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TCAP: Investing with Crypto Indexing

Here, we take a look at how crypto index funds work and how to take advantage of TCAP for long term investments.

Gemini-Category Cryptocurrencies 1 (1)

Summary

Indexes have long been a popular choice for investors looking to diversify their holdings, reduce risk, and simplify the investing process. These same benefits also apply to crypto indexes, which track the cryptocurrency asset class. Similar to how the S&P 500 index tracks stocks, the Total Market Cap Token (TCAP) indexes crypto assets into a single, synthetic asset.

Crypto: Indexing a New, Mainstream Asset Class

Investors have a variety of options to choose from when designing their portfolio. Traditional options include stocks, bonds, and real estate, but there are also options such as fine art, precious metals, and, perhaps most recently, crypto assets.

Between 2020 and 2021, we have seen a significant number of companies and financial institutions expand their investments into cryptocurrencies. This influx of new players in the crypto field was especially felt across the market during the bull rally in the first and second quarters of 2021. Crypto has positioned itself as a new and innovative asset class for public investors and established companies alike; many of the most notable banks have started allowing their customers to allocate a portion of their portfolio in crypto.

All of these developments signal a new era for retail investors as investment opportunities in crypto become mainstream. This acknowledgement of cryptocurrency as an asset class by financial institutions is an important indicator that the existential risk for crypto assets is largely behind us. In other words, the total market cap of all crypto assets has a value greater than zero.

Furthermore, the rise in value of the Total Cryptocurrency Market Cap from $10 billion USD in early 2014 to $1.5 trillion in July 2021 (a 15,000% increase) outlines the outstanding growth of the crypto asset class.

Given recent institutional adoption and a strong historical trendline, perhaps individual investors can also benefit from a non-zero allocation of cryptocurrencies in their personal portfolio.

Herein lies the value of a crypto index token: It offers investors the ability to hold not just an individual crypto asset, which have their own unique set of risks and rewards, but rather hold the value of the entire asset class. Let’s draw some parallels:

What Is an Index Fund/Index Token?

An index mutual fund tracks the performance of a specific market benchmark, like the S&P 500. The fund’s manager buys a representative sample of all the stocks and/or bonds in the index that it tracks.

Similarly, an index token tracks the performance of a specific market index, such as the market cap of the total cryptocurrency asset class. Note: the role of a fund manager can be automated and decentralized for index tokens through the use of oracles.

Benefits of Crypto Index Funds and Crypto Index Tokens

Traditional index funds offer some benefits to investors compared to individual stock picking. Some of the benefits of index funds also apply to index tokens:

Reduced risk through diversification

  • When you buy individual crypto assets, if one declines in price, your savings could take a much bigger hit in a short period. Investing in an index token helps offset the risks that a crypto investor can be subjected to.

Reduced taxes

  • Selling and trading crypto assets in the U.S. often triggers taxable events that investors may want to avoid. Investing in a crypto index token dissuades short-term impulsive selloffs and helps crypto investors hold through the years.

Reduced costs

  • Finally, researching individual crypto assets often requires significant technical knowledge, and can be a time-consuming process that some investors might prefer to avoid. Since the entire crypto market is accounted for in an index token, investors don't have to worry as much about the technical and fundamental analysis of individual crypto assets.

The tradeoff of crypto index investing is that while it lowers potential risks in the short term, it also lowers potential returns in the short term. It’s not unheard of for investors in crypto assets to see 100-fold returns on their investments. Unfortunately, it’s also not unheard of for investors in crypto assets to see their investment value go to $0, literally overnight in some cases.

Crypto index tokens offer exposure to the long-term upside of crypto assets while reducing the risk of an asset becoming worthless.

TCAP Token by Cryptex

An example of an index token tied to the crypto market is the Total Market Cap Token (TCAP) from Cryptex Finance. TCAP is designed to give investors accurate, real-time price exposure to the total capitalization of the cryptocurrency market via a single, synthetic asset.

In order to achieve this, TCAP aggregates data from a number of oracles to establish a total market cap median value, then bridges the value on-chain through an audited Chainlink smart contract.

There are two ways to get the TCAP token:

  1. Buy TCAP on an exchange

  2. Mint TCAP directly by depositing collateral such as ether (ETH) or DAI into the Cryptex protocol

Other index token options exist as well, such as Defi Pulse and the Bitwise 10 Large Cap crypto index. However, these projects typically index a subset of the total crypto asset class or are otherwise centrally controlled entities that come with their own set of pros and cons.

Ultimately, index tokens offer broad exposure to crypto assets and are an exciting tool for investors to consider when designing their personal portfolio’s asset mix.

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Joseph Sticco

Author

Joseph Sticco

Co-Founder, Cryptex

Joseph Sticco is a co-founder & core contributor of the Cryptex DAO. A lifelong equity trader and investment manager, Joseph brings immense knowledge of traditional market structure to the project. He founded Cryptex with the vision of blending traditional finance with world class blockchain development in building state of the art investment solutions for tomorrow.

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