16th Nov 2020

Advantages of Trading a Crypto Index

Article Table of Contents:

What is a Crypto Index?
The Advantages of Crypto Index Trading

When someone starts trading or investing, there are generally 2 questions on their mind. First, how they can invest to earn a profit in a growing market and second, what can they do to limit their losses if the market starts to go against them. One of the best solutions to these questions is taking advantage of indices.

What is a Crypto Index?

In the traditional markets, the first stock index was created by a newspaper journalist Charles Dow on July 3, 1884, in the United States. He then also created the Dow Jones Transportation Average Index, which took into account the 11 biggest US transportation companies.

In the financial markets, an index is a particular indicator of the state of the goods or securities market. An index is a collection of different bonds or stocks, representing multiple companies. For instance, the S&P 500 is an index representing 500 of the biggest companies listed on the US stock exchanges, including Apple, Amazon, Walmart and Microsoft.

With the help of an index, traders can discover the mood of the market and make informed trading decisions. Many companies and investors also use indices for portfolio diversification. 
The crypto index works in a similar manner. A crypto index is made up of multiple cryptocurrencies (generally Ethereum, Bitcoin, Litecoin, Ripple, and a selection of altcoins). These are designed to provide better performance and a safer investment environment than individual digital currencies.

With certain crypto indices, such as GTi12, the index is reconstituted regularly. This process takes place at the end of each quarter. It is done to decide whether any of the cryptos needs to be replaced by another. The decision is made by considering the liquidity and market capitalisation of each coin. This helps improve the performance of the crypto index. 

The Advantages of Crypto Index Trading

Some of the main advantages of trading a crypto index are:

Improved Risk Management

The old saying “don’t put all your eggs in one basket” works incredibly well for cryptocurrencies. This means that trading with a single asset can be highly risky. But when you invest in multiple cryptos, this risk can be hedged. This is what you can achieve with a crypto index. 

With a crypto index, even if the value of one currency plummets, the other currencies could mitigate the impact of this decline. Therefore, you might not suffer as severe losses as you would while investing in only one currency. This is a great benefit, since cryptos are prone to dramatic price shifts. Also, a diversified portfolio is considered to perform better in the long run.

So, if you are excited by the opportunities offered by cryptos but are worried about the volatility, a crypto index might be perfect for you.

Wide Choice of Technical Indicators

With MT5, traders gain access to 38 technical indicators, 44 analytical objects, as well as unlimited charts in 21 timeframes. The choice of technical tools available is even greater than with its predecessor MT4. Additionally, traders can customise the tools according to their trading strategy. There are also options for variations in timeframes. This enables traders to study price momentum and market volume from various angles.

Lower Cost

When investing in individual assets, you would have to pay a fee for BTC, then another for ETH, and another for XRP. This can quickly drive up your costs. But in the case of an index, it is treated as a single instrument. This means you can invest in several cryptos while saving on the individual commissions.

While trading crypto indices opens up huge opportunities, it also has its share of risks. It can be vulnerable to distributed denial of service, hacking, interruption of trading, cross-national legal environment, and an unstable technological environment. Additionally, the crypto market is extremely sensitive to liquidity and volatility. This can have an impact on the data available to the algorithm of the index.

So, make sure you do your research and put adequate risk management measures in place even while trading a crypto index.
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Cryptocurrency trading can be extremely risky and can lead to large and immediate financial losses. Crypto assets are highly volatile and can result in significant losses of your capital over a short period of time. Cryptocurrencies markets are unregulated services which are not governed by any specific regulatory framework. The provision of such services is not being directly provided by the Company but through licensed third parties.

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