One of the primary criticisms aimed at cryptocurrency has been its perceived lack of mainstream acceptance as an investment asset. However, a recent announcement from S&P Dow Jones Indices regarding a new crypto-focused index signifies a shift towards greater recognition of digital currencies. This development adds to a growing list of indicators that suggest cryptocurrencies are gaining traction in the investment landscape.
What’s Included in the New Index?
S&P Global has unveiled the S&P Digital Markets 50 Index, which aims to track a broad array of companies and digital assets associated with the cryptocurrency ecosystem. This index is distinctive because, unlike others that focus solely on specific cryptocurrencies, it seeks to provide a comprehensive view of the entire crypto landscape. It will not only feature individual cryptocurrencies but also stocks from companies involved in various aspects of the crypto market. Specifically, the index will incorporate 35 companies engaged in digital asset operations, infrastructure, financial services, blockchain technology, and other supporting sectors, along with 15 selected cryptocurrencies from the S&P Cryptocurrency Broad Digital Market Index. It is important to note that the S&P Digital Markets 50 is currently just an index and not an exchange-traded fund (ETF). However, fintech firm Dinari plans to launch investable “dShares” linked to this index later this year in collaboration with S&P Global. Additionally, this index could pave the way for new ETFs or mutual funds in the future.
Implications for the Overall Crypto Market
Any initiative that enhances the legitimacy of cryptocurrency and aids in its mainstream acceptance is viewed positively for the broader crypto market. Greater confidence among investors that cryptocurrency is not merely a speculative investment could lead to increased investment activity. A surge in investor participation could potentially drive up crypto prices and contribute to reduced volatility within the sector.
Investing in a crypto-based index offers two significant advantages. Firstly, it provides investors with access to a relatively diversified portfolio through a single investment. While this portfolio may not be fully diversified—given that it comprises crypto and related securities—investors would still hold 50 different assets rather than concentrating their funds on a single one. Secondly, it alleviates the research burden from investors, as S&P takes on the responsibility of analyzing the 50 individual cryptocurrencies and crypto-related firms. Although investors will need to assess whether this index aligns with their investment goals and risk tolerance, they can direct their focus toward evaluating one security instead of managing a diverse array of 50 investments.
Evaluating Whether It’s Right for You
While the new S&P index presents potential opportunities, several risks should be considered before investing based on this index.
One concern is over-diversification. In traditional mutual funds, owning 50 different securities can provide a buffer, but with cryptocurrency still being a relatively nascent and speculative asset class, one must question whether there will truly be 50 successful investments in this space. Alternatively, the enforced diversification into 50 different securities might result in holding a significant number of underperformers.
Volatility is another factor to consider. Although holding 50 securities may lessen some volatility, the reality is that most assets in this index are likely to move in sync due to their crypto-related nature. Therefore, investments based on this index might still be subject to considerable price fluctuations.
Lastly, fees are also a consideration. While S&P Global and Dinari have not yet disclosed a fee structure for this product, it is anticipated to be relatively low. However, any fees incurred will inevitably impact performance compared to simply purchasing a stock or cryptocurrency without a commission.
Conclusion
The introduction of the Digital Assets 50 Index by S&P Global marks a significant step towards making cryptocurrency investments more mainstream. This development is expected to positively influence the overall crypto landscape. However, the index and the forthcoming investable dShares may not suit every investor. It is crucial to weigh the advantages and disadvantages of the index in relation to your financial objectives and your capacity to manage volatility. Ultimately, it may be wise to consider this index as an additional or ancillary investment rather than a foundational one.
