An Index Fund, according to Wikipedia, is a mutual fund or exchange-traded fund designed to follow certain preset rules so that the fund can track a specified basket of underlying investments. In simpler terms for crypto enthusiasts, take an index fund as an asset that is made up of all or a selected group of assets, this explanation is exactly, what I mean by an index fund token. By buying an index fund token you diversify your portfolio thereby reducing the risks.
Index fund tokens have an edge over conventional index funds that involve stocks. This is a result of the fact that index fund tokens can be redeemed for their underlying tokens easily. Coinmarketcap stated that these index fund tokens, In little over a year, have captured hundreds of millions of dollars in value from tens of thousands of users.
Although it may be very tempting to quickly dive into investing in index funds tokens, as a matter of fact, any average stock investor that hears about index fund tokens would quickly put his money into it, it is still very important that you go through these important points before acquiring them.
You need to understand that like any other investment, there are still risks involved in investing in index fund tokens.
Index funds have quite a promising future with traders from all over the world hopping on to the trend and the possibility that more die-hard stock traders will start investing, however, like any investment, index fund tokens are not entirely free from risk.
Index funds tokens weigh each component asset based on market capitalization. The good side of this is that large-cap tokens have more influence on the index price. Basically, a 30% rise in the price of the largest cap token, say Bitcoin, for example, can see the price of the index skyrocket, so also will a fall in the largest cap token can send the entire index plummeting downward. Additionally, the fact that traders lack flexibility poses a risk. Traders can’t react to market changes since they can’t change the composition of underlying assets, hence, they are not even provided with a fighting chance against losses.
You can save a lot of time when you invest in index fund tokens.
At The Coin Times, we always encourage traders to do some research before buying a blockchain asset, be it NFT or the conventional cryptocurrencies, but what if you had $10,000 and wanted to invest in 20 different coins. Doing research for all 20 will be extremely time-consuming, however, by simply investing in the CRYPTO20, you automatically invest in the top 20 best performing cryptocurrencies. This is something stock traders that invest in the S&P 500 would fancy.
You can still equally invest in the TCAP which tracks the entire crypto market cap. Although Bitcoin is responsible for nearly 40% of the entire crypto market cap, this is expected to change with the rise of new cryptocurrencies.
Although not many people have hopped on this trend and it is not high in demand, the future looks very bright for these index fund tokens.