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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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Are You The Collateral Damage Of Central Planners?

Are You The Collateral Damage Of Central Planners?

Authored by MN Gordon via EconomicPrism.com,

The Conference Board – a nonprofit think…

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Are You The Collateral Damage Of Central Planners?

Authored by MN Gordon via EconomicPrism.com,

The Conference Board – a nonprofit think tank that delivers cutting edge research – recently published its latest Leading Economic Index (LEI) for the United States.  The findings were a giant bummer.  In December, the LEI dropped for the tenth consecutive month.

The LEI, if you’re unfamiliar with it, consolidates various measures of economic activity, including credit, interest rate spreads, consumer expectations, building permits, new orders of goods and materials, and several other items, to assess which way the economic winds are blowing.  Over the past six months, the LEI has fallen by 4.2 percent.  This is the fastest six-month decline since the great coronavirus panic.

This week, the Bureau of Economic Analysis provided its advance estimate of Q4 U.S. gross domestic product (GDP).  For the final quarter of 2022, real GDP increased at an annual rate of 2.9 percent.

How could it be that GDP is expanding while the LEI is contracting?

The most probable answer we can think of is the massive expansion of consumer debt.  For example, credit card balances hit a new record of $866 billion during Q3 2022.  That marks a year-over-year increase of 19 percent.

Americans are borrowing from their future to make ends meet today.  This may give GDP the appearance that it’s expanding.  But, in reality, the GDP expansion is merely a measurement of the rate that consumers are going broke.

The fact is the U.S. economy is traversing headlong into a recession at the worst possible time.  We expect things will get especially ugly, as consumers are operating in a world of chaos

World of Chaos

In a centrally planned economy, decisions are not made between individuals through free market mechanisms.  Instead, they’re made by politicians and bureaucrats through policies of mass market intervention.

The elites pass down their edicts.  Thou shall not use gas burning stoves, for example.  Or though shall burn corn in their gas tank.

The central planners, many of which are unelected administrators, force the decrees upon the populace.  Programs, forms, penalties, and whatever else are imposed.  Pounds of flesh must be exacted at every turn.

The real tragedy, however, the very thing that makes ultra-mega governments possible, is the monopoly on the control and issuance of money that’s granted to central bankers.  Without the Federal Reserve, the central bank to the U.S. government, and its seemingly endless supply of fake money, it would be impossible for Washington to cast its wide nets across the entire planet.

Feeding the Leviathan is only a small part of what the Fed does.  Through its control of the money supply the Fed causes a world of chaos to storm through the economy and financial markets.  When the money supply is inflated, a false demand is signaled.  Businesses and individuals change their behavior to exploit the apparent demand.

Then, when the money supply is contracted, and the rug is yanked out from under the false demand, disaster strikes.  Businesses go bankrupts.  People lose their jobs.  Stocks and real estate prices crash.

In short, the Fed’s money games make it exceedingly impossible for a wage earner to save, invest, and build real wealth.  The uncertainty this provokes turns regular wage earners into speculators and gamblers.  Here’s why…

Uncertainty and Instability

In a centrally planned economy, like America and most countries today, where people are compelled by legal tender laws to use fiat money, people must work, save, and invest with the recognition that the government will continue to arbitrarily change the rules.  The Fed may command ultra-low interest rates one year.  The next year it’s jacking them up by hundreds of basis points.

We know that central planners change course at whim and often for political reasons.  Where did the most campaign contributions come from?  Their decisions can be downright suicidal.

The 1930 Smoot-Hawley tariffs, for instance, turned a routine recession into the Great Depression.  Likewise, Fed tightening of monetary policy in 1987 drove interest rates up and triggered a massive stock market crash.

The great consumer price inflation of 2021 into the present marked the highest rate of inflation in 40 years.  And now it’s providing an instructive lesson to individuals and organizations about the uncertainty and instability that’s inherent to centrally planned economies.

As the Fed hikes rates and tightens its balance sheet in the face of a recession, many overleveraged businesses and individuals find themselves wholly unprepared for the central planner’s new set of rules.  Decisions were made in 2021 under a framework that’s radically different today.

Consider real estate investors.  Over the last decade, as interest rates were artificially suppressed by the Fed, their businesses flourished.  They could easily borrow money to buy properties to refurbish and resell at a profit.

