Cryptocurrency Index cover
July, 2018

Cryptocurrency Index

Index is the standard point of reference wherein the constituents and their statistics are taken as a whole. The concept of Index in fiat markets has been widely known, while in crypto market it is a relatively new concept. There is a huge difference in Fiat market and Crypto market Indices, mainly due to highly volatile nature of crypto currencies. The volatility in crypto market is an induced effect of multiple exchanges flooding in to the crypto market in a small span of time. Therefore, unlike the indices in fiat markets, fixing the list of currencies for calculation the index do not result in a reliable metric.

Cryptoz indices live charts

The Problem that has now been stated needs the indices to be dynamic in nature; the currencies under consideration need to be revaluated periodically. Kicks in the concept of rebalancing. Rebalancing is nothing but revaluation of the currencies that are to be considered until the next time re balancing is done, the idle scenario is rebalancing with high level of time granularity, but most of the time, this is done with a period of 1 month. This mechanism is what might be considered the savior, of the indices based on crypto currencies.

The Rebalancing might include multiple factors such as:

  1. Change constituents every month on the basis of Market Cap.
  2. Adjust Market Cap using AWF (Adjusted Weight Factor).
  3. If a Cryptocurrency is discontinued from the crypto market, make it insensitive from index calculation till rebalanced data is reached.


Why Indices ?

Crypto market is known for but two things: high volatility and decentralized 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 a 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 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 instant 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 with $10 each. Now even if lets say Bitcoin cash drops, it doesn’t mean that there will be a drop in Bitcoin (Because crypto currencies are decentralized), in fact, price might even increase, or some thing like, that Litecoin looses 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 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 are much stable investment than the individual crypto currencies.


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 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.


Live Projects and Solutions

There are not many projects that can be considered as robust and reliable crypto index, thought some of best might be listed as:

  • Bitwise(HOLD10):

    The HOLD 10 Index has a policy of selecting the top 10 coins, by inflation adjusted market capitalization. The selected coins are then held in proportion to their inflation adjusted market capitalization.

  • BBIndex:

    One of the world’s first diversified Cryptocurrency indices with exposures to different segments of the Cryptocurrency market. They offer 26 different investable indices which generally include 7, 20 or 50 Cryptocurrencies in each index. These offer professional index choices for consumers in the Olympus ecosystem, and having all the tokens trade able within the same place also sidesteps some of the complications of the buying process for new investors as well.

  • Cryptoz:

    The Index consists of top-x currencies based on their market capitalization where x depends on the type of index. For each index be it either Market Cap or Equal Weight, the index is calculated for x=10,25,50 and 100 currencies. Which gives indices as:

       - Market Cap Indices: Cryptoz-10, Cryptoz-25, Cryptoz-50 and Cryptoz-100.

       - Equal Weight Indices: Cryptoz-EW-10, Cryptoz-EW-25, Cryptoz-EW-50 and Cryptoz-EW-100.

    Market Cap based Indices

    Designed to provide complex features with an easy and fluid user interface and experience, It couldn’t get easier to analyze the crypto market with this all in one solution. Flexible towards time-interval of the whole graph and the time interval between each data point can be adjusted according to the requirement and wish of user.


Conclusion

As the Crypto market is moving forward, the need for a standard point of reference is required to analyze the behavior of crypto market. With a dynamic algorithms, it is possible to tap into the volatile nature of crypto market and establish a good index.


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