Crypto Asset Indices Are the Latest Evolution in a Promising Future

The first part of 2024 marked a major turning point for American investors in crypto assets, with the second half now shaping up to deliver the first crypto asset indices.

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From Spot ETFs to Indices – A Transformative Year for Crypto Investors

The long-awaited arrival of spot bitcoin ETFs and the approvals for spot ether ETFs have definitively transformed the investment landscape. While bitcoin and ether will undoubtedly benefit from a global demand surge fueled by these ETFs—as we have already seen with bitcoin ETFs—the increasingly mature crypto ecosystem offers investment opportunities far beyond these two largest assets.

Crypto is not just about bitcoin and ether. There are a variety of blockchains and thousands of crypto assets focused on numerous applications: payments, gaming, and decentralized finance, to name a few. As crypto markets evolve, the dominance of the largest assets will change. As crypto assets become more mainstream, other assets will disrupt the market share of bitcoin, ether, and other dominant assets. Investors can position themselves to benefit from the growth of these other crypto assets through an index.

Hashdex launched the world’s first crypto index ETF because we have long believed in the benefits of investing in a diversified basket of crypto assets through regulated ETFs or ETPs, structures that provide easy access and help eliminate operational constraints, including custody and private key management.

For many experienced investors, a basket of crypto assets offers superior diversification characteristics compared to investing in single-asset products. As highlighted in our 2024 Outlook, Brazil is currently the only country where crypto index ETFs surpass single-asset products. However, with evolving regulations and the appetite of professional investors and wealth managers seeking diversified exposure, we anticipate this trend will replicate in Europe and eventually in the United States.

Like traditional markets, crypto indices offer a dynamic insight into market health, using institutional-quality methodology to track performance in specific sectors of the digital asset universe. This offers several compelling advantages for investors:

• Risk Mitigation: Crypto indices provide diversified exposure, spreading risk across multiple assets with distinct functionalities. This is crucial in the volatile and nascent crypto asset market, where individual projects can experience significant price fluctuations.
• Transparency: Renowned indices adhere to rigorous selection criteria, ensuring that included assets are highly liquid, meet market capitalization thresholds, are traded on reputable platforms, and have secure custody solutions. This fosters confidence and attracts institutional investors who prioritize these aspects.
• Standardization: Indices contribute to the overall standardization and maturation of the crypto asset market. By establishing a common benchmark, they simplify the investment process and attract a broader investor base.
• Time-Tested Approach: Diversification strengthens portfolios over time, whether assets are stocks, bonds, or alternative instruments. It’s a proven approach to enhance long-term investment outcomes by reducing idiosyncratic risks and qualitative biases.

Strategic Allocation in Switzerland

Crypto-indexed ETPs are central to Hashdex’s mission. We believe that access to crypto through a regulated structure will allow more investors to benefit from this asset class.

History shows that investors in an institutional-quality index gain exposure to long-term winners in an asset class, and diversification within this universe is a time-tested investment strategy. For example, if you look at the 10 largest Nasdaq 100 stocks in 1999, only Microsoft remains 25 years later. Cryptos will evolve similarly, and dominant assets will change over time. Just as there were many ways to benefit from investing in Internet companies two decades ago (e.g., email platforms, browsers, e-commerce), there are many ways for crypto investors to benefit from diversifying their exposure to this technology (e.g., payments, decentralized applications, gaming).

Our commitment to index investing in this space is why we recently decided to reduce the ongoing fees to 0% (TER) for the Hashdex Nasdaq Crypto Index Europe ETP (HASH) until it reaches $1 billion in assets under management. We firmly believe that a benchmark crypto index like the Nasdaq Crypto Index™ is well-positioned to outperform a single crypto asset investment as the cycle could soon transition from a recovery stage to a bull market, especially given the current price consolidation creating an attractive entry point for a strategic long-term allocation.

A Promising Horizon for Crypto Indices Investors

The crypto asset market remains a complex landscape subject to volatility, and this will not change soon. Identifying individual winners and losers has always been a challenge in traditional markets, and it becomes even more difficult with an emerging asset class like crypto. However, crypto indices offer a standardized approach to capturing overall market performance, serving as a guide in the constantly evolving digital asset landscape.

We believe that indices fundamentally redefine crypto investment strategies, paving the way for a more mature and institutionalized market that will help unlock significant opportunities for long-term investors. We are excited to be at the forefront of this conversation and the development of products worldwide.

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(Featured image by Kanchanara via Unsplash)

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