Assessing the Crypto Market with a single trade: Cryptocurrency Index Trading
Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.” — Thomas Carper, US-Senator
History of the Cryptocurrency Market
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. Cryptocurrency made the transition from being an academic concept to a (virtual) reality with the creation of Bitcoin in 2009.
As Bitcoin emerged as the first decentralized cryptocurrency, it has coped with the test of time and remains as the primary gold standard for the overall industry. Currently, there are over 2.000 altcoins, yet only a dozen have demonstrated to be viable projects worthy of serious investor money. Decentralization bolstered the idea that cryptocurrencies represent the future of money. Adoption and popularity of cryptocurrencies hit a peak in 2017 with Bitcoin reaching an all-time high of around USD 20.000 in December of that year.
Nonetheless, the crypto market always faced regulatory risk. In 2018, several government agencies made serious efforts to cut off the wings of this type of assets that seemingly were not regulated until then. In January 2018, major tokens lost more than 40% of their value and were suppressed throughout the year. Yet, the regulation was not a curse to the industry entirely.
At the early stages of the crypto market, the headlines were of a blanket ban. Yet, the realization of the disruptive potential of the industry and the need to deal with possible negative effects implied a shift to regulation. Regulatory directives helped to promote interest in the cryptocurrency space, attracting more investors and encouraging adoption.
Nowadays, most regulators consider crypto assets as legitimate financial assets. Crypto ETNs have already been launched in major exchanges around the world. Furthermore, in the US, a former crypto critic — the Chicago Board Options Exchange (CBOE) — began to offer Bitcoin futures trading by the end of 2017. In more recent developments, on July 22, 2020, the Comptroller of the Currency (OCC) — an independent department within the U.S. Department of the Treasury — published a letter notifying that national banks and federal savings associations can provide cryptocurrency custody services for their customers.
“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today … This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.” — Acting Comptroller of the Currency Brian P. Brooks
Overall, cryptocurrencies have come a long way, and recent headlines will continue to attract new participants focused on this market.
What is a Cryptocurrency Index?
A sensible strategy for investors looking for stable returns is passive investing in indexes. A crypto index replicates the performance of a portfolio of crypto assets, such as Bitcoin, Ethereum, or Cardano, with the aim of covering the crypto market as comprehensively as possible.
Each crypto index is made up of a selection of cryptocurrencies, grouped together and weighted by market capitalization. The market cap of a cryptocurrency is calculated as the effective circulating supply of specific coin times its market value against the US dollar.
In its simplest form, the value of the crypto index will be tied to the evolution of the market cap. If the market cap increases, the value of the index will rise, and conversely, when the crypto prices decrease against the dollar, the value of the crypto index will fall.
The Benefits and Risks of trading on Crypto Indexes
There are several benefits to crypto basket trading instead of multiple individual cryptocurrencies. First, it can be a more cost-effective way of trading on this asset class, as it allows investors to get exposure to the sector as a whole, without having to open a position on each individual coin. Trading on a crypto index can also help to diversify risk, as investors are not exposed to a single coin.
How do BITA Crypto Indexes work?
The Crypto Indexes created by BITA aims to provide diversified and balanced exposure to the cryptocurrency market. This means that all BITA Crypto Indexes, namely BITA Crypto 10 (B10), BITA Crypto 20 (B20), BITA Crypto 30 (B30) and BITA Crypto Next 20 Index (BCN20I), have been constructed based on objective, rules-based methodologies that provide investors with a snapshot of the performance of the crypto market in one single and understandable measure. Composition buffers are used to achieve a reduced portfolio turnover. Capping of tokens is also set for better diversification, ensuring that no single cryptocurrency can constitute a weighting of greater than 25% of the index. By sourcing its prices from consolidated feeds built from the top global exchanges, the indexes accurately represent the performance of the most traded digital tokens in the world.
To learn more about BITA’s real-time data products visit our website at www.bitadata.com or contact us at info@bitadata.com.
