Over the last two decades, index and exchange-traded funds (ETFs) have increasingly grown to become the most popular form of investing. ETF and indices provide investors with easier access to a basket of stocks in contrast to investing in individual stocks which increases the risks of loss.
This trend of ETFs and indices have extended to the crypto sector since 2018. Certain crypto products such as Bitwise 10 Large Cap Crypto Index (BITX) track the total return of Ethereum, Bitcoin, Cardano, Litecoin, Solana, Chainlink, Polygon, Uniswap, and Bitcoin Cash.
Accessing top projects through a weighted-average market cap index is a great way to spread risk, and gain exposure to a wider range of assets. But whether such products provide investors with better returns in terms of profit and protection against volatility remains to be seen.
Delphi Digitals, an independent research firm, closely inspected the performance of Bitwise 10 in comparison to the performance of Bitcoin in the December 2018 market bottom. According to the data charts, investing in Bitcoin was more profitable than BITX even though the latter was less volatile.
It is not surprising to see Bitcoin outperform BITX purely on a cost basis, as reported by the research firm. The report made it clear that indices are not meant to outperform individual assets, but rather they are supposed to be low-risk portfolios as compared to holding invidious assets.
During the market sell-off in May, Bitcoin and Bitwise had a minor difference between drawdowns. Bitcoin’s drawdown was at 53%, while Bitwise’s drawdown was at 50%, a trivial difference but it implies that indices offer less downside risk to investors.
Due to the volatility of the crypto market, and the frequent drawdowns, there are not many benefits to investing in bitcoin nor an index
Decentralized finance (Defi) has been the most active crypto sector in 2021. It is for this reason the Defi Pulse Index (DPI) was launched to expand the growth of Defi systems, allocating 14 including Unisawp, SushiSwap, and Compound.
The performance of DPI was compared to Ethereum since the establishment of DPI, the results showed that Ethereum outperformed DPI in terms of profitability and volatility, with 57% drawdown while DPI had 65% drawdown.
Despite the fact that the Defi tokens have higher risk and higher volatility than Ether, it still proves the point that crypto baskets do not mirror the benefits of indices.
