What is a Cryptocurrency Index?

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If you are only investing in then it is easy to understand how your investment is doing, you can simply look at the Bitcoin price in USD – if it goes up, you are winning. However investors are often interested in relative performance and ask questions like,

  • have cryptocurrencies done better than stocks?
  • have done better than Bitcoin?

Indexes help answer that question. Well-known stock indexes include the S&P 500 the FTSE 100. Indexes show the value of a selection of assets, such as “the top 100 shares” or “all cryptocurrencies”. The calculations are often complicated because they allow for number of shares/coins and may cap the contribution of any one asset to the index.

An excellent example of a cryptocurrency index is the MVDA25. The chart below shows how the index tracks the performance of the wider cryptocurrency market.

Size and Liquidity Requirements Top 25 components of CryptoCompare Digital Assets 100 Index by size and liquidity.
Monthly average-daily-trading volume of at least 1 mln USD at review.
Diversification Component weightings are capped at 20%.
Review Monthly.

 

Click the chart to see the live version

 

 

Indexes help us diversity our investments

If we put all our money in one coin we might suffer a lot of volatility (it goes up and down a lot). If we invest in many coins we can smooth out some of the fluctuations, one way to do this is to invest in an index. To achieve this we either buy a basket of coins or we invest in a fund that does that for us. Either way it become easy to track our performance and understand our asset allocation.

Author

James Bayley

Ex-physicist, professional project manager and cryptocurrency enthusiast.

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