Creating a Crypto Index: Challenges and Approach

Creating a cryptocurrency index presents several challenges. First and foremost, Bitcoin represents around 52% of the total market capitalization, with Ethereum accounting for 17%. Together, they make up 69% of the market. If we were to create a market capitalization-weighted index similar to the S&P 500, the dominance of Bitcoin and Ethereum would limit the impact of other cryptocurrencies' price fluctuations.

Another consideration is the inclusion of stablecoins like USDT and USDC, which have a stable value pegged to the US dollar. It may not be very interesting to include tokens with stable values in a cryptocurrency index.

Furthermore, when ranking cryptocurrencies by market capitalization, we encounter not only Ethereum but also staked derivatives of Ethereum that offer additional returns on the cryptocurrency.

The reliability of market capitalization as a measure also comes into question. In the crypto world, it is not uncommon for many tokens to be unissued or self-held. Counting or not counting these tokens can significantly affect the total valuation of a cryptocurrency.

So, how did we approach this?

To measure the total valuation of a cryptocurrency, we focused on circulating cryptocurrencies, as is commonly done. As of September 1st, 2023, we listed the top 25 cryptocurrencies by market capitalization, excluding stablecoins. However, we included staked derivatives to offer exposure to returns and to minimize arbitrary rules.

We then created an equal-weighted index, with each token representing 4% of the index. Our goal was to minimize biases, remain neutral, and limit index modifications to provide an accurate reflection of the market's state.

Creating a cryptocurrency index is a complex task that requires careful considerations for market dynamics and token characteristics. By addressing the challenges and adopting a thoughtful approach, we aim to provide an index that accurately represents the cryptocurrency market.

Stay tuned for more updates and insights on our cryptocurrency index.