Everything You Need to Know about Crypto Index

Tired of giving personal attention to every crypto there is— hard work, no? 

Tired of checking the market dominance of every crypto you have your eyes on—time-consuming, no?

Or simply interested in tracking the broader crypto market during uncertain times? Well, for all that and everything similar, we have a crypto index: a bird’s eye view of the broader market.

Key Takeaways

• 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, the Nifty 50 is the most recognized and followed index in India to track the performance of the Indian stock market. It consists of the top 50 stocks by market capitalization, and each stock has a different weightage. 

By taking the example of the Nifty50, let’s understand what makes indices so useful. 

Nifty50: A brief about India’s most popular stock market index

In the Indian stock market, there are over 7,000 companies listed on the National Stock Exchange or NSE. So, if anyone wants to track the performance of the Indian stock market just by looking at the stocks listed, it would be very difficult. And, not all companies listed meet investors’ expectations. 

This is where Nifty50 fits in. It lists the top 50 liquid companies by market capitalization is usually referred to as the market movers. By tracking the price performance of these 50 companies, you can understand, how the stock market is doing. 

So, Nifty 50 makes it easier to track the market just by analyzing its level as it shows, how the 50 companies are currently doing. You don’t need to track the 50 companies individually. It simplifies the investment process. 

In the crypto sphere, indices can offer the same benefits and can be helpful in the investment journey. 

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.

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.

How is the value of any index calculated?

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. 

In simple words, an index represents the most important assets relevant to a class—where the focus is on adjusted dominance, trade volume, and age. 

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.

Are all crypto indices based on the market cap?

No. Not all of them.

Crypto indices can also be bucket-based. Remember the Bank Nifty Index, which houses the banking stocks, or the Nifty Metal index, which includes the metal stocks. Bucketed indices work similarly for crypto, with the components being the most prominent or use-case-specific assets for the given bucket.

For instance, in the crypto sphere, you can see a DeFi Index, Smart Contract Crypto index, expect to see the likes of Ethereum, Cardano, Binance Coin, and other relevant assets as components. The weightage might be subjective, depending on the calculation methodologies the index creator chooses to use.

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. An index is merely a guide to helping you make informed decisions. 

However, various index-wise investing strategies have been launched. For example, there are index funds, which are similar to 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.

Investing in indices (via Index funds or other means) 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.

Note: In a volatile market where decision making or timing the market is hard, Index-specific investing can be a good approach. The portfolio remains balanced and you aren’t overexposed to a single loss-making asset, if any. 

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%).

Wrap-Up

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.

Download the CoinSwitch Kuber App, and start exploring the world of crypto assets.