Index funds are popular investment options all over the world and have been for many years. They offer a simple way to diversify your investments, and since they are not actively managed, the fee is low. Given the aforementioned it is no surprise that index funds, over time, outperform most actively managed funds and hedge funds. It’s easy to see why this a big thing in the world of investments.

So what about crypto? Would the best way to invest be in a passive index fund?

Well, let’s start by looking at a broad, normal, index fund. Let’s pick S&P 500. It contains 500 big US companies. These companies operates in different sectors, have different earning cycles, win or lose money depending on things like interest rate and currency fluctuation. This means they will not move as one unless we see a systematic crash, or rise for that matter.

If we look at a more narrow index fund like a fund with 100 US tech companies. We will still see some diversification. Some of these companies might be in hardware, some in software, some do VR and others consult for heavy industry. Even though we see these diversifications, assets are most of the time correlating with each other. Meaning we will see higher volatility or risk as some prefer to put it.

Let’s look at what a crypto index fund could look like. Owning 20, 30 or even 50 cryptocurrencies is still a too small number of assets to call it diversification. And if you add in the fact that it’s difficult to find more than 30 that’s likely to be a good investment, you can see we are facing a problem here. Even if, in theory, a lot of the biggest cryptocurrencies are in different sectors such as micropayments, computing power or anonymous transactions they still act as one on the market. Whenever we see big moves everything moves either up or down. Cryptocurrencies alone are not the optimal way to invest.

There is a very easy way around this. Just by adding something more stable and some assets with low correlation we reduce the risk drastically. That’s why most portfolio construction strategies include bonds or some kind of interest-bearing instrument. In the case of crypto, this does not have to be something as boring as a bond. Maybe just an unlisted blockchain tech company. They will not be directly affected if the market moves down.

Lastly, we want to talk about the passive management. We hear a lot about just “hodling” crypto. Buying and holding on these assets no matter what happens. If you really believe in the asset this is a quite good idea. But it’s not the best one. Given the tight correlation between cryptocurrencies and the general trend of volatility, you are left with a great opportunity to “work around” your positions. Scaling down when currencies move up more than normal and accumulating when people sell in a panic. This, of course, would not work if many were to adopt the same strategy. However, considering the mental pressure demanded, i.e. selling something that looks strong and buying when things look weak, most people will fail to adopt such strategy. Instead most will get caught up in all the “FUD” and move away from their buy and hold strategy.

At the Global ICO Fund, you will access a portfolio of cryptocurrencies and ICOs. We make sure this portfolio is balanced and that we always hold some specific assets that will lower the overall risk. Most importantly, we will always try to avoid the psychological traps set by the market.

Do you want to find out more about ICO’s and Crypto? Andreas will be talking at the worlds first online summit, Cryptario this weekend and next week. Check it out!