But then raging consumer price inflation, which was manufactured by the Fed in the first place, became politically indefensible.  So, the Fed had to move to rein it in by restricting the money supply.  This pushed interest rates relatively higher and undermined the real estate market.

Investors who had planned for mortgage rates at 3 percent are being absolutely destroyed by mortgage rates at 6 percent.  Suddenly their investments don’t pencil out.  Real estate agents and mortgage brokers may find the years ahead to be extraordinarily challenging.

Are You the Collateral Damage of Central Planners?

When the Fed inflates the money supply it also inflates asset prices, including stocks, bonds, and real estate.  When it then yanks the rug, and contracts the money supply, businesses and investors face big losses.  And employees become collateral damage.

According to tech job tracker layoffs.fyi, there have been more than 200,000 technology jobs lost since the start of last year.  What’s more, in 2023 alone, not even one month into the New Year, technology companies have laid off over 67,000 employees.  What’s going on?

Right now, technology companies like Meta, Google, Microsoft, and Amazon, are discovering that the world they knew and loved over the last decade no longer exists.  As the supply of money has tightened, and the flow of speculative money into technology stocks has dried up, these companies have learned they have far too many employees who produce far too little value.

Coding senseless applications and widgets may be a viable job when there’s a seemingly endless supply of the Fed’s cheap credit being pumped into financial markets.  Take the money away, however, and those jobs are incapable of standing on their own two feet.

The point is in a centrally planned economy people are continually misled about how they should go about working, saving, and investing for the future.

Just asked the former code cruncher who was RIFed after two decades of Googling all day.  They thought they were set for life.

Instead, whether they know it or not, they’re the collateral damage of central planners.  Are you the collateral damage of central planners too?

*  *  *

You may not know it.  But you could unwittingly be wiped out be the schemes and designs of central planners.  One way to avoid becoming their collateral damage is to significantly increase your wealth.  The decks stacked against you.  But it can be done.  If you’re interested in learning how, take a look at my Financial First Aid Kit.  Inside, you’ll find everything you need to know to prosper and protect your privacy as the global economy slips into a worldwide depression.

Tyler Durden Sat, 01/28/2023 - 17:30

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Schedule for Week of January 29, 2023

The key reports scheduled for this week are the January employment report and November Case-Shiller house prices.Other key indicators include January ISM manufacturing and services surveys, and January vehicle sales.The FOMC meets this week, and the FO…

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The key reports scheduled for this week are the January employment report and November Case-Shiller house prices.

Other key indicators include January ISM manufacturing and services surveys, and January vehicle sales.

The FOMC meets this week, and the FOMC is expected to announce a 25 bp hike in the Fed Funds rate.

----- Monday, January 30th -----

10:30 AM: Dallas Fed Survey of Manufacturing Activity for January. This is the last of the regional Fed manufacturing surveys for January.

----- Tuesday, January 31st -----

9:00 AM: FHFA House Price Index for November. This was originally a GSE only repeat sales, however there is also an expanded index.

9:00 AM ET: S&P/Case-Shiller House Price Index for November.

This graph shows the Year over year change in the nominal seasonally adjusted National Index, Composite 10 and Composite 20 indexes through the most recent report (the Composite 20 was started in January 2000).

The consensus is for a 6.9% year-over-year increase in the Comp 20 index.

9:45 AM: Chicago Purchasing Managers Index for January. The consensus is for a reading of 44.9, down from 45.1 in December.

10:00 AM: The Q4 Housing Vacancies and Homeownership report from the Census Bureau.

----- Wednesday, February 1st -----

7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:15 AM: The ADP Employment Report for January. This report is for private payrolls only (no government). The consensus is for 170,000 payroll jobs added in January, down from 235,000 added in December.

10:00 AM: Construction Spending for December. The consensus is for a 0.1% decrease in construction spending.

Job Openings and Labor Turnover Survey10:00 AM ET: Job Openings and Labor Turnover Survey for December from the BLS.

This graph shows job openings (black line), hires (purple), Layoff, Discharges and other (red column), and Quits (light blue column) from the JOLTS.

Job openings decreased in November to 10.458 million from 10.512 million in October

10:00 AM: ISM Manufacturing Index for January. The consensus is for the ISM to be at 48.0, down from 48.4 in December.

