By Herbert Law, Founder and CEO of Crypto Price Index (CPI)
One of the most effective ways for retail investors to make money in the stock market is to invest in index funds, which have been found to generally outperform mutual funds over time. To date, the lack of a comprehensive index fund for crypto assets akin to those based on the S&P 500 in legacy financial markets has held the crypto market back; however, before crypto can effectively offer such opportunities to everyday people, the market needs a trustworthy index to accurately represent the state of the market. Such a measure would enable retail investors to make more informed decisions and perhaps entice institutional investors, such as pension funds and endowments, to make the leap into crypto.
Why Indexes are Important in Any Market
A comprehensive index of the stock market can be used as an indicator for the health of the market and overall trajectory. The Dow Jones Industrial Average (DJIA) and S&P 500 are the most well-known stock indices. The DJIA includes 30 of the most influential blue-chip stocks chosen by the editors of the Wall Street Journal. The S&P 500 tracks the top five-hundred stocks by market capitalization. Though these measures are not perfect reflections of the market, they have proven to be fairly accurate indicators of market health over time, since they are based on actual trades and not public sentiment.
Index funds are based on the underlying stocks included in the corresponding index. Warren Buffet has said, “ ‘Consistently buy an S&P 500 low-cost index fund. […] I think it’s the thing that makes the most sense practically all of the time.’ ” Given most people cannot accurately predict which stocks will perform best, and the management fees involved with mutual funds diminish ROI, index funds are great options for anyone who lacks the time, expertise, or resources to invest and manage stocks themselves. The indices themselves serve as invaluable reference points…