Over the past two decades, index and exchange-traded funds (ETFs) have become some of the most popular forms of investment because they offer investors a passive way to gain exposure to a basket of stocks rather than investing in stocks. individual, which increases the risk. loss.
Since 2018, this trend has spread to the crypto sector and products such as Bitwise 10 Large Cap Crypto Index (BITX) track the total performance of Bitcoin (BTC), Ether (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin. (LTC), Solana (SOL), Chainlink (LINK), Polygon (MATIC), Stellar (XLM) and Uniswap (UNI).
The ability to access multiple major projects through a weighted average market capitalization index sounds like a great way to spread risk and gain exposure to a broader range of assets, but do these products offer investors a better return? in terms of earnings and protection against volatility? compared to higher-ranking cryptocurrencies?
Hodling versus crypto baskets
Delphi Digital took a closer look at the performance of Bitwise 10 and compared it to the performance of Bitcoin after the December 2018 market bottom. The results show that investing in BTC was a more profitable strategy even though BITX was slightly less volatile.
Bitcoin price vs. Bitwise 10. Source: Delphi Digital
According to the report, “Indices are not meant to outperform individual assets, they are meant to be lower risk portfolios compared to holding an individual asset,” so it is not surprising to see BTC outperform BITX in terms. purely cost.
The index offered less downside risk for investors as the market sold out in May, but the difference was “trivial” as “BTC’s maximum drawdown was 53% and Bitwise’s was 50%.”
In general, the benefits of investing in an index against Bitcoin are not that great because the volatile nature of the cryptocurrency market and frequent large drawdowns often have a greater effect on altcoins.
Delphi Digital said:
“Crypto indices continue to be a work in progress. Choosing assets, allocations, and rebalancing thresholds is a difficult task for an emerging asset class like cryptocurrencies. But as the industry matures, we expect more efficient indices to emerge and gain traction. “
Ethereum also outperforms DeFi baskets
Decentralized finance (DeFi) has been one of the most popular crypto sectors in 2021 led by decentralized exchanges like Uniswap (UNI) and SushiSwap (SUSHI) and lending platforms like AAVE and Compound (COMP).
The DeFi Pulse Index (DPI) aims to take advantage of this rapid growth and the DPI token has assignments to 14 of the major DeFi tokens, including UNI, SUSHI, AAVE, COMP, Maker (MKR), Synthetic (SNX), and Yearn.finance (AND FI).
When comparing the performance of DPI to Ether since the index inception, Ether outperformed significantly in terms of profitability and volatility, as evidenced by a 57% reduction in Ether versus 65% for DPI.
Price of Ether vs. Price of DeFi Pulse Index. Source: Delphi Digital
While this is an “imperfect comparison” according to Delphi Digital due to the fact that “the risk and volatility of DeFi tokens are higher than Ether,” it still highlights the point that the traditional benefits seen in indices are not reflected in the baskets.
Delphi Digital said:
“You could have just edited ETH with HODL to get a higher risk-return profile.”
At the moment, Bitcoin and Ether have proven to be two of the lowest risk cryptocurrency games available compared to crypto index funds that offer exposure to a greater amount of assets.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trade move involves risk, you should do your own research when making a decision.
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