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S&P Dow Jones to launch Crypto Indexes In 2021

S&P Dow Jones to launch Crypto Indexes

March 10, 2021 | 

1128 Views | 

JOHN K MWANIKI | 

Get Into Cryptocurrency Trading Today

In December 2020, S&P Global Inc., a financial data provider, said that they intended to launch crypto indexes in 2021. The product will be launched by the S&P Dow Jones Indices division of S&P Global Inc. together with Lukka. Lukka is a New York-based virtual currency company, and it will provide data for over 550 of the most traded coins. These indexes will join the list of currently available indexes like Bloomberg Galaxy Crypto Index and NASDAQ's crypto indices.

What is S&P and Lukka’s goal?

According to Peter Roffman, who is the S&P's DJI (Dow Jones Indices) global head of innovation and strategy, cryptocurrencies are a rapidly developing asset class, and it is, therefore, time for reliable, independent, and friendly benchmarks. This joint venture aims to make it easier for investors to gain access to this new asset class while reducing the risks involved in trading in this market. 

If Bitcoin prices are anything to go by, the cryptocurrency market is very volatile and speculative and therefore puts any investors at high risk. S&P, therefore, aims to create benchmarking tools on indices such as customized indices.

What are indices?

In investment, it is a well-known fact that it is better to diversify your portfolio than it is to invest in just one asset. This is because you risk losing all your money if your investment loses its value. An index helps you to do that. When you invest in indices, your performance is the measurement of the price performance of a group of shares from an exchange. For example, the S&P 500 tracks how 500 large companies like Apple and Microsoft are performing while NASDAQ 100 tracks the performance of 100 large non-financial companies.

Why trade a cryptocurrency index?

If you are an investor, you may be wondering why you would choose to trade indices rather than the cryptocurrency itself. Besides the fact that you will be diversifying your portfolio, here are four key reasons you should consider trading cryptocurrency indices.

  • It makes for good risk management.

Take the example of Bitcoin. Between March last year and February this year, it traded at $10,000 in February 2020, went lower than $4,000 in March 2020, and in February 2021, it traded as high as $57,000. These price fluctuations may be okay for investors with larger portfolios and higher risk appetites, but not everyone will appreciate such extreme price fluctuations.

If you are looking for steady growth in your investments, investing in indices may be a safer bet for you. There is a higher chance for your bundle of assets to grow consistently, even if some of the individual instruments in the asset bundle experience swings short-term. This is because, despite the performance of the individual instruments, the price of the index reflects the combined performance of all the instruments together.

  • Needs lower capital

Let's say that you are interested in trading Ripple, Bitcoin, Litecoin, and Ethereum. You will need to find the crypto brokers for these assets and pay all the necessary fees such as commissions and the prices of the crypto brokers. Besides, you may have incurred additional costs such as transaction fees, manager fees, and accounting fees, among others. When you choose crypto indexes (or any other indices for that matter), when you buy an index, all the instruments in the index are treated as one asset, meaning you save a lot on management fees and commissions in the long run

  • Saves you time and energy

A lot of research goes into deciding which instrument is better than the other and why. This means that it takes significant time and effort to decide which cryptocurrencies you will be trading. As you are conducting your research, you also need to find out the past performance and compare it to future performance so that you can decide how much you will invest in each cryptocurrency you settle on. This is a lot of time and energy you could be doing something else. By investing in an index, you invest in several currencies all as one bundle asset, saving you time for other things.

  • Indexes perform better than actively managed funds

Indices, according to Investopedia, are a form of passive investing. They are passive because instead of choosing or having a fund manager choose what assets to invest in and then trade them in an index, you invest in several assets together as one package. It is difficult for an individual to consistently pick stocks that beat the market every time. According to CNBC, when comparing the performance of large-cap funds vs the S&P 500, they found that the fund managers outperformed the index for a few years, maybe two, but eventually, the index outperformed the fund managers. While not the same asset class, one can expect similar trends with good crypto indexes in 2021

Tips for picking an index

There are several index providers online, and not all of them are created equally. While investing in indices may be a passive experience in the long run, it does not have to be so when selecting your index package. First, you should pick an index provider that offers you the best crypto indexes in 2021 you can get. Second, pick the index package or packages that you feel best suit your needs. For example, you can choose to pick a package with the top 3 to 5 cryptocurrencies, or you may choose to pick one with more instruments.

Conclusion

Cryptocurrencies are here to stay. It may be harder for an investor to pick individual cryptocurrencies to invest in, and that is where companies like S&P and Lukka come in. By creating crypto indices, they allow for investors with interest in the cryptocurrency asset class but reservations such as the high volatility and the fluctuating prices to safely join the game. More and more investors are finally choosing to invest in cryptocurrencies. In the last few months, big-name companies like Tesla, PayPal, and I&M have shown interest in cryptocurrencies, and some Wall Street companies are doing the same. There is no reason for you not to invest in crypto indexes in 2021

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