BullsEye Crypto10: The Crypto Market Cap-Weighted Index
Updated: Feb 6, 2022
If cryptocurrency is to mature into a well-respected and stable asset class it will likely need to acquire some of the hallmarks of other, more traditional, asset classes.
What first comes to mind when you think of stocks and the stock market?
If you're like me, probably some of the stock exchanges. Traditionally investing and trading stocks is characterised by the exchanges at the heart of that activity, exchanges which have become household names - think Nasdaq, New York Stock Exchange, London Stock Exchange. And then you have their associated market indices - think Dow Jones, FTSE 100, S&P 500, Nasdaq 100 and so on.
These stock exchanges not only provide investors with reputable services for trading stocks and other securities, but they also provide useful market indices to help investors and traders measure their performance relative to the wider market.
Typically these market indices are defined by value (market capitalisation) or by industry sector - but all market indices serve that one core purpose of providing a yardstick against which individual or portfolio performance can be measured.
So what about cryptocurrencies?
Well, for starters, over the last few years, as the cryptocurrency market has continued to evolve and mature, leading global crypto exchanges have started to emerge. If you are a keen crypto trader I'm sure you'll have your favourite exchange(s) - think Coinbase, Kraken, Binance, KuCoin and so on.
But love them or hate them, these exchanges play an integral role in the functioning of the crypto market.
Some are global, some regional - but all provide a centralised point of exchange, generating much-needed liquidity for traders to trade. Crypto exchanges are starting to become brands in their own right, which inevitably leads to publicity - the good and the bad - and over time they will begin to exert an increased ability to influence the wider market and, in particular, the individual trader and investor.
As time passes, and the crypto markets mature, natural selection will take hold. Some exchanges will continue to proposer - those that offer reliable, secure, transparent and fairly-priced crypto trading and staking services. Others will fall away - those that, well, don't. It is likely that there will be a consolidation of crypto exchanges over time.
So there are plenty of crypto exchanges out there. But what about reliable benchmark indices for cryptocurrencies?
Investors, traders and the markets more generally require reliable reference points to enable them to measure performance - this stands true for cryptos as it does for stocks.
Measuring the performance of your investments is vital, and therefore understanding how to do this is a critical skill for any investor. We explore this issue in more detail separately in a separate BullsEye Insights blog: Alpha - can you beat the market?
A few crypto indices have popped up over time, but there remains a lack of leadership in this space.
But before I continue, let's first briefly explore some examples of the types and calculation methodologies of the more traditional stock market indices.
Common Types of Stock Market Indices
A capitalisation-weighted index takes the individual components and 'weighs' them according to their total market capitalisation. The 'larger' components carry higher percentage weightings, while the smaller components have lower weights.
This type of index is also known as a 'market value-weighted index'.
A large number of well-known market indices are market cap-weighted - such as the S&P 500 Index, Nasdaq 100, FTSE 100 and Hang Seng.
In a cap-weighted index, large price movements in the largest components can significantly effect the value of the index. Some commentators feel that this 'overweighting' towards the larger components gives a distorted view of the market, but the fact that the largest companies also have the largest shareholder bases makes the case for having the higher relevancy in the index. Calculating the index value in this way ensures that proportionality is maintained.
It is however possible for companies to grow to the point that they take up an inordinate amount of space in an index (I'm sure you can see the obvious parallels with cryptocurrency market too!). As a company grows, index designers are obligated to appoint a greater percentage of the company to the index. This can have a negative impact on a diversified index by placing too much weight on one stock's performance.
Interestingly, index funds buy more of the stock as its market cap increases, meaning its share price has gone up. This goes against the traditional investing mantra of buying at low rather than high prices and acts as a self-fulfilling prophecy.
A price-weighted index is an index in which the components are weighted according to their market price per share, rather than by market capitalisation or other factors.A price-weighted index is simply the sum of the members' stock prices divided by the number of members. Using an example with five components:
$5.05 + $9.00 + $25.25 + $20.45 + $1.50 = $61.25
$61.25 / 5 = 12.25
Therefore in a price-weighted index, stocks with higher prices receive a greater weight in the index, regardless of the issuing company's actual size or the number of shares outstanding. Accordingly, if one of the higher-priced stocks has a huge price increase, the index is more likely to increase even if the other stocks in the index decline in value at the same time.
