What Are Crypto Indices?

January 5, 2022
by Leon Marshall,

Article Recap

Crypto indices track grouped virtual currencies’ performance. They make crypto trading easier overall, but they are not necessarily for everyone.

Cryptocurrency indices – what are they?

Indices take a group of assets in an industry based on certain criteria and track their performance as a whole. Cryptocurrency indices function in the same way except that they are made up entirely of cryptocurrencies. Blockchain technology and different cryptocurrencies share common factors like governance capabilities, energy efficiency, speed, scalability, decentralization, etc. Market capitalization is the most common factor in determining which commodity enters the index. There are crypto indices that track projects with the largest market cap, those that are the most decentralized and with the largest market cap, most scalable projects per market cap, and so on.

Over the course of a bit more than a decade, crypto markets have gained traction and have become one of the most volatile assets out there. Even when comparing crypto exchanges, it can be seen that prices of digital currencies within them are not the same. Crypto indices are a good way to get an estimate of the performance a specific basket of currencies has. An index’s price fluctuation is affected by that of individual cryptos within it and the constant changes that occur. Using real-time data from multiple exchanges that they aggregate, trading crypto indices mean that traders can enjoy diversification instead of choosing individual assets. 

Pros and cons of crypto indices

Crypto indices, like everything else, have their pros and cons. When it comes to the advantages, the biggest ones are efficiency and cost-effectiveness. As already mentioned above, by trading an index, you do not have to deal with multiple assets individually but rather as a group. . Traders who wish to gain some portfolio exposure more easily can benefit from indices. Those riding trend waves, such as NFT-based indices, can also make use of speculating on the price movement of a group of virtual currencies. By diversifying risk across a range of instruments, traders prevent overexposure to a single asset as well.

That being the case, indices are not for everyone. If an index has a divisor – in other words, an additional tool to calculate the index price based off specific changes in the market – prices can sometimes be dependent on multiple factors. This could turn the index into a more complex trading asset than individual cryptos. Another thing to consider is that market capitalization indices are the most common, and some cryptos have a considerably larger impact on movements within an index. Bitcoin and Ethereum, for instance, are the top cryptos and indices that include them can be more volatile as a result of their price movements compared with other currencies. 

Therefore, you should research what each index focuses on before starting to trade. There are many options to choose from and it is even possible to create one’s own index. Index Coop is one such decentralized organization that makes this possible using Set Protocol. Some indices you can find on it are DeFi Pulse Index ($DPI), the Metaverse Index ($MVI), the Ethereum Flexible Leverage Index ($ETH2x-FLI), and many others. PieDAO is another decentralized organization that creates crypto indices, though there are the classic options like Nasdaq, NYSE and S&P that each offer their own alternatives. Famous crypto indices, in general, are Weiss Crypto Ratings, Bloomberg Galaxy, Bitwise, Shitcoin Futures, RAD 30, and more.

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