TCAP: Investing with Crypto Indexing

What Is an Index Fund or Index Token?

For basic informational purposes, let’s start with an overview of index funds, their methodology , and the benefits that make them such a popular investment choice.  Index funds are a type of investment that group together securities, such as stocks and bonds. Cryptocurrency index funds are very similar and share many of the same benefits as traditional index funds. 

They can be considered a type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a specific market benchmark, like the S&P 500. Each index fund contains a representative mix of stocks or bonds within the index it tracks.  Index funds, created in the 1970s, offer investors a way to hold long-term investments with diverse exposure.

The founder of Vanguard, investment mogul John Bogle, championed the everyday investor and made index funds popular. The benefits include lower-risk investments and a lower cost than many other types of investments. Traditional index funds paved the way for cryptocurrency index funds.

Cryptocurrency Index Funds and Tokens

Like traditional index funds, a cryptocurrency index fund is made up of more than one cryptocurrency, and this reduces risk for the investor and allows for built-in diversification within the crypto assets. A cryptocurrency index fund, such as Bitwise 10 Crypto Index Fund (BITW), can perform better than individual cryptocurrencies. 

Crypto index funds are attractive to investors for various reasons — especially those seeking long-term investments.  Crypto investments can be more volatile than stocks and bonds, and opting for cryptocurrency index funds helps mitigate risk. This also requires less research time for an investor, who would typically evaluate past performance and try to predict the future performance of individual crypto assets — which is nearly impossible. 

Additionally, tracking individual stocks involves research and understanding a stock's expense ratio, which is the percentage of the cost of owning any given fund in a year. Comparing this and other factors across an entire portfolio is smart investing, but it can be time-consuming, especially when tracking multiple stocks. Index funds generally have lower expense ratios than mutual funds because of their passive management style. 

For these reasons, index funds have become a mainstay for many investors, helping them diversify portfolios and maintain overall asset management. Many of these same principles and benefits of index funds apply to crypto investing. An index token tracks the performance of a specific market index, such as the market cap of the total cryptocurrency asset class. 

Note: the role of a fund manager can be automated and decentralized for index tokens through the use of oracles.

Crypto: Indexing a New, Mainstream Asset Class

Aside from index funds, mutual funds or ETFs allow investors exposure to a group of investments.

Investors have a variety of options to choose from when designing their portfolio. Traditional options include stocks, bonds, and real estate, but there are also options such as fine art, precious metals, and, perhaps most recently, crypto assets.

Between 2020 and 2021, we have seen a significant number of companies and financial institutions expand their investments into cryptocurrencies. This influx of new players in the crypto field was especially felt across the market during the bull rally in the first and second quarters of 2021. Crypto has positioned itself as a new and innovative asset class for public investors and established companies alike; many of the most notable banks have started allowing their customers to allocate a portion of their portfolio in crypto.

All of these developments signal a new era for retail investors as investment opportunities in crypto become mainstream. This acknowledgement of cryptocurrency as an asset class by financial institutions is an important indicator that the existential risk for crypto assets is largely behind us. In other words, the total market cap of all crypto assets has a value greater than zero.

Furthermore, the rise in value of the Total Cryptocurrency Market Cap from $10 billion USD in early 2014 to $1.5 trillion in July 2021 (a 15,000% increase) outlines the outstanding growth of the crypto asset class.

Given recent institutional adoption and a strong historical trendline, perhaps individual investors can also benefit from a non-zero allocation of cryptocurrencies in their personal portfolio.

Herein lies the value of a crypto index token: It offers investors the ability to hold not just an individual crypto asset, which have their own unique set of risks and rewards, but rather hold the value of the entire asset class. Let’s draw some parallels:

What Are the Benefits of Crypto Index Funds and Crypto Index Tokens?

Traditional index funds offer some benefits to investors compared to individual stock picking. Some of the benefits of index funds also apply to index tokens:

Reduced risk through diversification

• When you buy individual crypto assets, if one declines in price, your savings could take a much bigger hit in a short period. Investing in an index token helps offset the risks that a crypto investor can be subjected to.

Reduced taxes

• Selling and trading crypto assets in the U.S. often triggers taxable events that investors may want to avoid. Investing in a crypto index token dissuades short-term impulsive selloffs and helps crypto investors hold through the years.

Reduced costs

• Finally, researching individual crypto assets often requires significant technical knowledge, and can be a time-consuming process that some investors might prefer to avoid. Since the entire crypto market is accounted for in an index token, investors don't have to worry as much about the technical and fundamental analysis of individual crypto assets.

The tradeoff of crypto index investing is that while it lowers potential risks in the short term, it also lowers potential returns in the short term. It’s not unheard of for investors in crypto assets to see 100-fold returns on their investments. Unfortunately, it’s also not unheard of for investors in crypto assets to see their investment value go to $0, literally overnight in some cases.

Crypto index tokens offer exposure to the long-term upside of crypto assets while reducing the risk of an asset becoming worthless.

TCAP Token by Cryptex

An example of an index token tied to the crypto market is the Total Market Cap Token (TCAP) from Cryptex Finance. TCAP is designed to give investors accurate, real-time price exposure to the total capitalization of the cryptocurrency market via a single, synthetic asset.

In order to achieve this, TCAP aggregates data from a number of oracles to establish a total market cap median value, then bridges the value on-chain through an audited Chainlink smart contract.

There are two ways to get the TCAP token:

1. Buy TCAP on an exchange

2. Mint TCAP directly by depositing collateral such as ether (ETH) or DAI into the Cryptex protocol

Other index token options exist as well, such as Defi Pulse and the Bitwise 10 Large Cap crypto index. However, these projects typically index a subset of the total crypto asset class or are otherwise centrally controlled entities that come with their own set of pros and cons.

How To Get Started With Crypto Investing

Gemini offers an entire world of crypto to explore and enables you to purchase, sell, or store cryptocurrency like Ether (ETH), Bitcoin (BTC), and many more options. You can do all of these things safely and securely on the trusted source for cryptocurrency, Gemini.  Getting started with cryptocurrency investing doesn’t have to be hard, and growing your knowledge base before starting your crypto investing journey is key to being successful. This is true in any asset class — cryptocurrency is no different. 

Signing up for an account with a cryptocurrency exchange provider is the first step. Registration is easy and you’ll need to provide basic information, including your email and personal information. Set up your password and you’ll officially have a crypto account.  Do your research — learn the terminology and differences between the investment options. Gemini has a glossary of cryptocurrency terms to get you started or to use as a reference. 

Consider the amount of money you’re ready to invest to get started. You can begin with a one-time investment or use dollar cost averaging to pace yourself over time and slowly add to your investment. You can even automate it.

Select the cryptocurrency you’d like to invest in or pick a cryptocurrency index fund to broaden your exposure to a variety of crypto assets, diversify, and mitigate risk. Only you can determine your risk tolerance and the amount of investment your budget and personal situation allow for. 

Make your purchase, and you’re officially a crypto investor.

The Bottom Line

Cryptocurrency index funds have many of the same benefits as traditional index funds. Choosing this type of investment can mitigate risk, as it doesn’t rely on the performance of a single crypto asset. 

Ultimately, index tokens offer broad exposure to crypto assets and are an exciting tool for investors to consider when designing their personal portfolio’s asset mix. You don’t need to be an institutional investor to tap into digital currencies such as cryptocurrency index funds. 

Whether you’re new to crypto or a seasoned crypto investor, you can stay up to date with all things crypto, including staking, mining, and crypto ETFs. Get the latest information at Cryptopedia.