The Dow Jones Industrial Average (DIJA) is probably the best-known and most widely followed index in the world. At its inception, the DJIA started with just 12 stocks and was priced at 40.94 - a world away from today's levels. The Dow now consists of just 30 stocks, making it one of the least diversified indices around. The calculation behind the actual Dow value is quite complex, but essentially it is derived by summing up the prices of all 30 member stocks and then dividing that figure by a "magic number" (also referred to as the divisor).
Say hello to BullsEye Crypto10
BullsEye Crypto10 is BullsEye's native crypto market index.
BullsEye Crypto10 is a market cap-weighted index which uses the market capitalisations of the top ten cryptocurrencies, weighted by their relative contribution to the total overall market cap for the top ten, to calculate its value.
The value of BullsEye Crypto10 is recalculated every 15 minutes.
Why does BullsEye Crypto10 matter?
As part of BullsEye's service offering to crypto investors and traders, we aim to provide the necessary toolkit to help inform day-to-day trading and investing decisions, in a simple and accessible way.
BullsEye Crypto10 is a key component of that - a component we could not find elsewhere, so we created our own.
Now, we have already briefly explored the tried and tested index calculation methodologies used by the global stock markets, and whilst it might seem like an awesome idea to create a new, all-singing-all-dancing, crypto market index - to reinvent the wheel, so to speak - we decided a simple and easy-to-understand cap-weighted crypto market index would do the job.
So that's exactly what we did by creating BullsEye Crypto10.
The Background to BullsEye Crypto10
We first calculated BullsEye Crypto10 on 16 May 2020. And the crypto market has certainly been on a ride since then!
Since inception, we have been calculating and the value of BullsEye Crypto10 each day, every 15 minutes to be precise, and have embedded it as part of our iOS and android apps.
BullsEye users can use BullsEye Crypto10 as a performance yardstick in their alpha calculations to track crypto portfolio and investment performance over time and compare it to the broader market. This is BullsEye Crypto10 serving its core purpose - acting as a crypto market performance benchmark from which individuals can measure their own crypto investing and trading performance.
As explained above, BullsEye Crypto10 employs the capitalisation-weighting methodology - but why only the top ten cryptocurrencies?
Well, to put it simply, the cryptocurrency market is still relatively immature, with new crypto coins and token being introduced at an increasing pace. The crypto market also continues to show an extraordinary level of price-correlation, driven primarily by the price movement of Bitcoin. This high-level of turnover, combined with the current lack of stability and over-reliance on Bitcoin as the driving force behind market moves, made cap-weighting, as opposed to price-weighting, the obvious choice.
We decided to draw the line under the top ten as the extended market outside of this sphere is much more turbulent and volatile.
One day in the not too distant future, we will look at introducing additional crypto market indices to compliment BullsEye Crypto10 and provide a greater choice to our users.
How is BullsEye Crypto10 calculated?
It's pretty simple really.
The top ten cryptocurrencies are ordered by their current market capitalisation. A cryptocurrencies maket capitalisation is a function of the total coins/tokens in existence, multiplied by the current market price per coin/token.
Then, the total market capitalisation across the top ten cryptocurrencies is calculated, before a set divisor (chosen for no other reason than it allowing the output to be more manageable) is used to calculate the BullsEye Crypto10 value.
This calculation is updated at least every 15 mins.
BC10: the story so far
As you'd expect the BullsEye Crypto10 index chart (May 2020 - June 2021) shown below reflects the recent bull-market in all its glory!
Being the most established coins/tokens of the crypto market, the top ten cryptos provide a *relatively* stable market segment.
Relative to the rest of the crypto market that is!
Using this market segment in combination with the market cap-weighted approach means that the volatility which characterises the crypto market is somewhat tempered, and only significant swings in the top cryptos would materially impact the BullsEye Crypto10 value.
However, as I touched on earlier, with regularity we see large swings in one (or more) of the top ten cryptos, typically accompanied by a wider market trend in the same direction.
I'm sure you've noticed that if Bitcoin or Ethereum increase or decrease in market value over a relatively short period, the rest of the crypto market tends to follow.
The design of the BullsEye Crypto10 index means it will inherently reflect the market performance as a whole, even within a relatively immature and unpredictable market such as cryptocurrency.
BullsEye Crypto10 therefore provides a useful yardstick against which crypto investors and traders can measure the performance of a crypto portfolio or investment.