In the past 10 years, investing in crypto has grown rapidly.
From beginners just getting started in acquiring assets, to experienced investors, everyone is looking to Bitcoin and other cryptocurrencies as a strong asset class.
But, as it grows, so do the risks involved.
Extreme volatility is the scariest risk for most investors.
This is why having a diversified crypto portfolio is the ideal strategy for some.
In this guide, we’ll explore why crypto index funds for portfolio diversification can be a smart move.
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What Is a Crypto Index Fund and How Does It Work?
Both traditional and crypto index funds follow the same core principle: diversification through a mix of assets.
However, they operate in two different worlds.
Crypto Index Funds vs Traditional Index Funds
Market Structure
The traditional stock market operates as a centralized exchange.
It has set trading hours and strict regulations.
On the other hand, crypto functions on decentralized, global networks that never close.
Crypto Assets Commonly Included in Index Funds
Crypto index funds for portfolio diversification are ideal because, in essence, they mix the leading projects across different sectors.
👉Pro Tip: A healthy crypto index has a balance of large-cap coins like BTC and ETH with some layer 1s and a small amount of smaller, niche projects.
How Crypto Indexes Are Built
Different from most stock indexes, crypto indexes use rule-based methodologies because the market changes so quickly.
Common Crypto Index Structures
Market Cap Weighted
- Bitwise 10 Crypto Index: Allocation is proportional to each coin’s market cap.
Equally Weighted
- DeFi Pulse Index (Index Coop): Each token gets an equal allocation no matter its market cap.
Sector-Focused Indexes
- Metaverse Index, Web3 Index, Layer 1 Indexes: Use narrower protocols on specific growth areas.
☝️Many crypto indexes are rebalanced monthly or quarterly.
This helps to manage high volatility and rapid price changes.
Example: Crypto Index Allocation (Bitwise 10, May 2025)
Why Crypto Index Funds for Portfolio Diversification Works
Crypto markets are notoriously volatile.
For example, in 2024, Bitcoin suffered a 30-day volatility range between 40% and 70%.
When you diversify across many assets, it helps to smooth out the price swings.
For example, when one token crashes, others can hold or even rise, reducing your entire portfolio from crashing.
Index funds spread across sectors like DeFi, Layer 1s, and metaverse projects, giving you more balanced, long-term growth without the stress of daily trading.
Crypto Index Funds vs ETFs
Investing in a Bitcoin or Ethereum ETF is another great way to diversify your crypto portfolio.
But they are different.
A crypto index fund pools investors’ money to buy a “basket” of cryptocurrencies directly.
Crypto ETFs are publicly traded funds that track crypto prices and trade like a stock on regulated exchanges, usually using futures or custodial holdings.
The Benefits of Adding a Crypto Index Fund to Your Portfolio
1️⃣ More Market Exposure with a Lower Individual Risk
- A popular crypto index fund is the Bitwise 10 Crypto Index Fund (BITW).
- It holds a variety of coins and tokens, helping to diversify your portfolio.
2️⃣ Hands-Off Strategy
- Investing in a crypto index fund is considered a passive investment strategy and is great for beginners who are just getting started and want to diversify.
3️⃣ Higher Risk-Adjusted Returns Over Time
- The Sharpe ratio is a metric used to assess returns. It can help you understand the return of an investment in relation to its risk.
- As of June 3, 2025, the Bitwise 10 Crypto Index Fund had a 1-year Sharpe ratio of 1.14.
- This is a fairly reasonable return within the crypto market.
Secure Your Investments with Cold Storage
While crypto index funds give you diversification, you also need to consider protecting your investment.
Cold storage wallets, like Material Bitcoin, allow you to store your crypto completely offline.
Integrating the best in hardware wallet solutions into your investment strategy guarantees that your digital assets remain safe.
Leading Crypto Index Funds and What They Include
Most of these crypto index funds are accessible to investors on major exchanges like Coinbase and Kraken.
Their fees are generally higher than traditional index funds, but they remain much lower than what active crypto trading would cost.
Should You Consider Crypto Index Funds?
Crypto index funds are good for beginners who want to enter the market but don’t know which coins/tokens to buy.
It’s great for a conservative investor who wants broad exposure but low risk.
Index Funds vs Active Trading
Crypto index funds can be a smart choice in both bull and bear markets.
They take the emotional decision-making aspect out of the equation and don’t rely on your ability to track crypto markets all day long.
Index Funds vs Simply Buying Bitcoin
While index funds give you easy diversification, many long-term investors still prefer to simply buy and hold Bitcoin.
As the largest and most established cryptocurrency, Bitcoin is the core asset in most crypto portfolios.
Over time, Bitcoin has consistently shown strong long-term growth, with lower risks compared to smaller tokens.
If you are looking for a simple, long-term investment, then steadily buying Bitcoin and holding it in secure cold storage, like Material Bitcoin, is the most effective strategy.
Raoul Pal, a former hedge fund manager known for his early bullish stance on Bitcoin and strong advocacy for cryptocurrency, digital assets, and Web3 as part of the future global financial system.
Final Thoughts on Crypto Index Funds and Diversifying Your Portfolio
Crypto index funds for portfolio diversification are a good option as they reduce risk and let you spread out your investment over multiple crypto assets.
However, investing in BTC has been a long-time recommendation by most experts to simplify investing and see historically proven returns.
Regardless of your investing choice, the key is staying consistent and protecting your crypto properly in a trusted non-custodial wallet.
FAQ
What is a crypto index fund?
- A fund that invests in a “basket” of different cryptocurrencies.
Are crypto index funds safe?
- They reduce risk through diversification, but are still associated with crypto market volatility risks.
How do I invest in a crypto index fund?
- You can buy them through platforms like Bitwise, Galaxy, or certain exchanges.
Should I invest in Bitcoin or a crypto index fund?
- Both are valid options. Bitcoin is simpler and more established; index funds will give you broader exposure.
How often are crypto index funds rebalanced?
- Most are rebalanced monthly or quarterly.
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