If you are only investing in bitcoin 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 alt coins done better than Bitcoin?
Indexes help answer that question. Well-known stock market 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 mvis CryptoCompare Digital Assets 100 Index by size and liquidity.
Monthly average-daily-trading volume of at least 1 mln USD at review.
|Component weightings are capped at 20%.
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.