Crypto Indices: A New Form of Passive Investing

Contents

• Introduction
• What are crypto indices
  • How an index is constructed
• Types of crypto indices
  • Market-cap weighted
  • Equal-weight
  • Smart beta (quality/volatility/liquidity rules)
  • Sector indices (DeFi, AI, L1/L2, etc.)
  • Total market
• Rebalancing rules
• Benefits for the investor
• Risks and limitations
  • How to reduce risks
• Index products and infrastructure
  • Exchange-traded ETP/ETN
  • Custodial funds
  • On-chain indices (tokenised)
• Where assets are held and what costs arise
  • Fees and costs
• How to assess total costs
• Portfolio use
• Conclusion

Introduction

Crypto indices offer a straightforward way to gain broad market exposure to cryptocurrencies, eliminating the need for manual coin selection and constant position monitoring. This approach reduces the risk of concentration in a single position, saves time, and enforces discipline through predefined rules. An index moves with the market: when the market rises, the index value increases; when it falls, the index declines. In this article, we will look at how indices work in practice, where they fit in a portfolio, and what to check before choosing one.

What are crypto indices

A crypto index is a basket of crypto assets assembled according to clear rules: which coins are eligible, what weight each has, and how often the composition is reviewed. Weights can be set by market capitalisation or an equal allocation; the composition is reviewed on a calendar schedule to stay current and avoid skew toward individual assets. Importantly, an index is a calculation methodology, not an investment product by itself.

How an index is constructed

Selection and calculation steps:

• Initial list of assets. Coins/pairs with stable quotations on major venues are considered.

• Liquidity and size filters. Minimum daily volume/turnover, sufficient number of trading days, basic price and listing checks.

• Composition cleaning. Free float is considered (only coins in public circulation); stablecoins, wrapped/synthetic versions, and assets with delisting or network halts are excluded.

• Weighting scheme. By market cap (with a ceiling for any one asset) or alternative rules.

• Concentration limits. Caps on a single asset/sector, and “buffers” to reduce turnover during rebalancing.

• Periodic review. On a calendar (e.g., monthly/quarterly) with a pricing cut-off date, extraordinary events are described separately (forks, delisting, migrations).

Types of crypto indices

Different schemes produce different risk and maintenance profiles. Below is a brief “how it works” and “when it’s suitable.”

Market-cap weighted

Market leaders receive larger weights; behaviour is close to a “market basket,” with moderate turnover at rebalancing.
Suitable for: a core portfolio position.

Equal-weight

Each component has the same weight, increasing exposure to mid- and small-cap coins; rebalancing is more frequent.
Suitable for: when you want more diversification beyond top coins.

Smart beta (quality/volatility/liquidity rules)

Weights depend on simple factors; the goal is to smooth drawdowns without straying far from the market.
Suitable for: those who want milder drawdowns while keeping broad exposure.

Sector indices (DeFi, AI, L1/L2, etc.)

Targeted thematic exposure with higher idiosyncratic risk.
Suitable for: “satellites” alongside a core index, or to express a theme.

Total market

Broad coverage of the liquid segment with concentration limits.
Suitable for: a long-term base with minimal manual work.

Rebalancing rules

Rebalancing keeps the composition and weights current while balancing index “freshness” and costs.

• Calendar. Reviews on a set schedule (e.g., monthly/quarterly): more frequent reviews mean closer alignment with the market, while less frequent reviews result in lower turnover and fees.

• Entry/retention thresholds. Stricter requirements for entry on liquidity, market cap, and price; milder thresholds to remain, to avoid unnecessary churn.

• Concentration control. A cap on the maximum weight for one coin and for the leader group; any excess is redistributed among other components.

• Extraordinary events. Delisting, network halts, forks — a separate procedure is described in the methodology (as are the date/time of the pricing snapshot).

Benefits for the investor

An index approach simplifies market entry and makes the process more predictable.

• Diversification. Exposure to multiple assets and segments at once reduces single-coin risk.

