Stocks, bonds, currencies: even if you are not an investor as of yet, those are all terms you are probably familiar with. Indices, though, don't seem to make the cut on those investing 101 concepts. They should – not only are they easy to understand, investing in them is also one of the smartest strategies for people who want to keep things simple and, in most cases, have better profits than most investors. But what is an index and why is it a good idea to invest in index funds?
Let's start with the why.
Indices are basically a list of assets that represent a certain performance in the market. The way to invest in them is through index funds, a simple, time-saving format that often beats the performance of individual assets.
They allow you to ride the trends of the market, rather than the extremes – an index fund gives you exposure to a number of different assets at a lower cost, reducing volatility and increasing the chances of good returns.
The outcome is that you, as an investor, don't have to understand all of the comings and goings of each individual asset throughout the business news.
Rather than making multiple (and more costly) moves on your investments portfolio than would be advisable – and risking losses at an attempt to anticipate or beat the market – indices are a way to stay the course while increasing chances of better returns than the average investor.
So what is an index, exactly?
In a nutshell, an index is a list of assets which, when assembled, represent a predetermined performance in the market.
One of the more famous indices is the S&P 500, which tracks the performance of 500 of the top companies listed on United States stock exchanges. People who want the performance of those 500 companies in their portfolio don't need to buy stocks from every single one of them – that would be a costly and complex way to manage your investments.
Instead, those people can simply invest in the S&P 500 index through and index fund. The prices of the assets, of course, are always rising and falling, which means the price of the index does the same.
Throughout these fluctuations, certain companies that weren't on the index may surpass others who were and the index will automatically replace them – all of this without requiring any action from the individual investors.
That way, people have one single investment to deal with, while still being exposed to a diversified number of assets, with a clear view of what the desired performance is.
But indices are not limited to stocks – far from it. They can be composed of bonds, for instance, or cryptocurrencies. In any of those cases, they aim to snap a photograph of a certain segment of the market so that investors can match that performance and risk in a low-cost, simpler way.
What is an index fund and how does it work?
If the index is a list of assets, an index fund is the instrument through which you can invest in that list. It is basically a single investment that "packages" several assets to perform as the benchmarked index.
In other words, an index fund is like a basket of several different investment assets that compose an index.
When people invest in index funds, they are indirectly investing in all of those assets, but without having to track and manage them themselves – because the fund tracks a specific benchmark, any moves on the assets will be made in search of that performance.
How to understand index funds
Let's imagine you're in the mood for a fruit salad (bear with us).
You know what the desired outcome is; you want to eat a fruit salad. There are two ways of going about that: you can either buy each individual fruit, chop them up and attempt to create a snack that tastes good… Or you can buy a fruit salad that has already been assembled by a vendor who balanced ingredients in order to make it just right.
Both are perfectly acceptable options. They're just two different ways to approach the same problem.
Circling back to the point: when assembling their portfolio, investors can pick the many individual assets in which they wish to put their money, attempting to generate an overall performance of their investments. Or they can invest in an index fund that has already curated those assets and assembled them in order to follow the index.
Naturally, you won't invest in just any index fund – it is important to know its origin in order to trust where you are putting your money (hopefully you won't buy fruit salad from a shady vendor either).
What are the advantages of index funds?
Investing in index funds can bring many advantages to people who want to keep things simple, spend less on fees and have a diversified portfolio with less exposure to risks. Here are some of the main advantages:
- Less volatility: by aggregating a number of assets and diversifying the portfolio, index funds make investors less exposed to volatility, while still tending to perform better than individual assets in the long run. It is a long game, and one that doesn't rely on gambling.
- Time-saving: tracking the market takes a lot of time, knowledge and business acumen – and still there is a big chance of getting it wrong. Index funds do the hard work to make sure your investments are accompanying the market and help you stay disciplined in your choices.
- Lower costs: buying several assets in most cases means paying more fees. Index funds have generally lower fees because they are passively managed – that is, they don't have an active manager and analysis team making trading choices and recommendations, they simply duplicate the index that is being used as a benchmark.
- Curated choices: an index fund, when assembled and managed by an organisation you trust, does the cherry-picking for you and leaves you with a diversified, best-in-class selection.
It is worth noting that there is no guarantee of actually making a profit when investing in indices – as is the case with most investment formats.
However, the track record of index funds shows that they are able to dilute risks while still maintaining better returns than most of the market.
Yeap, you read that right: indices historically give better returns than when people try to buy and sell individual assets. That happens because, most of the time, investors will make more moves than it's advisable trying to anticipate the market. While they may sometimes ride some highs, more often than not they fall through the lows.
All in all, indices tend to be smarter choices that make investments simpler with better returns. If you track most success stories in the long run, you will find that people who matched the benchmark actually outperformed the investors who tried trading on their own.
What is a crypto index?
Everything that is true for indices and index funds as a general rule can be applied to crypto indices and crypto index funds. While most people are accustomed to indices such as the S&P 500, which are based on stocks, cryptocurrencies can also make up their own indices.
