Over the past two decades, index and exchange traded funds (ETF) have become the most popular forms of investment, as they offer investors a passive way to get exposure to a basket of stocks rather than investing in individual stocks, which increases the risk of loss .
Since 2018 this trend has spread to the crypto sector and products like the Bitwise 10 Large Cap Crypto Index (BITX) track the total returns of Bitcoin (BTC), Ether (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin (LTC), Solana (SOL), Chainlink (LINK), Polygon (MATIC), Stellar (XLM) and Uniswap (UNI).
The ability to access multiple top projects through a weighted average market capitalization index sounds like a great way to spread risk and gain exposure to a wider range of assets, but these products offer investors better returns in terms of both profit and loss Protection against volatility? compared to the top cryptocurrencies?
Hodling versus crypto baskets
Delphi Digital took a closer look at the performance of the Bitwise 10 and compared it with the performance of Bitcoin after the market low in December 2018. The results show that investing in BTC was a more profitable strategy, even though BITX was a little less volatile.
According to the report, “Indices are not meant to outperform individual assets, they are intended as portfolios with lower risk compared to holding a single asset,” so it is not surprising that BTC outperforms BITX on a purely cost basis.
While the index offered investors less downside risk as the market sold out in May, the difference was “trivial” as “BTC’s maximum drawdown was 53% and Bitwise’s 50%”.
Overall, the benefits of investing in an index over Bitcoin are not that great, as the volatility of the crypto market and frequent large drawdowns often have a greater impact on altcoins.
Delphi Digital says:
“Crypto indices are still in the works. Selecting assets, allocations, and rebalancing thresholds is a daunting task for an emerging asset class like crypto. But as the industry matures, we expect more efficient indices to emerge and gain importance. “
Ethereum also outperforms DeFi baskets
Decentralized finance (DeFi) was one of the hottest crypto sectors in 2021, led by decentralized exchanges like Uniswap (UNI) and SushiSwap (SUSHI) and lending platforms like AAVE and Compound (COMP).
The DeFi Pulse Index (DPI) aims to capitalize on this rapid growth and the DPI token has assignments to 14 of the top DeFi tokens including UNI, SUSHI, AAVE, COMP, Maker (MKR), Synthetic ( SNX) and Yearn.finance (YFI).
When comparing the performance of DPI with Ether since the inception of the index, Ether came out clearly in terms of profitability and volatility, as shown by a decrease of 57% for Ether versus 65% for DPI.
Although this is an “imperfect comparison” according to Delphi Digital, as “the risk and volatility of DeFi tokens are higher than those of Ether,” it nonetheless underscores the point that the traditional advantages of indices are not replaced by crypto-based ones. Baskets are reflected.
Delphi Digital says:
“You could have just made ETH HODL-ed for a superior risk-return profile.”
Currently, Bitcoin and Ether have proven to be two of the lower risk cryptocurrency games available when compared to crypto index funds, which offer exposure to a larger number of assets.
The views and opinions expressed are those of the author only and do not necessarily reflect the views of Cointelegraph.com. Every step of investing and trading involves risk, so you should do your own research when making a decision.