In recent years, the passive style of investing has taken over the world, and now the concept of index investing is slowly making inroads into the crypto market. Crypto indices provide buyers a broad exposure to the crypto market and help eliminate investing biases. They make it easier to create a diversified portfolio, and there are many to choose from.
There’s a lot to learn about crypto indices, and how they work, but let’s start with the basics.
- A crypto index is a list of crypto assets, which gets its value from the tracking and measuring of the value of each asset within it.
- It is often used as a benchmark for the measurement of the performance of the overall market.
- Investing in an index is a kind of passive investment.
- Top crypto indices include the ones by Nasdaq CI, Bloomberg Galaxy (its Crypto and DeFi indices), and CoinDesk (its Large Cap and its DeFi indices).
What is an Index?
In simple terms, an index is a list that tracks the performance of a group of securities/assets using a standardized metric and method. For example, Nifty 50 is a stock market index, and it consists of the top 50 stocks by market capitalization, and each stock has a different weightage.
How is the value of an index calculated?- H3
The value of an index is calculated using a pre-set method, and there are a variety of options in terms of the method. In the case of Nifty 50, for instance, it is the free-float market capitalization-weighted method. It reflects the total market value of all stocks in the index relative to the base value, which was 1,000.
Any change in the prices of stocks in the index is instantly reflected in the value of the index. A stock with higher weightage will significantly influence the value of the index. At the end of the day or cut-off time, the value of the index is adjusted as per the net change in the value of securities/assets.
Is it possible to invest in an index?
Technically, no, you cannot invest in it. The index only reflects the overall market trend—whether the momentum is bullish or bearish.
However, various index-wise investing strategies have been launched. For example, there are index funds, which are nothing but mutual funds that mimic the index composition in their portfolio.
Because the purchases are made as per the index composition, there is no need for much active fund management by the buyer, which reduces the costs and complexities in investing.
The first index fund, which was introduced by John C Bogle in 1976 in the US, became very popular among investors. Index investing follows a passive style of investing and has proved its efficacy by outperforming many actively managed funds over the years.
What is a Crypto Index?
Similar to a stock market index, one can create a crypto index, comprising different crypto assets having different weights in the portfolio. For example, the Crypto 10 index by BITA provides an objective measure of the Price Return Performance of a basket of leading cryptocurrencies.
The following is the index composition and weight of different crypto assets in the portfolio.
Launched in 2018, the base value was 5,000, and is currently (22 March 2022) trading at 15,137 points. The index value is calculated based on the free-float market capitalization method.
Investing in indices is always considered a better option for beginners than buying individual crypto assets. By investing in them you get exposure to various crypto assets in a single investment and reduce the back and forth of having to constantly analyze the performance of each coin.
Top Crypto Indices to Follow
The following are some of the top crypto indices for your reference.
NASDAQ Crypto Index
Launched in May 2020, the NASDAQ Crypto Index (NCI) is one of the top indices in the crypto market. It is listed on multiple crypto exchange platforms, including Coinbase. NCI currently lists only eight crypto assets, of which Bitcoin has the highest weightage in the index. The composition of the index is rebalanced and reconstituted every quarter based on liquidity and performance standards.
Bloomberg Galaxy Crypto Index (BGCI)
The Bloomberg Galaxy Crypto Index (BGCI) tracks and measures the performance of the largest crypto assets that are traded in USD. It was launched in May 2018 with a base value of 1,000. The constitution of the index is rebalanced and reconstituted every month.
Bloomberg Galaxy DeFi Index (DEFI)
Launched in August 2021, the benchmark index tracks and measures the performance of top DeFi protocols by market value. The DeFi protocols are chosen based on institutional trading, custodian readiness, and pricing quality.
Based on the market scenario, the index composition is rebalanced and reconstituted every month.
CoinDesk’s Large Cap Index (DLCX)
CoinDesk’s Large Cap Index (DLCX) is designed to track the performance of large-cap crypto assets. The composite benchmark is based on CoinDesk’s single currency index and targets 70% digital asset market capitalization coverage through a rule-based index construction process. In other words, it is a portfolio of multiple single-asset indices.
Its coins include bitcoin (XBX), Ether (ETX), Bitcoin Cash (BCX), Litecoin (LTX), and Chainlink (LNX).
CoinDesk’s DeFi Index (DFX)
This benchmark index represents popular coins in the DeFi sector and selects suitable coins for long-term holding. The weights of different coins in the index are determined by the latest dollar-denominated value and its corresponding circulating token supply. The index is rebalanced and reconstituted quarterly.
The top five coins in the composite index include Uniswap (38.98%), Curve DAO (15.39%), AMP (10.75%), Aave (10.29%), and Maker (8.11%).
As the crypto market evolves and grows in size, the crypto index will gain importance among investors as they tend to be very useful. For instance, just by looking at Nifty 50 or Sensex, it is possible to get a feel of the market, and its near-future direction, without having to study the entire market.
A good crypto index will be able to capture most gains over time by investing in a select few coins, eliminating much of the noise and complexities of investing in crypto coins.
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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