Cryptocurrency indices – What they are and how they work

Indices are a group of assets that are used to track the collective movements of a specific sector. Each index has its own type of composition, but by default they are all expressed in points and not in currencies, just as other asset classes do. Don't know which cryptocurrency to invest in now with the current market situation? Let's see how we can leverage cryptocurrency indices to make a diversified investment in a basket of cryptocurrencies to diversify risk.

What are cryptocurrency indices?

Previously we already explained what are indices in a article which we published a few months ago, but we are going to do a brief review to refresh our memory. As we mentioned in the first paragraph, the indices are asset groups that are used for track collective movements of a specific sector. Each index has its own composition, which are expressed in points and not in currencies. In order to measure the profitability of an index we must look at the base point, that is, the price at which the index was launched. Mostly, indices can be calculated in two ways:

Not weighted on asset prices

These indices are based on the Prices of the assets That composes. The calculation of these indexes is based on the the amount of the Prices of the assets that comprise it. Next we share the result of said calculation between the total number of assets in the index (arithmetic mean based on prices). In these indices the assets with higher price They are the ones who move the value of the index.

Market capitalization weighted

These indices are based on the market capitalization of the assets that comprise it. The calculation of these indices is based on the the amount of the joint market capitalization of the assets. In these indices the assets with largest market capitalization They are the ones who move the value of the index.

What cryptocurrency indices can we highlight?

Within the cryptocurrency ecosystem we can also take advantage of cryptocurrency indices to be able to make a diversified investment in a basket of cryptocurrencies. These indices allow us to invest in a basket of cryptocurrencies that may have similarities, from being part of the same sector, to sharing positions. in the top 10 assets by market capitalization and much more. Let's see which are the most prominent cryptocurrency indices:

Bankless BED Index (BED)

El Bankless BED Index (BED) is a cryptocurrency index designed to track performance of the three types of assets most promising of the ecosystem of cryptocurrencies, . Therefore, this index is equally weighted in three assets: Bitcoin (BTC) as a refuge of value, Ethereum (ETH) as programmable money and Defi Pulse Index (DPI) as decentralized finance. This index has an expense ratio of 0,25%, a market cap of $1,10 million, and a current price of $54,22. 

 

Defi Pulse Index (DPI)

 

The DeFi Pulse Index has 4 criteria that the tokens that make it up must comply with. Are used two criteria to evaluate the token characteristics, a to evaluate the Project features and another is used to evaluate the protocol features. Inclusion criteria are the basis for selecting which tokens will be included in the index. These criteria are the following:

1. The token must be available on the blockchain Ethereum.
2. The token must be associated with a decentralized finance (DeFi) protocol or decentralized application (dApp) listed on Defi Pulse.
3. The token cannot be considered "security" type by the corresponding authorities in different jurisdictions.
4. The token must be a bearer asset.

Therefore, the criteria do not include: wrapped tokens, tokenized derivatives, synthetic assets, tokens linked to physical assets, or tokens that represent claims on other tokens.

Metaverse Index (MVI)

El Metaverse Index (MVI) is a cryptocurrency index designed to track the performance of a basket of tokens entertainment, sports and business within the theme of metaverses. The index is calculated using a combination of root market capitalization and a liquidity weight to arrive at the final index weights. This is because liquidity is an important consideration in this space and should be taken into account when determining portfolio allocation. This index is currently composed of the tokens of Iluvium (ILV), Axie Infinity (AXS), Sandbox (SAND), Decentraland (MANA), Enjin (ENJ), WAXE, Rally (RLY), Audius (AUDIO), Yield Guild Games (YGG), Decentral Games (DG), Ethernity Chain (ERN), NFTX, WHALE, Virtua (TVK), Rarible (RARI) and REVV. It has an expense ratio of 0,95%, with a market cap of $4,45 million and a current price of $26,75. 

 

In the same way as with the Defi Pulse index, the metaverse index also has selection criteria when incorporating tokens, but in this index they are more extensive. These selection criteria are the following:

1. The token must be available on the Ethereum blockchain.
2. The protocol must be in one of the following token categories on Coingecko: non-fungible tokens, entertainment, virtual reality, augmented reality, or music. More categories will be added in the future as the market matures.
3. ‍The total market capitalization must be greater than $50 million.
4. The protocol must have at least 3 months of trading history and its token must have at least 3 months of price and liquidity history.
5. The token must have reasonable and constant liquidity on decentralized exchanges on Ethereum.
6. Have conducted an independent safety audit on the protocol and results reviewed by the product methodologist. If it has not been done, the first points presented will be put to trial to assess the incorporation.
7. Tokens will not be locked in staking at the launch of the index. This is subject to change as liquidity increases and it becomes possible to safely generate returns through staking.

Conclusions on cryptocurrency indices

Cryptocurrency indices provide us with a great tool to diversify our cryptocurrency investment into different types of asset groups. Within this article we have shown you the three most notable within the ecosystem. The Defi Pulse Index will allow you to invest in a basket of assets belonging to decentralized finance. The Bankless BED Index, on the other hand, will allow you to have a diversified basket weighted equally between Bitcoin, Ethereum and the Defi Pulse Index. Finally, through the Metaverse Index you can gain exposure to a wide basket of tokens belonging to the metaverse ecosystem. Without a doubt, this tool makes it easier for us to invest in a diversified way in cryptocurrencies. If you want a more in-depth look, you can consult the page Token Sets, where you can find a wide range of different indexes composed based on different criteria.