How Fast Will Index Funds and ETFs Expand in Crypto?

January 5, 2022

One of the most important values that fund managers provide investors is the ability to achieve diversified exposure to a market by investing, on behalf of their investors, into diversified portfolios of investments.

In fact, before 1976, there wasn’t an index fund for retail investors to net the average gain of the stock market. So, if an investor simply wanted diversified exposure to the market, they almost always had to pay a high-fee active fund manager — who, most of the time, either merely achieved performance similar to the overall market’s average performance or even… underperformed the market!

Most fund managers don’t beat the market after trading costs and fees due to the nature of market averages.

It was true before, and today this phenomenon continues. Most active fund managers underperform the S&P500 index.

In 1976 Retail investors were however offered an alternative to actively-managed funds when John Bogle created the Vanguard 500 Index Fund, which raised a paltry $11 million in its first underwriting. Today, that fund manages $557 billion in assets. What drove its popularity was simple: index fund investing provided the lowest fees and outperformed most active managers over time. Index investing’s trading and fund management fee savings compound overtime to the great benefit of investors.

We see the same dynamics playing out in the crypto market today — Where index-based investing remains in its infancy.

Revolutionary crypto-currencies are launching with a velocity that’s spectacular by even the traditional stock market’s previous bull-market standards. As shown in the chart below, the number of cryptocurrencies has ballooned to over 7,500 from just above 500 in 2014.

Source: Statista

Many new cryptocurrencies have become multi-billion dollar platforms in short order, representing compelling new technologies that will dramatically reshape finance.

Hence while owning Bitcoin may have previously been a decent proxy for going long the crypto-market, to simply trade Bitcoin or Ethereum is to completely miss the majority of the crypto market opportunity today. The universe of exciting cryptocurrencies beyond Bitcoin is expanding every day and this trend won’t stop.

As shown below by the Bitcoin Dominance Index, Bitcoin now represents less than 40% of the crypto market’s total market cap. Given the launching and expansion of new cryptocurrencies, it seems likely that the long-term trend is for Bitcoin is to become a smaller and smaller percentage of the total market over time as more and more new cryptocurrencies launch, even if the price of Bitcoin still rises in the long-term.

This means that for investors to go long the crypto market and capture the growth of the entire market, they will increasingly need to own a diversified portfolio of cryptocurrencies that represents the total market’s expansion. You can’t just own Bitcoin and hope to capture the entire crypto market’s growth trajectory. Just like you can’t only own Apple and hope to capture all of the stock market’s tech growth.

However, investors who want to invest in entire crypto-market trends today face similar challenges that were found in traditional finance back in the 1970s before Vanguard launched their index funds:

  1. It’s time-intensive and costly to pick individual winners and losers in a crypto market evolving at warp speed
  2. Active fund managers can come with high costs and on average, after trading and other costs many if not most active managers in crypto could underperform the market average, in a similar fashion as has been seen in the traditional markets over decades.
  3. Buying a diverse portfolio of tokens one by one is complicated and expensive from a trading and gas fee perspective. Especially when it comes time to rebalance your portfolio periodically.

So, considering hindsight, shouldn’t investors have an easy and low-cost way to invest in diversified index exposure for the crypto market?

So we’re building Durafi 🙂

  • Want to capture the performance of the entire crypto market without having to successfully pick and manage dozens of positions? Just long our Durafi Crypto Index.
  • Bullish on Defi, but less sure about Cefi? Long our Durafi DeFi Index, and hedge with a short of the All Crypto Index.
  • Bullish on NFTs? Just go long our Durafi NFT Index.

Our indices bring together exposure to baskets of multiple tokens into a single, easy-to-trade “Durafi Fund Token” (DFT).

The mission, if you choose to accept it

Durafi is on a mission to make it simple, cost-efficient, and secure for anyone to achieve diversified exposure to the entire crypto market or crypto market sub-sectors and trends.

Moreover, we’re building a decentralized exchange for the trading of crypto indices that leverages DeFi 2.0:

  • Fully On-Chain
  • Non-custodial
  • Permissionless
  • Scalable
  • Transparent
  • Capital Efficient
  • Hybrid Liquidity
  • Community Driven

As institutional and mainstream investors shift to allocate an increasing proportion of their portfolios to the crypto market, we hope that Durafi’s community will help steer the birth of future Durafi indices that track emerging crypto trends, sectors, and sophisticated crypto trading strategies.

We would love for you to join our nascent community — get in on the ground floor of a decentralized platform we believe will shape the future of crypto investing!