What is a Basket?
A crypto index fund, also known as a basket, is an investment vehicle that provides access to a diversified portfolio of digital assets such as cryptocurrencies. The idea behind a crypto index fund is that it allows investors to invest in a fund, which in turn invests the money into a specific index of cryptocurrencies. By doing this, investors can get exposure to a wide range of digital assets without having to buy each token in the fund individually.
An index fund is a financial product that provides investors with access to a basket of assets that represent a particular market or sector. Similarly, a crypto index fund is designed to give investors access to a diversified basket of digital currency assets.
It's important to note that, as of early 2022, a true crypto index fund does not yet exist in the United States. However, this is a growing trend in the world of digital assets and is likely to become more prevalent in the future as the industry continues to develop.
Simplified Example
A "basket" in cryptocurrency can be compared to a mixed fruit basket. Just as a mixed fruit basket might contain a variety of different types of fruit, a cryptocurrency basket might contain a variety of different types of coins and tokens. Just as a mixed fruit basket offers a diverse range of flavors and nutrients, a cryptocurrency basket offers a diverse range of investments, spreading risk across multiple assets and potentially reducing overall risk. Just as a mixed fruit basket might be customized to meet the preferences and dietary needs of its recipient, a cryptocurrency basket might be customized to meet the investment goals and risk tolerance of its investor. In short, a basket in cryptocurrency is a collection of different coins and tokens, offering a diverse range of investments and potentially reducing overall risk.
History of the Term "Basket"
The term "basket" appears to have surfaced approximately between 2017 and 2018, aligning with the surge in popularity of Initial Coin Offerings (ICOs) and the tokenization of assets. Its origin can be traced to discussions within online communities and investment forums, where it was employed to describe a collection of distinct cryptocurrencies held together as a unified unit. The term gained prominence within this context for several reasons. Investors, keen on portfolio diversification to manage risk and enhance performance, found the concept of grouping multiple currencies into a "basket" to be a practical approach. The emergence of investment products and funds responding to the demand for diversified exposure further contributed to the adoption of the term, as these entities offered pre-constructed "baskets" comprising various cryptocurrencies. Additionally, traders incorporated the notion of "baskets" into their strategies, utilizing them for practices such as arbitrage or portfolio rebalancing.
Examples
The Bitwise 10 large Capitalization Crypto basket, aims to offer investors exposure to the top 10 cryptocurrencies by capitalization.
The S&P 500 is a stock index fund tracking the stock performance of the 500 large companies listed on stock exchanges in the US.
Baskets started gaining prominence in 2018. Around this time, it became possible to group several different coins and offer a single separate token during trading. Users could list the token on an exchange platform and trade it as they would with standard cryptocurrencies.
Related Terms
Initial Coin Offering: A form of crowdfunding that has become increasingly popular in recent years. Essentially, an ICO is when a company or organization offers tokens – digital assets created on a blockchain – to investors in exchange for investment capital.
Capital Fund: A big piggy bank where people or organizations put money together to use for a specific purpose.