Cryptocurrencies are now everyday slang in the financial market ecosystem - significant players in wall street have started to take an interest in these digital assets. Today, the total crypto market cap is well over $2.3 trillion, with a 24-hour trading volume of $325 million. While Bitcoin still leads the pack, there have emerged over 5,000 cryptocurrencies, some of which propose a fundamental solid value. Investors looking for exposure in this growing ecosystem now have a wide range of options to choose from - however, the risks are similarly high.
This growth of crypto as an emerging tower in finance has led to the debut of price indexes to track the market. Most investors or traders who actively participate in the crypto ecosystem have to interact with a price index in one way or another. The indexes inform the price of a crypto asset amongst other factors such as market capitalization, trading volume, and the number of tokens in circulation. As you can already see, crypto price indexes are not so different from stock indexes, whose role is to inform the price of a security in traditional markets.
The last few years have seen more crypto price indexes pop up due to the growing demand for accurate and timely data by institutions. Some of the most common crypto price index platforms include Coinmarketcap and Coingecko - the two provide detailed information about cryptocurrency prices and other fundamentals such as the technical underpinnings of a particular project. An investor or trader can analyze the crypto ecosystem's health by a simple glance at one of the two sites. Coingecko features primary metrics for most crypto niches, including Markets, DeFi, crypto exchange liquidity and NFTs.
Notably, other popular crypto indexes assume a similar model to that of the S&P 500 (measures the performance of the top 500 stocks listed on U.S stock exchanges). One such crypto index is the Weiss Crypto Ratings - this index aggregates data from most popular exchanges to provide an accurate pricing benchmark. It features various segments, which include the Weiss 50 Crypto Index (50), Weiss 50 Crypto Ex-BTC (W50X), Weiss Large-Cap Crypto Index (WLC), Weiss Mid-Cap Crypto Index (WMC), and Weiss Small-Cap Crypto Index (WSC).
Bloomberg and Galaxy Digital Capital management also have a crypto index dubbed 'The Bloomberg Galaxy Crypto Index (BGCI) - this one measures the performance of the most significant crypto assets traded in U.S dollars. The BGCI index constituents are distributed across various crypto categories like privacy assets, innovative contract protocols, mediums of exchange, and stores of value. With such an inclusive representation, crypto investors and traders can now do real-time analysis to inform portfolio allocation or risk management decisions.
Going by the rate at which crypto indexes are being developed, it is evident that they play a significant role in the crypto ecosystem. We will highlight some of the ways in which they add value:
As previously mentioned, crypto indexes are a core source of information for investors and traders. The data summarized by these platforms is precious in calculations that involve portfolio balancing and risk management. For example, the crypto price action displayed on Coinmarketcap; can inform the past performance of a particular crypto asset amongst other indicators like the daily traded volume. These metrics are fundamental in choosing whether to invest in a specific crypto asset - in most advanced scenarios, pro traders use them as part of the decision-making factors.
With crypto indexes in the picture, market participants can access real-time price updates. This is especially important in making investment decisions within an environment that is as volatile as the crypto market. While there may be a lag in some indexes, most still provide price updates that are reliable. Some have even gone the extra mile of aggregating real-time data from various exchanges to avoid this pitfall.
As the crypto ecosystem grows bigger, more products debut daily - they range from technical innovations to financial instruments such as derivatives. The latter has become so popular in recent years and largely depends on crypto price indexes for pricing. Let's take for example Bitcoin futures at Drixx - we use the price index of various exchanges to come up with a median value that informs the price of the underlying asset 'BTC' deriving a real-time value for the futures contract.
Exchange-Traded Funds (ETFs) are prevalent in traditional finance - this type of investment comprises a collection of securities such as currencies, commodities, bonds, and stocks. They track an underlying asset's price and are traded in traditional stock exchanges such as the Chicago Mercantile Exchange (CME). ETFs are designed to give investors exposure to an underlying asset without buying or owning the asset directly.
These tracking instruments are now making in-roads into the crypto market as well - stakeholders view them as an alternative to escape the regulatory and technical hurdles involved in buying crypto directly. Today, you can buy a Bitcoin ETF from Canada's Purpose Investments ETF, having been approved by the country's financial watchdog in March 2021. This Bitcoin ETF now has an Asset Under Management (AUM) of over $1.1 billion - a figure that seems to be rising with the growing interest in Bitcoin. Meanwhile, the U.S is still lagging as the SEC continues to reject applications that seek to launch a Bitcoin ETF, citing the protection of investors and market manipulation as some of the main reasons.
Index funds are another alternative to gaining crypto exposure without direct management of the underlying funds. In traditional finance, an index fund is simply a portfolio composition of assets like bonds, stocks, currencies, or commodities. Index funds offer investors the opportunity to buy or participate in a financial market while entrusting the fund managers with investment decisions. Investors buy the index fund shares instead of directly buying a specific asset in the index composition.
Similarly, crypto index funds have emerged to suit prospective investors who want to avoid the hustle of doing research and active portfolio management. Some of the popular crypto index funds include Bitwise - it is credited as the first to debut. However, it currently serves only U.S residents and accredited investors as of press time. This fund offers exposure to Bitcoin and Ethereum through the Bitwise Bitcoin Fund and Bitwise Ethereum Fund, respectively. Other index funds that Bitwise features include a top ten crypto index fund and a DeFi index fund. Here’s an example of today’s trading price for the Bitwise 10 Crypto Index fund share ‘BITW’:
Price indexes are fundamental in the ongoing operations of financial markets, especially product pricing and tracking real-time data. More indexes are likely to be developed as the crypto market comes of age to accommodate the surging demand for accurate and timely information. Such growth would mean that the market participants will have various options to choose from or aggregate for price information - a development that would reduce the market inefficiency in crypto.
As for the Crypto ETFs and Index funds, more will spring up to set the pace for mainstream adoption. These investment avenues are likely to fuel crypto uptake by exposing the digital assets to legally limited investors. Nonetheless, a lot still depends on the regulatory pace set by leading financial giants like the United States.