The Tokenization of Index Funds

An indicator of the crypto market coming of age in the emerging wave of massive tokenization

Today’s cryptocurrency market capitalization is standing at over $200 billion — but there is still room for potentially incredible growth. Because, even with strong growth the market capitalization of cryptocurrencies as a whole is still only a fraction of the S&P 500 index, which in turn is a fraction of the global stock market.

There are over two thousand cryptocurrencies to choose from, with more appearing almost daily. With all of these to choose from, it is already difficult to make investment choices, and the degree of difficulty compounds with the continuing release of new tokens. Additionally, the volatility inherent high risk of cryptocurrencies renders the buying, selling, and securely storing a diverse portfolio of digital assets a complex process requiring specialized and often esoteric knowledge.

Divide and conquer

One solution taken right out of the conventional finance market playbook are products using an “index” of multiple, diverse cryptocurrencies based on shared parameters such as their respective market capitalization. Typically referred to as index funds, they put together a portfolio of cryptocurrencies that represent a diverse group of endeavors.

Diversification mitigates the risk of choosing the “wrong one” and at the same time increase the chances of being onboard with a potential winner. Most importantly, it is merely taking well-established portfolio management principles and applying them to build a sustainable portfolio of digital assets with higher risk-adjusted returns. In conventional finance markets, index funds have consistently beaten the average managed funds, and at a much lower cost due to not requiring large management costs. Crypto index funds are applying this same strategy in the hope that it will prove to be just as applicable for digital assets.

Currently, investing directly in index funds require investors to be accredited. As a result, index funds are not a product available to the general public or typical retail investor in the cryptocurrency market.

Tokenize it!

Index tokens represent a new investment paradigm for cryptocurrencies because:

They are index funds that have been “tokenized”

A wider audience with fewer restrictions can purchase index tokens

There are no sizeable minimum investment requirements

There are no broker fees

There are no exit fees (other than transaction fees from the blockchain)

Most cryptocurrency indexes use supply-adjusted market capitalization as the parameter for determining their position in the index. This framework is similar to how, in the conventional financial markets, the Vanguard 500 Index Fund keeps a portfolio based on market capitalization of the top 500 publicly-traded US companies (S&P 500). Some examples of cryptocurrency index tokens are as follows:

Abra — tracks the weighted average of 10 major cryptocurrencies based on their capitalization and rebalances their portfolio monthly

Crypto20 — uses the market capitalization of the top 20 diverse cryptocurrencies rebalancing their portfolio weekly or monthly

108token — Similar to the above, the 108token maintains a portfolio of the top 15 cryptocurrencies with rebalancing their portfolio monthly

CIT (Crypto Index Token) — combines the output of an index of the top 50 cryptos based on market cap with automated trading and mining revenues

Time will tell whether these tokenized index funds follow in the footsteps of their conventional market counterparts and provide consistent returns. As indexes typically beat managed funds, Warren Buffett (while not a crypto enthusiast by any stretch of the imagination) is a major proponent of index funds as a reliable investment.

Index tokens offer broad exposure in the crypto markets as a whole by holding only a single asset and therefore provide a lower barrier of entry into digital assets. Tokenization allows forward-thinking investors to embrace a digital future with an institutional grade and liquid investment.

Are you ready for the million token world? We are. After all, that’s why we built LXDX.