The logic is the same: a crypto index is a list of crypto assets – it could be, for example, an index tracking the performance of the top 10 cryptocurrencies on the market. If at some point number 11 surpasses number 10, for instance, the index will automatically adjust to make the substitution.
By that same logic, investing in crypto index funds means investing in a crypto index. The fund assembles a portfolio to match that performance.
Crypto Fear and Greed Index
One of the most famous crypto indices out there nowadays is the Crypto Fear and Greed Index. In very short lines, it measures the predominant sentiment the markets hold over crypto at a given moment.
"One of these things is not like the other", or so the song would say. The Crypto Fear and Greed Index is not like the indices that were explained up until here. It is not a performance-based portfolio that tracks the performance of investment assets, rather an indicator of the market's mood towards crypto as a whole.
In other words:
- If the Crypto Fear and Greed Index is indicating greed as the main sentiment, it usually means the market is heated and prices could be up – possibly not a time to buy and join in a herd effect.
- If, on the other hand, fear is the dominant sentiment, it might be a good moment to take advantage of lower prices and invest in the long term if you believe the crypto market will heat up.
Again, those are not fail-proof indicators. It is a tell of how the market is behaving right now, and could indicate certain behaviours for the near or long future, but there are no guarantees.
Crypto Fear and Greed Index: how does it work?
The logic of the Crypto Fear and Greed Index is quite simple: at any given moment, it will rank the market from 0 to 100, where 0 means fear dominance and 100 means greed dominance.
Six factors are weighed in to make up the Crypto Fear and Greed Index, each with different degrees of participation. They are:
- Dominance: how dominant Bitcoin is at the moment in relation to the rest of the crypto market. The more dominant Bitcoin is, the more it indicates the market is afraid.
- Market momentum: this factor measures the trading volume and momentum of Bitcoin in a 30-day and 90-day average. By the same logic as dominance, a larger market momentum indicates crypto market fear.
- Social media: this is a measure of crypto mentions across several social media platforms. The higher the mentions, the greedier the sentiment.
- Trends: similar to social media, the search volume of terms related to crypto on Google is yet another indicator of how popular crypto is at the moment (a.k.a., how greedy for it the market may be).
- Volatility: this factor compares the oscillations and value decreases of cryptocurrencies in a 30-day and 90-day average. Higher volatility indicates more fear.
- Surveys: not always used in the index, surveys may shift the scales depending on their results.
Lots of investors use the Crypto Fear and Greed Index as an indicator of when to buy or sell cryptocurrencies, but it should not be the only indicator for this decision. The market as a whole – and the crypto market is no exception – always has many moving pieces at once.
So, how to invest in a crypto index?
There are still very limited options for people who want to invest in a crypto index, but that is on the verge of changing.
The crypto universe is in full expansion when it comes to popularity. A global research conducted by Visa in eight countries shows that crypto is moving from a niche asset class for a small community of investors to a broader market increasingly accessible for mainstream and new adopters.
Here's the problem: investing in crypto on your own can still be a little complicated, with all of the difficulties shown above for other types of investment assets.
That's where crypto indices come. There are already some of them out there, like the S&P Cryptocurrency Broad Digital Market Index (which tracks the performance of 250 top cryptocurrencies).
However, it is still not possible to invest in that or most other indices directly through funds. The experience still depends on each investor making their purchases and assembling and managing their portfolio.
If the track record for index funds as an excellent strategy for both individual and institutional investors is anything to go by, crypto indices can make this type of investment smarter, simpler and more accessible.
Phuture crypto index funds
Phuture was created to bring simple crypto exposure to all investors. We are a crypto index platform that simplifies investments through automated themed index funds.
In other words, Phuture aims to help people invest in crypto with the same simplified, easy to understand experience they can get with index funds nowadays.
What are the advantages of investing in crypto index products?
- Ride the trends, not the extremes
Crypto indices soften volatility without giving up on returns. Index funds as a whole tend to perform better than individual assets in the long run.
- Save time
Tracking the market requires time and keen eyes. Phuture index funds are built to follow the market so you can blink again.
- Invest in themes
Phuture indices group the space into themes and curate the best projects so people don't have to. Do you believe there's a big future in a specific market segment? There could be a crypto index for that.
- Automated rebalancing
Our index funds are managed by Phuture's protocol, and always will be. That means that once set, they are unchanged – no one touches the strategy.
- Stay disciplined
Discipline beats timing the market. If you believe the crypto market will grow, then set the strategy, invest and forget.
- Avoid gas fees
Phuture index funds are gas-efficient. That means all of this exposure to crypto assets comes without paying gas for every one of them.
Investing shouldn't be a chore. It should be something exciting that you are doing for your future. And the best way to do that is by keeping things simple and easy to understand.
The future of crypto investments is crypto index products.
Passive investing is a proven strategy to make the most out of your money and get away from the notion that investments are only for the market-savvy.
Phuture's mission is to make that available to everyone. You don't have to know everything about the crypto market. You don't have to have lots of experience. You definitely don't have to be wealthy.
Investing in crypto should be for everyone. Ready to get started?