One of the main criticisms directed at cryptocurrency has been its lack of acceptance as a "mainstream" investment option. However, the recent unveiling of a new crypto-centric index by S&P Dow Jones Indices marks yet another development aimed at enhancing the credibility and acceptance of cryptocurrencies in the financial landscape.
Contents of the New Index
As reported by S&P Global, the recently introduced S&P Digital Markets 50 Index is designed to monitor a broad spectrum of companies and digital assets associated with the cryptocurrency ecosystem. This index stands out as it aims to include not just specific cryptocurrencies, but the entire crypto ecosystem. It will feature individual coins and tokens alongside the stocks of companies engaged in various aspects of the crypto industry. Specifically, the index will comprise 35 companies involved in digital asset operations, infrastructure, financial services, blockchain technology, and related fields, along with 15 cryptocurrencies selected from the S&P Cryptocurrency Broad Digital Market Index. It is important to note that currently, the S&P Digital Markets 50 exists solely as an index and is not yet an investable exchange-traded fund (ETF). However, fintech company Dinari plans to introduce investable “dShares” based on this index later in the year, in partnership with S&P Global. Furthermore, as highlighted by The Motley Fool, the establishment of this index could pave the way for new ETFs or mutual funds in the future.
Impact on the Crypto Market
Any initiative that is perceived to validate and integrate cryptocurrencies into the mainstream financial system is beneficial for the overall market. When investors gain confidence that cryptocurrencies are more than just a speculative gamble, they may be more inclined to invest. An influx of new investors could potentially drive up crypto prices and stabilize the market. Investing in a crypto-based index presents two significant advantages. Firstly, it offers investors a relatively diversified portfolio through a single transaction. While not fully diversified—as the investments will primarily consist of cryptocurrencies and related securities—investors will hold 50 different assets rather than concentrating their capital in one. Secondly, it alleviates the need for investors to conduct extensive research on numerous individual cryptocurrencies and associated companies, as S&P handles this analysis. While it remains crucial for investors to assess whether this index aligns with their investment goals and risk tolerance, it allows them to concentrate on evaluating a single investment rather than managing a diverse portfolio of 50 different assets.
Assessing Its Suitability for Your Portfolio
Despite the potential benefits of the new S&P index, there are inherent risks associated with any investment linked to it. Some possible drawbacks to consider include:
- Overdiversification: In conventional stock mutual funds, having 50 different securities can be advantageous. However, given that cryptocurrency is still an emerging and speculative asset class, one must question whether there will truly be 50 successful investments in this arena. The concern arises that "forced diversification" across these 50 securities may lead to holding several underperforming assets.
- Volatility: While owning a broader array of securities may help lessen volatility, most investments within this index are either crypto-related or actual cryptocurrencies, which likely means they will move in tandem. Consequently, an investment tied to this index could still experience significant volatility.
- Fees: Although S&P Global and Dinari have yet to disclose a specific fee structure for this new product, it is anticipated that fees will be relatively low. Nevertheless, any fees incurred will inherently reduce overall investment performance compared to simply purchasing a stock or cryptocurrency without incurring commissions.
Conclusion
S&P Global is playing a pivotal role in bringing cryptocurrency investments into the mainstream with the launch of its Digital Assets 50 Index. This initiative could be a positive development for the broader crypto market. However, the index and the forthcoming investable dShares may not suit every investor. It is essential to carefully weigh the advantages and disadvantages of the index, matching them to personal financial goals and the capacity to handle market volatility. As such, it may be wise to view the index as a supplementary or niche investment rather than a foundational one.
