With all these data points, it can be difficult for traders to get a sense of what the digital currency market as a whole is doing. Fortunately, traders can leverage indices to get a better sense of key variables like the market's total value and which segments are experiencing the greatest volatility.
What Is An Index?
An index is a means of measuring something. For those familiar with traditional investments, a perfect example is the S&P 500 index, which is a benchmark group of 500 stocks. This index provides a quick glimpse of how equities are doing, seeing as how it includes roughly 80% of the stock market's total market capitalisation. Another example of a well-known index is the Dow Jones Industrial Average, which is calculated using the values of the stocks of 30 major U.S. companies.
How Can Crypto Indices Help?
By harnessing crypto indices, traders can zero in on what the broader market is doing, in terms of both price fluctuations and also trading activity. This can save interested parties some time and energy when they are researching the digital currency markets.
5 Noteworthy Crypto Indices
Let's now look at certain indices for this particular market, as well as their characteristics.
1. The Bitwise 10 Large Cap Crypto Index (BITX)
This index, which is provided by investment firm Bitwise Asset Management, "tracks the total return of the 10 largest cryptoassets, as measured and weighted by free-float and 5-year inflation-adjusted market capitalization," according to the Bitwise website.
To be eligible for inclusion in any of Bitwise's indices, a "cryptoasset" (as referred to on Bitwise's website) must meet several requirements. For starters, it has to be a "cryptographically secured digital bearer instrument." In other words, the integrity of its network needs to be secured through cryptography, and it is also a bearer instrument, meaning that the person who physically retains the asset is presumed to be the owner.
Further, it must meet additional requirements, including being available for trade on at least two exchanges deemed eligible by Bitwise. In addition, stablecoins are not eligible to be included in Bitwise indices.
The CCi30 is another index designed to track the performance of the digital currency market. More specifically, it includes the 30 largest cryptocurrencies, as measured by their market capitalisation. The CCi30 does not permit stablecoins.
This particular index, which was developed by a group of fund managers, mathematicians and quants, represented more than 90% of the market value of all cryptocurrencies as of the time of this writing (July 2020).
According to the website for the index, "the CCi30 has been designed with 5 main characteristics: 1. diversified; 2. replicable; 3. transparent; 4. provides in-depth coverage of the entire sector; 5. presents the best risk-adjusted performance profile possible."
3. Bloomberg Galaxy Crypto Index
The Bloomberg Galaxy Crypto Index (BGCI) was created to follow the largest cryptocurrencies that are denominated in the U.S. dollar. In addition to being traded in the USD, digital assets must meet several other criteria to be eligible for inclusion.
For example, they must have at least two pricing sources that fulfill certain criteria, including providing Bloomberg with details on their management structure and compliance program. Further, cryptocurrencies must achieve a certain trading volume to be eligible, attaining a 30-day median value of at least US$2 million from across no fewer than two eligible sources.
"The index brings our rigorous approach to index construction to cryptos and will provide investors with a transparent benchmark to gauge the performance of the broader market," Alan Campbell, who served as the Global Product Manager for Bloomberg Indices at the time of launch, explained.
4. CMC Crypto 200 Index
The CMC Crypto 200 Index (CMC200), which was announced in March 2019 by CoinMarketCap, was designed to track the largest 200 cryptocurrencies by market capitalisation. Saying that this particular index "essentially covers more than 90% of the global cryptocurrency market," the company described it as one of the most "comprehensive" indices available.
5. CMC Crypto 200 ex BTC Index
The CMC Crypto 200 ex BTC Index was announced at the same time as the CMC Crypto 200 Index, and it was also created to follow the biggest cryptocurrencies by market value. However, it was designed to exclude Bitcoin.
The company revealed that Solactive, a German index provider, would be responsible for administering both the CMC Crypto 200 Index and the CMC Crypto 200 ex BTC Index. It also noted that it planned to rebalance both of the aforementioned indices on the final day of each calendar quarter, providing different digital assets with the potential for inclusion.
The digital currency markets provide traders with a wide range of options, including thousands of digital assets from which to pick. For some, this can prove difficult, even overwhelming. Fortunately, traders can make things a bit easier by leveraging indices, which are basically just measures of the market.
By harnessing indices, traders can quickly obtain a status of the digital currency market, whether they are looking at the market as a whole or specific segments of it.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…