How Index Tokens Simplify Exposure to High Growth Crypto Ecosystems

Bitcoin still tends to grab the headlines, but in truth, it no longer dominates the crypto market to the same extent it once did. Two years ago, Bitcoin accounted for 70% of the market, but currently, with the total crypto market valued at over $2 trillion, that share has fallen to less than 40%.

It’s not that bitcoin is shrinking, but rather that many altcoins are starting to offer four- and even five-digit percentage returns. Ethereum, for example, far outpaced Bitcoin in 2021, returning 399.2% thanks to the boom in NFTs and decentralized financial sectors. However, as an ironic consequence of the increased use of Ethereum, transaction fees have skyrocketed, forcing users to migrate to other smart contract platforms with lower fees.

Alternative smart contract and budding scaling platforms like Solana (11,634%) and Polygon (14,251%) all had 4-5 digit percentage returns.

Find and seize new opportunities within ecosystems

As the crypto ecosystem continues to mature, altcoins present a good opportunity for investors in the cryptocurrency market to diversify their portfolios.

Polygon, for example, has already been widely adopted. It has the most vibrant and dynamic decentralized application (DApp) ecosystem with more than 7,000 DApps deployed, including developments from Sushiswap, Dolce & Gabbana, and Ubisoft. Several virtual worlds in development, such as Decentraland and Sandbox, are already Polygon compatible, as are top DeFi services like Aave, Balancer, and Uniswap.

With such an array of DApps deployed on Polygon, the problem for investors is seeking exposure to lesser-known top tokens, where the gains can be significant and outperform the native MATIC token itself. A newly launched Polygon index token, which includes GHST, QUICK, GNS, DFYN, as well as wrapped MATIC, has become very popular for investors who expose themselves to some of the best performers in the Polygon ecosystem, without having to spend a lot of time sourcing and investing in each one.

Solana takes on the same challenges as Polygon but takes a different approach. Rather than leveraging a separate layer on top of Ethereum, it offers an all-new carbon-neutral smart contract platform that is faster and more scalable than even the new Ethereum 2 currently being rolled out. The growth has been dramatic, earning the network a spot in the top 10 cryptocurrencies by market capitalization, after flexing its market maturity in a $314 million funding round led by Andreessen Horowitz and Polychain.

There have already been great successes within the Solana ecosystem, investors who were able to spot them early on have generated significant returns. With over 500 dApps deployed and many more in the pipeline, emerging index tokens on Solana can offer investors exposure to tokens like RAY, SRM, SLND, and TULIP, as well as MSOL, a Staked version of Solana’s native SOL that captures a 6% APY staking reward. . Additionally, since index tokens tend to be rebalanced monthly, investors can rest assured that they have continuous exposure to the best performing projects, without having to stay on every new dApp deployed on the chain.

Index Tokens Simplify Upside Exposure

As these examples show, the number and range of options available to investors quickly snowballs. Keeping track of all the possibilities, let alone evaluating them as candidates for a portfolio, is beyond most people’s abilities and time capacity.

Many new investors have been buying Bitcoin and maybe one or two other high-profile coins in hopes of giving exposure to their larger network of hugely popular projects. But that’s not how it works. The advantage of a very successful project – like AAVE on Polygon, for example – impacts the value of Polygon’s MATIC token, but diluted to such a level that the impact on an investor’s profit is much less exciting than by direct exposure.

For many investors, the solution lies in index tokens, an emerging asset class in crypto that offers an easy way to diversify a range of assets. These are based on an idea borrowed from traditional securities, where diversification is achieved through a single product that provides exposure to a range of assets. A simple example is the current range of ETFs that track the performance of the S&P 500 Index, providing investors with exposure to a wide range of top performing US-listed companies.

In the world of crypto, tokens that track the performance of a basket of digital assets provide the diversification investors seek in the simplest way possible. They contain multiple cryptocurrencies and related DeFi assets bundled into a single product managed using smart contracts.

Users benefit from ongoing professional-grade research that automatically selects index constituents and ongoing tracking of selection criteria via smart contracts, ensures regular rebalancing of index constituents as their performance evolves over time. In well-managed indices, constituents are usually selected via an algorithm based on a weighted average of market capitalization and DEX liquidity, to ensure that investors can easily enter and liquidate positions.

They also have a big advantage over their traditional exchange counterparts: they can be traded for their underlying tokens, and quite easily. This is not true for ETFs, which often do not hold all of the constituent elements of the index or market they are tracking, but seek to capture underlying movements more efficiently using fewer components.

The easy way to spread exposure to growth opportunities

For investors who are short on time, index tokens do all the hard work. They simplify the asset allocation process, reduce risk and maximize upside exposure, serving to encourage participation in the digital asset class in general.

Index trading allows anyone to gain instant exposure to some of the major crypto projects or verticals – from L1 and L2 specific to Metaverse, NFT, DAO and DeFi in general. Even better, it offers immediate diversification within this sector. In the time it takes to invest in a token, users can gain exposure to an entire ecosystem of projects or certain market segments.

While demand is still low relative to conventional securities, bonds and derivatives, this is changing as investors become more knowledgeable about digital assets and seek to adopt more sophisticated approaches to risk management. We expect to see many more index funds emerge as the crypto industry matures, and many more investors who will see how to take advantage of their benefits.

About the Author

James Wang is Head of Tokens at Amun, providing clients with diversified crypto exposure through indexed token products. Prior to joining Amun, James was a principal analyst at ARK’s next-generation internet fund, ARKW. Asset growth from $10 million to over $6 billion AUM.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.