Crypto market is known for two things: high volatility and decentralised investments. What do these two terms incur is simple, Crypto market is highly unstable, and that there is just no way to predict where a crypto coin/token is going if another coin drops or rises. In other words highly unpredictable and what some might call, 'risky'. So for an investor what is needed is a point of reference which can reflect the market as a whole. This is where comes into play Indices.
Cryptocurrency Index is a concept that implements mutual funds concept in the crypto market. Let's take up an example for understanding this: We have an index, called Cryptoz-EW-10, Where all the investment done would be equally distributed. In all the 10 currencies that it considers, for instance, lets say the currencies be Bitcoin, Bitcoin Cash, Cardano, Eos, Ethereum, Iota, Litecoin, Ripple, Stellar and Tron. Let's say we want to invest $100. Then when we follow Cryptoz-EW-10, each currency would be invested at $10 each. Now even if lets say Bitcoin cash drops, it doesn't mean that there will be a drop in Bitcoin (Because cryptocurrencies are decentralized), in fact, price might even increase, or something like, that Litecoin loses its hold, but there are 9 other currencies to back up for the losses by one currency/or at least minimize the effect. That is until and unless the whole market crashes, which is a very difficult concept if the Cryptocurrencies are truly decentralized. But just in case like the recent bear run of the crypto market, there were some currencies like Ethereum classic which unlike other Cryptocurrencies, were able to maintain their price and market cap. Thus Cryptocurrency index is much stable investment than the individual cryptocurrencies.
Another thing that is considered in Cryptocurrency indices is rebalancing. What is rebalancing then? Rebalancing is nothing but reevaluating the currencies to be considered as top currencies, i.e. if you are investing in top 10 currency index, and if X currency in top 10 suddenly loses its grip on market, or the project behind it crashes, and the currency drops down to 11th position, the top 10 currencies will change, and thus rebalancing becomes important to keep the indices dynamic and stable.
Another type of indices and the one widely considered are Market Capitalization based indices. Where the investment is not equally distributed between all the currencies under consideration, but the investment distribution is based on the market capitalization of individual currencies, and investment is divided in the ratio of the same. It is based on the fact that more the Market of a crypto the stronger the crypto is considered. Let's take up an example, we have an index called Cryptoz-10, which is a market cap based index. If the in a hypothetical scenario market cap of Ethereum is half that of Bitcoin, and an investment in Ethereum is $10, then an investment of $20 is done in Bitcoin. It can be thought of like this Stronger the project backing a coin, stronger the currency and thus more secure your investment is.
Indices in the crypto market can be seen as an opportunity, though criticized by many for the legitimacy, the methodology on which the indices work on is surely as definite as it can get. There have been Indices for enough time now like crypto20 that have given good results