The Rise of Passive Investing: How Crypto is Evolving for Retail Investors

Most people assume that crypto's most popular financial instruments are tokens, but index funds are gaining significant traction. In traditional finance (TradFi), index-based funds have historically outperformed single-asset funds in terms of assets under management (AUM), providing investors with diversified exposure while mitigating risk.

While crypto ETFs, particularly Bitcoin ETFs approved by the Securities and Exchange Commission (SEC) in January 2024, have dominated recent market discussions, index funds offer a broader approach to digital asset investing. Instead of relying on the performance of a single asset, index funds track baskets of assets, creating the diversification that investors have long favored in traditional markets. 

In crypto, this approach holds similar potential. Instead of focusing on a single token like Bitcoin or Ethereum, index funds track multiple high-performing digital assets, offering exposure to the broader market while reducing concentration risk. The Bitwise 10 Crypto Index Fund was one of the first such crypto indexes, launched in 2017, and Fidelity and Bloomberg soon followed with its Bloomberg Galaxy Crypto Index in 2018.

As institutional adoption grows, multi-token index funds that take their unique approach to tracking, benchmarking, and reflecting the overall crypto sector could play a key role in bridging traditional investment strategies with the digital asset space.

Indexes spare the hassle – and risk – of investing in individual coins

The abundance of information about a coin – spread across white papers, discussion boards, social media platforms, and messaging apps – is difficult to keep up with for one coin, let alone the 1000s of digital assets at any given time. While ETFs save investors the inconvenience of buying, storing, and securing $BTC or other coins with forthcoming ETFs, investors must keep up with this real-time information firehose to manage their portfolios.

When there are many ETFs on the market, investors need to sift through piles of information before deciding which one to ultimately purchase. This is burdensome for most retail investors who simply want some exposure to crypto without getting into the technical details. 

From this viewpoint, crypto indexes are a much better option: Investors can defer to the collective growth of a handful of top coins, eliminating the need to perform constant, extensive research on any one coin or ETF.

Indexes alleviate users from having to trade short-term

When investing stocks, short-term trading is often necessary. For instance, if you held shares of Nvidia ($NVDA), you might have felt compelled to buy or sell after the stock dropped following the Deepseek announcement.

In contrast, if you are an investor in the S&P 500, which includes $NVDA, you would not need to respond to any market news. You could buy shares in the S&P 500 and count on the overall growth of the market to withstand any changes to a single stock. Such investors can rest easy, knowing that their investment will always be bullish in the long-term (the S&P boasts an average annual return of over 10% going back to 1957).

Crypto indexes will be attractive in the same way. Instead of having to regularly take action on a specific token position, investors can simply buy shares in a crypto index and leave them untouched for the long-term. In the parlance of the crypto community, they can "hodl." Such investors can count on the continued growth of crypto to take their shares to new heights over time.

Indexes protect investors from the risks associated with FOMO

The fear of missing out (FOMO) is a real problem in crypto. When investors sit on the sidelines and see peers make money from different financial instruments, they may be prone to jump in and make ill-advised decisions.

FOMO is rampant now with meme coins, which Solana has made easier to launch than ever. A few cycles ago, there was also FOMO for non-fungible tokens and even play-and-earn tokens. All of these instruments are highly volatile. For example, the $SQUID token plummeted 99% in value in a matter of minutes, while once popular NFT collections, such as those of tennis balls by the Australian Open, were down by 90%. 

Indexes can prevent investors from risky FOMO-based decision-making because they already have broad exposure. For example, they would not need to invest in meme coins because most popular indexes include Solana, the preferred blockchain for such assets. Similarly, they would not need to purchase any single NFTs because indexes always have Ethereum, the market leading blockchain for them. 

Indexes will likewise give investors exposure to other major trends in the future, all without having to buy into individual assets that are highly risky on their own.

Indexing your Crypto Exposure 

As crypto investment vehicles evolve, indexes represent the next logical step in providing retail investors with diversified, low-maintenance exposure to the market. While ETFs solve the challenge of buying and storing individual tokens, they still require investors to stay informed about specific assets. Indexes, on the other hand, simplify the investment process by spreading risk across multiple top-performing cryptocurrencies, much like how traditional stock indexes provide long-term stability.

By mitigating the risks of short-term trading and FOMO-driven decisions, indexes offer a more resilient approach to crypto investing. Whether the market shifts toward new trends or faces periods of volatility, indexes allow investors to participate in crypto's overall growth without the burden of constant research and rebalancing. Just as stock indexes have become a cornerstone of traditional investing, crypto indexes are poised to become a preferred vehicle for long-term, diversified exposure to the digital asset space. 

Crypto, in short, operates like a book: The best guide is often the index.