New research suggests this DeFi token-based indices are not diversifiedThis is not ideal for advanced investors looking to reduce risk.
Indices are a very popular way to get broad exposure to a market without researching and buying individual assets. With the explosion of DeFi protocols and related tokens earlier this year, several indices were introduced.
Analytics provider DeFi Pulse was one of the first to launch its own index In mid-September at the height of the boom, however, the analyst stopped Messari, Roberto Talamas, completed which is heavily skewed towards certain assets. He wrote:
“While DPI is a good investment for beginners, it may not offer the diversification that discerning investors demand, leaving them overexposed to individual DeFi assets.”
He added that despite the positive characteristics of broad engagement and lower fees Index funds can become highly concentrated and reduce the benefits of product diversification.
Diversification is one of the main reasons investors flock to indicesAfter analyzing the DeFi pulse index, the researcher found this Only four assets accounted for 77% of the total portfolio risk.
In relation to the percentage contribution to risk, there are four assets The UNI token from Uniswap, which holds more than a quarter of the stake (26.12%), the native token from Aave (20.18%), the YFI from Yearn Finance (17.87%) and the SNX token from Synthetix (13.29%). These four alone make up more than three quarters of the portfolio, so any major movement in any of them will affect the overall performance of the index.
The problem seems to be with other DeFi indexes such as the Synthetix sDEFI, which is heavily weighted with only four tokens: Compound, Maker, Kyber Network and SNX, which make up almost 60% of the portfolio.
At the time of this writing The DPI token was trading at $ 100, 6.7% less in the last 24 hourswhen DeFi tokens followed the general decline in the cryptocurrency market. The index-based token hit a high of $ 125 immediately after launch. However, during the first week of November it fell to its lowest level of $ 60.
Compared to the overall performance of DeFi tokens DFI has recovered much better and is only 20% below its all-time highA large number of tokens, including SWRV, CRV, SUSHI, BZRX, and MTA, remain more than 60% below their highs.
Indices are also available for the general crypto markets but are currently underperforming. Crypto 20 or C20 was launched in an ICO in 2017 as the first tokenized index fund for cryptocurrencies only.
Keep an eye on the top 20 cryptocurrencies by market capitalization, But it’s well below its high of nearly $ 4 in January 2018 and is trading at just $ 0.90 today. This is despite the total cryptocurrency market cap rebounding to $ 560 billion, just 32% from an all-time high of over $ 830 billion in the same month.