Another use case for indexes is to benchmark performance for both professional and retail traders.
By comparing their own returns to that of a representative index, an investor can better understand their own performance and risk. For example, say a crypto hedge fund is delivering 80% annualized returns over the last three years. On face value that sounds like a great performance.
However, if the performance is compared to the CMBI 10, which returned 130% annualized over that same time period, those same returns look significantly worse. Therefore, benchmarking would help show the need for the fund to pivot strategies or even tell money managers and investors that they should invest their money somewhere else.
Indexes can also help investors backtest potential investment thesis before launching a fund. By comparing potential trades against an index, investors can help determine if the basis for their strategy could be successful or not.