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The mechanism by which the major market indices will rebalance to include cryptocurrency (or any other new form of major economic activity) is that they will sell large amounts of equities at the current price supported by non-index buyers, and they will buy large amounts of cryptocurrency at the price demanded by non-index sellers. That price functions as a large transfer of wealth from index buyers to non-index sellers who bet right on their particular investment thesis. Future price gains (after rebalancing) require that future investors continue to demand more of the indexed securities than other non-indexed securities.

Basically, the index fund itself becomes a bet that the future will look much like the present, at least qualitatively, and that future investors will demand the same categories of securities as present ones do. If the future looks dramatically different from the present, then people who bet correctly with their particular version of the future reap the spoils, at the expense of all index fund investors.

(I should note that this is explicitly the purpose of indexing - by giving up the possibility of above-market returns and settling for market returns, you can eliminate the need for fees. If you believe that being average is good enough, this is a good bet. If you believe that the average person is going to get screwed and bad financial things will happen to the lots of people, why would you want to be them?)

> they will sell large amounts of equities ... and they will buy large amounts of cryptocurrency

More likely they will buy new crypto focused companies (Coinbase IPO) or that existing firms will adopt crypto based business lines. The investment is firms innovating, rather than the value of the underlying instruments or technology they use.

That's entirely possible too, but the problem (for index fund shareholders) is identical if the securities involved are "private preferred stock" rather than "tokens on the Ethereum blockchain". They're still growth opportunities outside the indexed universe that siphon from value opportunities inside the indexed universe, which the index fund can only legally purchase once much of the growth has already occurred.

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