• Transparency. Clear rules for selection, weighting, and review make expectations easier to manage.

• Less routine. Fewer ad-hoc decisions, fewer trades, and fewer operational errors.

• Discipline. A fixed rulebook helps maintain a risk plan and stick to the strategy.

• Suitable for DCA. Regular calendar purchases tend to be more predictable than attempts to “time the market.”

Risks and limitations

The crypto asset class remains volatile, so even a broad basket can experience notable drawdowns. In addition, an investor’s outcome can differ from the “pure” index because of product and execution specifics.

• Tracking difference. Fees, spreads, and replication methods cause deviations from the index.

• Component liquidity. In periods of stress, slippage and divergence from the benchmark increase.

• Reconstitution costs. Frequent rebalances increase turnover and expenses.

• Provider/methodology risks. Asset custody, price sources, and selection rules affect outcomes.

• Technical factors. Trading halts, delistings, and discrepancies between price sources.

How to reduce risks

Make scheduled, incremental purchases rather than timing; maintain concentration limits on any single asset and sector; choose a product with a public methodology, a clear rebalancing schedule, and sufficient liquidity. For on-chain solutions, prioritise code audits and the quality of price oracles to minimise operational surprises and tracking discrepancies.

Index products and infrastructure

Three main formats follow an index methodology but differ in asset custody and costs.

Exchange-traded ETP/ETN

Traded via a broker, with a custodian holding the underlying assets. Pros: regulation, reporting, and liquidity support by market makers. Cons: broker/depository fees plus internal TER.

Custodial funds

Subscriptions/redemptions at NAV, with custody procedures and possible minimums. Execution may take time, but accounting is transparent via the administrator and custodian.

On-chain indices (tokenised)

Minting/redemption via smart contract; ownership resides in your wallet. 24/7 access and visibility of reserves are available; however, network fees, MEV risk, and DEX pool depth are also considerations.

If you don’t want to assemble a basket manually, you can use formats where the composition and rules are predefined and regularly reviewed. On specialised marketplaces, curated crypto indices and automated strategies are available: you choose the approach, set the allocation and limits, and execution runs automatically in your account. This option saves time, helps you stick to the selected risk plan, and your funds remain under your control.

Where assets are held and what costs arise

In ETP/ETN, your interest is recorded with the broker, and the custodian holds the underlying assets. In funds, the administrator and custodian maintain records. In an index token, ownership is tied directly to your wallet. Results are affected by internal TER, broker/exchange fees, network fees, as well as the spread and slippage from operations by both the provider and the investor.

Fees and costs

Component	What it is	How it affects results
TER (expense ratio)	A regular provider fee is charged in small daily portions	Gradually reduces the product’s price/value
Reconstitution costs	Venue fees, spread, and market impact during rebalancing	Increase expenses and tracking differences
Investor costs	Broker/exchange fees, network fees, and  the spread on your trade	Depends on venue and order size; lowers net returns
Tracking difference	The result gap between the index and the product after all factors	Shows how much the product lags/leads the index

How to assess total costs

Add TER, typical fees, and expected spread/slippage losses, considering basket structure and reconstitution frequency. Evaluate liquidity specifically on the venue where you plan to trade: via a broker, on a CEX, or in a DEX pool.

Portfolio use

An index works well as the “core”: 60–80% of the portfolio provides broad market exposure and reduces concentration risk. The rest are “satellites”: thematic indices (DeFi, AI, L1/L2) or individual ideas with limited weights. Target allocations are set in advance and maintained by rebalancing so the portfolio doesn’t drift into a single segment.

Conclusion

Crypto indices provide baseline market exposure with transparent selection and review rules. Results are shaped by discipline (regular purchases and calendar rebalancing), an informed choice of provider, and control of total costs. Proper accounting and reporting complete the system: it is logical to use an index as the portfolio “core,” and thematic positions as limited “satellites” within a defined risk budget.