The distinction between cryptocurrencies and mainstream finance is slowly fading as more and more people adopt these digital assets. Case in point, in 2021 alone, the combined market cap of all cryptocurrencies more than tripled from January to December. However, cryptocurrencies are highly volatile assets. For that reason, some investors have been looking for alternate vehicles to gain exposure to cryptocurrencies while simultaneously mitigating some of the risks associated with their trade. Two popular options are indexes and ETFs.
Why indexes and ETFs?
A crypto index is a grouping of selected cryptocurrencies that are collectively traded as a unit and are weighted by their market cap. Whenever a coin’s dollar value rises, so does its market cap. If the coin was part of an index, the value of that index would rise. Conversely, when a crypto coin declines in value, its market cap decreases, and so does the value of the index.
A crypto exchange-traded fund (ETF), on the other hand, seeks to track the price of one or more crypto tokens. However, instead of holding the coins themselves, they are backed by derivatives such as crypto futures contracts. Some ETFs also hold stocks of several blockchain-related companies such as miners, manufacturers of mining equipment, or companies with a majority of their holdings in crypto.
Both of these investment vehicles provide their clients with exposure to the crypto market without the risk of the wild volatility it sometimes experiences. However, these are still speculative assets, and as such, they are still risky investments in their own right.
Top crypto indexes and ETFs
- Nasdaq Crypto Index (NCI)
This index was launched in 2021, and by design, it measures the performance of a variety of crypto assets. As of year’s end, its major constituents were Bitcoin which accounts for 61.68%, and Ethereum, which takes up 35.09% of the index. The remainder (less than 4%) is scattered across Litecoin, Chainlink, Uniswap, Bitcoin Cash, Stellar Lumens, and Filecoin. This distribution is revised and rebalanced every quarter. What’s more, investors can track this index using an ETF. The Hashdex Crypto ETF tracks the NCI on the Bermuda stock exchange. Nasdaq also has separate price indexes for Bitcoin (NQBTC) and Ethereum (NQRTH).
- New York Stock Exchange Bitcoin Index (NYXBT)
This index was launched in 2015 with the sole purpose of tracking Bitcoin prices. At its inception, it used 237.03 as its base level. At the time, traders at the exchange were increasingly considering investing in Bitcoin, which prompted the launch of this index. To date, the NYXBT aims to represent one BTC in dollar terms every weekday at 16:00 GMT.
- S&P
S&P Dow Jones has a variety of crypto indexes they launched in 2021. These include:
- The S&P Bitcoin Index (SPBTC) follows the price of the leading cryptocurrency by market cap, Bitcoin. Its base date is set as 1/1/2014, and its base value 100.
- The S&P Ethereum Index (SPETH) tracks the second largest crypto, Ethereum. Its starting date is set as 1/1/2017, and its base value 100.
- S&P Cryptocurrency MegaCap (SPCMC), which closely follows the values of both Bitcoin and Ethereum, weighs them by market cap. For this one, they set the beginning date as 1/1/2017 and the base value as 100.
- ProShares Bitcoin Strategy ETF (BITO)
This was the first-ever cryptocurrency ETF to receive the green flag from the SEC to trade on a major US exchange. Rather than holding actual BTC, this fund holds different futures contracts on Bitcoin. It was launched in October of 2021 and is primarily traded on the NYSE. It has an annual expense ratio of 0.95%, which makes it one of the best ETFs that are tracking BTC futures contracts.
So far, it has slightly underperformed the Bitcoin USD price benchmark. It also underperformed the S&P 500 index year-to-date. However, seeing as the fund is barely a year old and Bitcoin is increasingly gaining traction with more institutional investors buying into it, BITO’s value is well set to increase in the future.
- Global X Blockchain ETF (BKCH)
This is a passively managed fund that invests in blockchain-related companies. These include companies that undertake crypto mining, host centralized exchanges, and the myriad of companies developing blockchain products. Currently, it holds stocks in about 40 of these companies, which puts this ETF’s assets under management at around $86 million.
Below are some of the top holdings in the BKCH portfolio.
- Coinbase Global – renowned crypto exchange platform
- Riot Blockchain Inc – the biggest BTC mining operation in North America
- Marathon Digital – dabbles in Bitcoin mining
- Siren Nasdaq NexGen Economy ETF (BLCN)
This is a passively managed ETF that tracks the Nasdaq blockchain economy index. This index contains shares of several companies that utilize blockchain technology in their operations. The fund contains stock on a total of 63 companies, amounting to $209 million in assets under management. Notably, none of the top 10 holdings account for more than 3% of their total AUM.
Some notable companies included in BLCN’s portfolio are:
- IBM is a famous technology company that is shifting to blockchain solutions for its business clients.
- Baidu Inc is a Chinese technology company that is releasing an array of blockchain products.
- JD.com is another Chinese company involved in e-commerce. It utilizes blockchain technology to track and trace goods for its business clients.
Conclusion
Cryptocurrencies are among the most volatile speculative financial assets. This volatility presents traders with unique profit-making opportunities, but it also carries its fair share of risk. To offset this risk, some investors prefer to invest in ETFs and indices rather than trading the cryptos themselves. To that end, there are several well-performing ETFs and indices in the market today. However, any recommendations contained in this article should not be taken as investment advice, and we are therefore not liable for any losses that may result from investing.
