Indexing strategies are some of the most popular and most profitable investing strategies in modern financial markets. TradFi’s S&P 500 is a monument to the immense advantages of investing in a diversified portfolio. Even investors from the digital asset market are known to invest in a crypto index fund.
But not everyone likes the prebuilt funds offered by crypto investing funds. Moreover, recent events in the market have proven that crypto investors shouldn't trust funds with their money. So what’s the next best thing? Building your very own custom crypto index fund.
What is a Custom Crypto Index Fund?
A crypto index fund is a portfolio made of several cryptocurrencies with similar or differing characteristics. It can contain digital assets from the same category (e.g. DeFi) or include a diverse set of assets from all crypto sectors and use cases. The tokens held can also vary by market capitalization.
An index fund can be a derivative contract that you hold in the form of a token, which represents the shares of tokens held in the index. But it can also be a normal portfolio that contains each individual cryptocurrency contained within the index.
The first version is available in the form of crypto indexes. Many popular crypto indexes exist, such as:
These index funds track the average performance of the assets that it holds, ensuring proper diversification. You don’t own individual assets but a custom ERC-20 token that represents their collective value. You can compare this to buying SPX shares rather than buying the shares of each top 500 U.S. company individually.
The second version is a custom crypto index fund – practically a normal crypto portfolio that you can create on your own. You analyze the market, create a diverse set of assets that you think will perform well, and create a portfolio that holds those assets. You allocate a portion of your capital to each asset and then rebalance your holdings once the assets drift away from their initial allocation targets.
Benefits of indexing strategies
Indexing strategies have many benefits, one of which is diversification. Indexing the crypto market exposes you to a diverse set of digital assets, more than you would normally buy. A typical portfolio only holds 4-6 assets, but an index fund can hold up to 14 assets if not more. Moreover, the allocations inside an index are typically more balanced than on a regular portfolio.
Managing an index also tends to be easier than managing a portfolio. An index fund is mostly automatically rebalanced and adjusts its weightings and allocations on its own. A regular portfolio requires manual adjustments – unless you apply automated portfolio management.
Are Custom Crypto Index Funds Better than Regular Funds?
The difference between custom crypto index funds and regular funds falls down to customizability. An index fund has preset allocations, assets, and weightings. You can’t change any of these factors. They’re changed and regulated by the entity operating it.
The number of index funds managed by crypto investing firms is also quite low. If you don’t like any of the funds mentioned in the previous section, you won’t have any choice but to create your own custom crypto index fund.
The flipside is that a regular fund requires absolutely zero research and management. Funds are generally operated by highly experienced investing professionals who specialize in market research, technical analysis, and fundamental analysis. They regulate and rebalance the fund on their own, with no need for any action on your part.
This means that a fund saves time and money by:
Readjusting allocations on their own
Covering transaction, trade, and rebalancing costs
Researching the market and individual assets
But as recent events have shown, investing funds might not be that much smarter than retail investors. If you have the skills and knowledge to manage your own fund, you’re better off creating a custom index. Plus, you can always use 3rd-party services like Shrimpy to automate the index and tasks such as allocation adjustments and rebalancing.
How to Build a Custom Crypto Index Fund with Shrimpy
Shrimpy enables you to build a custom crypto index fund in just a few minutes. You start by registering an account at shrimpy.io and inputting your personal information. After creating an account, find the API keys of your exchange and link them to Shrimpy.
Head over to the automation tab after connecting your exchange account and click on the plus sign next to ‘My Automations.’
You will encounter a pop-up window asking you to choose between creating a portfolio and a custom index. Click ‘Create Index’ to continue.
The index tab interface is made of two parts. The section on the left shows the settings for your custom index. You can adjust your index and change the:
Weighting method: adjusts how the portfolio weights its assets
Asset range: adjusts the number of assets held
Min allocation: adjusts the minimal allocation amount
Max allocation: adjusts the maximum allocation amount
By clicking ‘show more index settings’ you can unlock advanced settings.
This unlocks the possibility to pick which assets to include and exclude. You can also add asset types from certain sectors such as NFTs, DeFi, P2E, etc. You can also copy portfolios from investing funds such as Alameda Research and Coinbase Ventures.
Under the advanced index settings you’ll find options for automated portfolio management. Here, you can decide whether you want to rebalance and on which time basis to rebalance. You can also add a stop loss and adjust the slippage rate for your rebalancing trades.
The right side shows the index itself and the assets stored inside it. You can also see their allocations in percentages.
Once you have selected the right settings, you can save the index by clicking the ‘save’ button. If you want to automate your custom index by periodically rebalancing your assets, you can press the ‘start automation’ button.
That’s it! You’ve successfully created your own custom crypto index fund by following these simple steps. Now all you have to do is monitor the performance of your index and manually intervene whenever necessary.
Should You Copy Crypto Investing Funds?
The great thing about Shrimpy’s custom index creation feature is that you can copy the portfolios of successful crypto investing funds. These funds are operated by some of the smartest and most experienced traders in the crypto market. Their expertise allows them to successfully analyze the market and invest in projects that promise long-term returns.
This is a Messari page that shows the portfolio of Alameda Research – one of crypto’s best investing funds. Although their portfolio is mainly red – due to ongoing market conditions – you’ll notice that the fund has actually invested in all the good projects from this bull run. If you lack the FA skills required to identify profitable projects like Alameda can, the second best thing you can do is copy their portfolio by creating a custom index.
But beware, this strategy does not come without risks. The latest events have shown us investing funds and VC firms are not untouchable. Three Arrows Capital, a hedge fund operated by Zhu Su and Kyle Davies, has recently undergone a dramatic downfall amidst Bitcoin’s drop to $20,000.
Rumors indicate that the hedge fund is on the brink of insolvency after a series of unlucky events – mainly the $500m LUNA investment, among other projects. Therefore, I don’t recommend you create a custom index based on an investing fund if you believe that this is a fool-proof strategy that doesn’t warrant proper risk management.
If you want to learn more about crypto investing strategies, I recommend reading the following articles:
Marko is a crypto enthusiast who has been involved in the blockchain industry since 2018. When not charting, tweeting on CT, or researching Solana NFTs, he likes to read about psychology, InfoSec, and geopolitics.