Demand Beginning To Improve

By Eric Kulisch of FreightWaves

Air Canada expects the slow recovery in cargo volume that began in the fourth quarter to quicken in 2024, aided by the addition of two more freighter aircraft, but doesn’t anticipate gains in pricing power, Mark Galardo, executive vice president for network planning and revenue management, said Friday.

The cargo division within Air Canada (TSX: AC) currently operates five converted and two factory-built Boeing 767-300 freighters. It is scheduled this year to receive two cargo jets converted from passenger configuration, but delivery of a third plane has been delayed until 2025 because of lingering supply chain and labor challenges faced by aerospace manufacturing companies, said Galardo on the company’s fourth-quarter earnings call.

The company nonetheless expects cargo capacity to increase 6% to 8% this year with the addition of the two freighters and more passenger aircraft that also carry cargo. The converted freighters are retired Air Canada passenger jets that are being retrofitted by aftermarket aerospace firms for carrying large containers in the main cabin area.

Cargo revenue fell 15% year over year in the fourth quarter to US$181 million on soft demand and lower yields, Air Canada reported. The three-month period represented an improvement from prior months as the downturn in freight transportation that gripped the air logistics industry for nearly 18 months began to ease. Full-year cargo revenue fell 27% to $253.7 million.

At the end of 2023, Canada’s flag carrier operated four more 767 freighters than at the end of 2022. Freighters were reintroduced at the company two years ago. Increased freighter operations to Central and South America and to Europe partially offset the year-over-year decline. Air Canada also enhanced its interline cooperation with Emirates SkyCargo, which allows customers to book interline cargo shipments through the Emirates SkyCargo flights, including between the Americas and Southeast Asia and India, through key European hubs. 

“We had a bit of a slower start in January, but as we look into February and beyond we’re starting to see volumes pick up and yields also pick up. And our 2024 assumption on cargo is more volume-driven than yield-driven. So we’re starting to see some positive indicators,” Galardo told analysts. “We’ve taken all the necessary measures to position ourselves to take advantage of the recovery. This includes strategically adjusting our freighter plan so that we can keep focusing on proven overall results for the long term and on maximizing cargo network value for our entire fleet.”

Air Canada in late September canceled an order with Boeing for two 777-200 production freighters because of the reversal in airfreight demand following the pandemic-fueled boom for air transport that lasted until early 2022. It then ordered 18 787-10 Dreamliners, including two that were swapped for the 777 freighters. Management, at the time, reiterated its commitment to operating freighters, saying that it needed to take a more measured approach to fleet expenditures and keep more cash available for other purposes.

Air Canada expects another leap in cargo business when the 787-10s begin entering the fleet in late 2025. But ongoing safety and manufacturing problems at Boeing could upset the delivery schedule. Production flaws have previously prevented customers from receiving Dreamliners on time.

“As we eventually receive the larger 787-10s, taking advantage of global cargo flows through our hubs will become an important lever for further diversifying revenue streams,” said Galardo. 

Air Canada performed well on cargo against its peers during the fourth quarter. Delta Air Lines and American Airlines saw cargo revenue slide 24% during the period, and Korean Air said its cargo sales fell nearly 29%. The percentage change in revenue at Air Canada was on par with the 14.8% decline at United Airlines. On a total dollar basis, Air Canada cargo revenue was less than that of the other carriers. The three major U.S. airlines are much larger than Air Canada but also do not have a dedicated cargo fleet. Delta was the closest to Air Canada at $188 million in revenue.

Overall, Air Canada generated $3.9 billion in revenue, up 11% from the prior year, during the final three months of 2023. But earnings before interest, taxes, depreciation and amortization of $386.4 million came in below expectations. On an adjusted basis, the company lost $32.6 million versus a loss of $162 million the year before. Higher wages, maintenance costs and flying volumes pushed expenses up 8%. Inflation is expected to increase costs another 4.5% to 5% in 2024, offset in part by productivity gains.

Tyler Durden Tue, 02/20/2024 - 06:30

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