The vast majority of retail cryptocurrency investors buy and sell individual coins on exchanges using their own accounts and wallets. The rise of online guides teaching crypto newcomers how to open accounts, trade, and secure their funds has helped investors do this. However, bond and equity investors have also long bought and held through passively managed index funds. Though some big players are attempting to create crypto index funds, it's not always easy comply with regulation, be practical, and attract investor interest.

In March, Coinbase announced a crypto index fund weighted by market capitalization. Only open to US accredited investors with a minimum investment of $250,000, the Coinbase Index Fund contains Bitcoin (BTC), Bitcoin Cash (BCH), Ethereum (ETH), and Litecoin (LTC). It also assesses investors an annual management fee of 2 percent. Officially launched in May, it accepts investment in US dollars and has a quarterly redemption window.

The Coinbase Index Fund is not innovative and does not make sense for retail or institutional investors. It is a poorly diversified basket and weighted too heavily towards BTC. The fund passively tracks an index, but the redemption window restricts liquidity in the manner of hedge funds. The management fee is too high for an index fund, compared to something like Vanguard's Total Stock Market Index Fund Admiral Shares (MUTF: VTSAX), with an annual expense ratio of 0.04 percent. Institutional investors would be better off buying large amounts of crypto in over-the-counter (OTC) markets.

A better option might be the startup Olympus Labs, which has partnered with BB Index, a platform that offers numerous diversified crypto indices. The first 8 indices include up to the top 50 cryptos, and large cap and mid cap without BTC. Another 18 indices include blockchain currency, infrastructure, and token investments. The funds are market cap-weighted and regularly rebalanced. The fee structures and minimum investment of the fund are unclear. Decentralized exchanges like the Kyber Network provide liquidity. The indices are more diversified, offer greater investment options, and undergo automated readjustment, making this a wiser option than the Coinbase Index Fund.

The startup IronChain Capital recently announced two index funds, MiX10 and an institutional counterpart. The funds include up to 10 cryptos, assess a 1 percent management fee, and offer daily liquidity and high security. The minimum investment is $10,000, and investment is limited to accredited investors. The fund accepts investment in dollars, BTC, and ETH. IronChain's two index funds have better features than the Coinbase Index Fund but can improve.

Although more crypto index funds have been coming up, the product faces many challenges until widespread adoption. The issues include liquidity, accessibility, diversification, security, and fees. Until these characteristics become similar to equity and bond index funds, investors will likely save money by creating and managing a portfolio of coins themselves.

The author owns a small amount of BTC and LTC.