Crypto indexing and weighed baskets quickly emerging as norm
A new trend involving Crypto exchanges, crypto blockchains, and fund managers point to increased adoption of ‘indexing’ that cater to investors in digital currencies, Bitcoin and alt-coins.
According to the Cryptoresearch report, when designing a Cryptocurrency Index, the idea is to create one that tracks the entire cryptocurrency market.
“A professional index will give market participants a quick, concise impression of the direction of the relevant market segment or asset class,” says the Cryptoresearch report.
Most stock investors are familiar with ‘popular’ indices such as the S&P, German DAX, Dow Jones, or British FTSE 100.
The DAX index calculates the performance of the 30 largest companies on the German stock market, representing close to 80% of the market cap of listed stock corporations in the country.
Can the same happen with Cryptos?
Coinbase crypto basket
US-based cryptocurrency exchange operator Coinbase announced it will add Coinbase Bundles to its offering that will allow users to purchase a weighted basket of the five cryptos it lists: Bitcoin, Ethereum, Bitcoin Cash, Litecoin, and Ethereum Classic, as reported by Business Insider (BI).
Instead of investors having to decide what digital assets to purchase, they can buy a “basket” of them, with the cryptos weighted by market capitalization at the time of purchase, with bundles beginning at $25.
Coinbase last week announced a major listing policy shift that will see it increase its digital asset offerings substantially.
“Investors (will) get wider exposure to the market without actively trading. The $8 billion firm has already introduced similar index funds feature for its institutional investors looking to for exposure to a broad range of crypto assets. These changes will likely open up the platform’s ecosystem to a much wider institutional and non-institutional investor base,” says BI.
As per Coinmarketcap, Coinbase Pro, Coinbase’s trading arm, is only ranked 14 on the list of top 100 exchanges by volume, led by Binance in Malta.
Crypto 20- Autonomous ‘token-as-a-fund’.
Crypto 20 is a new crypto index fund that will use the ICO funding to buy the underlying crypto assets. It promises no broker fees, no exit fees, no minimum investment and full control over your assets, effectively creating full blockchain transparency.
CRYPTO20 provides a way to track the performance of the crypto markets as a whole by holding a single crypto asset. Index funds have consistently beaten the average managed fund since their inception.
How to track the crypto index market
A cryptocurrency Market Index or CMI should model changes in the price of digital currencies giving broad-based exposure to the crypto market, where no single cryptocurrency or specific group thereof dominates the index.
Cryptoresearch.report says indices can be categorized as either price-weighted or capitalization-weighted.
1-Price-weighted: A price-weighted index holds assets in proportion to their prices. Price-weighted indices include an equal number of each asset in their basket; their weighting method is simple to understand and their daily value easy to calculate. If an index contains three stocks A, B, and C with current prices of $3, $8, and $10 respectively, the ABC index level is calculated as $21/3 = $7. Therefore, share A would have a weight of $3/$21 = 1/7 of the entire index.
2-Capitalization-weighted: A capitalization-weighted index hold assets in proportion to their market capitalization. For example, if Bitcoin holds 60% of the entire market capitalization and Ethereum holds 20% then the portfolio allocation will have 60% of the funds invested in Bitcoin and 20% invested in Ethereum. The remaining 20% will be invested in the rest of the cryptocurrencies according to their proportion of the entire cryptocurrency market.
Cryptoresearch.report says two main risks exist:
1- Extreme volatility in prices and liquidity
2- Uncertainty stemming from the regulatory framework around cryptocurrencies.