2:00 PM: FOMC Meeting Announcement. The FOMC is expected to announce a 25 bp hike in the Fed Funds rate.

2:30 PM: Fed Chair Jerome Powell holds a press briefing following the FOMC announcement.

Vehicle SalesAll day: Light vehicle sales for January. The consensus is for light vehicle sales to be 14.3 million SAAR in January, up from 13.3 million in December (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the December sales rate.

----- Thursday, February 2nd -----

8:30 AM: The initial weekly unemployment claims report will be released.  The consensus is for 200 thousand initial claims, up from 186 thousand last week.
----- Friday, February 3rd -----

Employment Recessions, Scariest Job Chart8:30 AM: Employment Report for December.   The consensus is for 185,000 jobs added, and for the unemployment rate to increase to 3.6%.

There were 223,000 jobs added in December, and the unemployment rate was at 3.5%.

This graph shows the job losses from the start of the employment recession, in percentage terms.

The pandemic employment recession was by far the worst recession since WWII in percentage terms. However, as of August 2022, the total number of jobs had returned and are now 1.24 million above pre-pandemic levels.

10:00 AM: ISM Manufacturing Index for January. The consensus is for the ISM to be at 50.3, up from 49.6 in December.

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US gov’t $1.5T debt interest will be equal 3X Bitcoin market cap in 2023

The U.S. will pay over $1 trillion in debt interest next year, the equivalent of three or more Bitcoin market caps at current prices.

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The U.S. will pay over $1 trillion in debt interest next year, the equivalent of three or more Bitcoin market caps at current prices.

Commentators believe that Bitcoin (BTC) bulls do not need to wait long for the United States to start printing money again.

The latest analysis of U.S. macroeconomic data has led one market strategist to predict quantitative tightening (QT) ending to avoid a “catastrophic debt crisis.”

Analyst: Fed will have “no choice” with rate cuts

The U.S. Federal Reserve continues to remove liquidity from the financial system to fight inflation, reversing years of COVID-19-era money printing.

While interest rate hikes look set to continue declining in scope, some now believe that the Fed will soon have only one option — to halt the process altogether.

“Why the Fed will have no choice but to cut or risk a catastrophic debt crisis,” Sven Henrich, founder of NorthmanTrader, summarized on Jan. 27.

“Higher for longer is a fantasy not rooted in math reality.”

Henrich uploaded a chart showing interest payments on current U.S. government expenditure, now hurtling toward $1 trillion a year.

A dizzying number, the interest comes from U.S. government debt being over $31 trillion, with the Fed printing trillions of dollars since March 2020. Since then, interest payments have increased by 42%, Henrich noted.

The phenomenon has not gone unnoticed elsewhere in crypto circles. Popular Twitter account Wall Street Silver compared the interest payments as a portion of U.S. tax revenue.

“US paid $853 Billion in Interest for $31 Trillion Debt in 2022; More than Defense Budget in 2023. If the Fed keeps rates at these levels (or higher) we will be at $1.2 trillion to $1.5 trillion in interest paid on the debt,” it wrote.

“The US govt collects about $4.9 trillion in taxes.”
Interest rates on U.S. government debt chart (screenshot). Source: Wall Street Silver/ Twitter

Such a scenario might be music to the ears of those with significant Bitcoin exposure. Periods of “easy” liquidity have corresponded with increased appetite for risk assets across the mainstream investment world.

The Fed’s unwinding of that policy accompanied Bitcoin’s 2022 bear market, and a “pivot” in interest rate hikes is thus seen by many as the first sign of the “good” times returning.

Crypto pain before pleasure?

Not everyone, however, agrees that the impact on risk assets, including crypto, will be all-out positive prior to that.

Related: Bitcoin ‘so bullish’ at $23K as analyst reveals new BTC price metrics

As Cointelegraph reported, ex-BitMEX CEO Arthur Hayes believes that chaos will come first, tanking Bitcoin and altcoins to new lows before any sort of long-term renaissance kicks in.

If the Fed faces a complete lack of options to avoid a meltdown, Hayes believes that the damage will have already been done before QT gives way to quantitative easing.

“This scenario is less ideal because it would mean that everyone who is buying risky assets now would be in store for massive drawdowns in performance. 2023 could be just as bad as 2022 until the Fed pivots,” he wrote in a blog post this month.

The views, thoughts and opinions expressed here are the authors’ alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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