Decentralized Crypto Index Funds Set to Explode

Index funds that offer exposure to a basket of assets are becoming more popular in the world of cryptocurrencies, especially amongst retail investors and a new breed of decentralized funds is emerging.

An index fund is one that is linked to a portfolio of related assets rather than just tracking one or two. They can offer broader exposure to a specific sector such as decentralized finance (DeFi) or nonfungible tokens (NFTs).

Index fund advantages

The big advantage for investors is that they don’t have to spend the time and effort researching individual assets. Bloomberg has taken a closer look at crypto index funds in a Dec 20 report examining the increasing role that decentralized exchanges and DAOs are playing.

Over the past year, a number of community-based, decentralized index funds such as Index Coop, Indexed Finance, Pie DAO, Basket DAO, and Bankless DAO have emerged on the scene. Instead of being operated by a centralized corporation or asset manager, they are governed by a DAO.

Multi-purpose Index tokens

According to Simon Judd, head of business development at Index Coop, the fund has around $343 million for more than 26,000 investors. “What Index is building is going to work for a long-term hold,” commented one investor that has put around $50,000 into the fund.

Bloomberg Intelligence’s James Seyffart stated that these index DAOs are still relatively small compared to the rest of the crypto ecosystem, with around $2.2 billion invested.

These decentralized index funds issue tokens reflecting the focus of the fund that can then be traded on decentralized exchanges. Index Coop, for example, has 7 different tokens reflecting its indexes such as DeFi, metaverse, and NFTs. They can also be used as collateral in various DeFi protocols to generate additional yields, take out a loan, and even access leveraged trading.

Index Coop’s Mike Taormina, a former JPMorgan employee, commented “Imagine being able to take a share of SPY (SPDR S&P 500 ETF) and redeem it for the underlying S&P 500 companies,”

There is also the premise of governance voting for the index platform, but that is usually limited to the whales that hold the majority of tokens. Another advantage is that anyone can gain exposure to the index unlike centralized funds such as Bloomberg’s own DeFi Index which are usually limited to accredited investors.

Volatile returns

Like everything in crypto, index fund tokens are volatile as they track the wider markets. The DeFi Pulse Index (DPI) for example surged to an all-time high of $656 in May but has retreated 62% to $250 where it currently trades.

Index Coop’s Metaverse Index (MVI) token launched at about $100 in April and surged more than 250% to $357 in November before pulling back to current levels around $224.