• Amy Arnott of MorningStar believes that Cardano could win over mainstream investors to join Bitcoin and Ethereum.

• She also disclosed her dream of seeing a diversified crypto index fund.

Cardano (ADA) has over the past few years improved on its technological innovations, making it a strong competitor of Ethereum. According to a portfolio strategist at U.S financial service firm MorningStar, Amy Arnott, Cardano (ADA) could join Bitcoin and Ethereum to form the “big three” mainstream assets. During an interview, she stated that it is extremely difficult to determine a suitable price for many cryptos since they are not cash-generating. However, assets like Ethereum have an in-built price to some extent. She explained that the Ethereum platform has several use-cases including the facilitation of Decentralized finance (DeFi) transactions and the support for Non-Fungible tokens (NFTs).

The fact that ether is used as a utility should provide some sort of price floor, but I’m not sure what that should be. A lot of people talk about a network effect where these currencies become more valuable as they are used more and there are more interdependencies and connections.

Institutional investors back Cardano

According to Arnott, Cardano has a lot in common with Ethereum. She mentioned that the Cardano protocol boasts of promising technical applications that could lead its penetration into the mainstream.

There is a lot of enthusiasm about Cardano, and also various stablecoin.

In June, Digital Asset Manager CoinShares disclosed that institutional investors are buying more Proof-of-Stake (PoS) assets like Cardano and Polkadot compared to the Proof-of-Work (PoW) assets. It was reported that Cardano attracted an inflow of $5.2 million with Polkadot attracting $3.8 million in just a week.

Governments’ crackdown on cryptos could pose a greater risk

Speaking on the institutional interest in crypto, Arnott admitted that in the past year this has grown exponentially. Institutional investors who are willing to invest in the leading digital assets. She believes that the growing crypto exposure among institutions could see other assets go mainstream.

Regardless of the current trend of growing mainstream investors, she stated that the strong stance of the US Securities and Exchange Commission (SEC) regarding Bitcoin Exchange-Traded Funds could pose a big challenge for other institutions to get exposure. This was after she explained that it will be great news to have a diversified crypto index fund in the industry.

Regulatory risk is a big issue – that’s been the driving factor behind a lot of the volatility over the past few months. If governments around the world clamp down on crypto in general, or bitcoin and ether specifically, that would be a large negative.

Over the last few months, the crypto market has struggled to regain even half of its all-time high market value after China staged a crackdown on Bitcoin miners, and the likes of the UK, Japan, Singapore, the US, etc imposed tougher crypto laws to control their operation.

In the past two decades, index and exchange-traded funds (ETF) have become some of the most popular forms of investing because they offer investors a passive way to gain exposure to a basket of stocks as opposed to investing in individual stocks which increases risk of loss.

Since 2018, this trend has extended to the crypto sector and products like the Bitwise 10 Large Cap Crypto Index (BITX) tracks the total return of Bitcoin (BTC), Ether (ETH), Cardano (ADA), Bitcoin Cash (BCH), Litecoin (LTC), Solana (SOL), Chainlink (LINK), Polygon (MATIC), Stellar (XLM) and Uniswap (UNI).

The ability to access multiple top projects through one weighted average market cap index sounds like a great way to spread out risk and gain exposure to a wider range of assets, but do these products offer investors a better return in terms of profit and protection against volatility when compared to the top-ranking cryptocurrencies?

Hodling versus crypto baskets

Delphi Digital took a closer look at the performance of the Bitwise 10 and compared it to the performance of Bitcoin following the December 2018 market bottom. The results show that investing in BTC was a more profitable strategy even though BITX was slightly less volatile.

According to the report, “indices aren’t meant to outperform individual assets, they’re meant to be lower-risk portfolios compared to holding an individual asset,” so it’s not surprising to see BTC outperform BITX on a purely cost basis.

The index did offer less downside risk to investors as the market sold-off in May but the difference was “trivial” as “BTC’s max drawdown was 53% and Bitwise’s was 50%.”

Overall, the benefits of investing in an index versus Bitcoin are not that great because the volatile nature of the crypto market and frequent large drawdowns often have a larger effect on altcoins.

Delphi Digital said:

“Crypto indices continue to be a work-in-progress. Choosing assets, allocations, and re-balancing thresholds is a difficult task for an emerging asset class like crypto. But as the industry matures, we expect more efficient indices to pop up and gain traction.”

Ethereum also outperforms DeFi baskets

Decentralized finance (DeFi) has been one of the hottest crypto sectors in 2021 led by decentralized exchanges like Uniswap (UNI) and SushiSwap (SUSHI) and lending platforms like AAVE and Compound (COMP).

The DeFi Pulse Index (DPI) aims to tap into this rapid growth and the DPI token has allocations to 14 of the top DeFi tokens, including UNI, SUSHI, AAVE, COMP, Maker (MKR), Synthetic (SNX) and Yearn.finance (YFI).

When comparing the performance of DPI to Ether since the inception of the index, Ether significantly outperformed in terms of profitability and volatility, as evidenced by a 57% drawdown on Ether versus 65% for DPI.

While this is an “imperfect comparison” according to Delphi Digital due to the fact that “the risk and volatility of DeFi tokens are higher than Ether’s,” it still highlights the point that the traditional benefits seen from indices are not mirrored by crypto-based baskets.

Delphi Digital said:

“You could’ve just HODL-ed ETH for a superior risk-return profile.”

For the time being, Bitcoin and Ether have proven to be two of the lower-risk cryptocurrency plays available when compared to crypto index funds that offer exposure to a larger number of assets.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.