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Why is it good to have a Crypto Index? Understand the Basics

04 Feb 2022 By : Rohit Khandelwal
Southeast Asia’s Lar


With the advent of the IC15 Index, Indices based on Crypto are becoming increasingly popular. The IC15 index shows an index and index of 15 cryptocurrencies with a specified weighted average formula. this index gained a lot of popularity because of the niche it created. Actually, the base behind the formation of this index is pretty simple. The index takes the weighted average of the market capitalization of the selected cryptocurrencies and presents its variation over a period of time which in this case, is on a continued basis.

 

What is an Index?

The index is basically considered to be a representation of the overall market condition which is represented by the values of select items which are seemingly the representation of the whole lot. this makes the index an indicator of the overall market performance.

We can take the examples of various indices in this case like the nifty, which is a weighted average index of the share prices off 50 companies which are reasonably considered to be the combined representation Of all these stocks listed on the exchange.

Similarly, the wholesale price index, which is considered to be the barometer of inflation in India, Is calculated on the basis of Changes in the moving prices Of the underlying commodities listed for the purpose.

An index is calculated by the percentage change in the combined value of the assets listed in the representative list, thereby providing valuable insight into the approximate change in the overall market position of the underlying list of assets.

Hence, any change in the index value will denote that the combined value of the listed assets has moved by a certain percentage.

 

What is a crypto index?

The crypto index is a similar concept that is being used to estimate an overall change in the market considering the representation of a few crypto assets, which can be assumed to have a fair share of representation by the virtue of their share in the overall market capitalization, or because of some fundamental reason which gives them a space in this representative list.

We can take for example the I see15 crypto index which takes into account 15 crypto assets for calculating the index. In this case, the change in the combined weighted average value will be the change in the value of the overall index.

Although the IC15 index is just an abasic representation of the changes in the crypto market prices, we can safely say that it is not a true barometer of the ups and downs of prices and values in the crypto world. This index's just an initial attempt to combine and assimilate the value proposition of the overall crypto market.

We feel there should be a better representation of the real changes in the Crypto Market prices. At the present time, the Total Market Capitalization of Bitcoin and Ethereum combined covers more than 70% of the total market capitalization of the prominent crypto assets. Hence, any Index which is following the basis of market capitalization is heavily skewed in the favor of these two crypto assets.

 

Why is it good to have an index?

Having an index plays its own role in the market. It becomes very difficult to judge the overall performance of the market in bits and pieces. Hence it is always good to have an index that can combine the position and can show the overall change in quantifiable terms.

This is the place where the index plays a very important part. The index comes up with the basic representation of the overall progress of the market.

Generally, the indices are divided into different representations. As we can see in the case of the national stock Exchange (India), the representative index is nifty. However, to depict the changes in the overall growth on a sectoral basis, a number of different indices are used separately. The examples can be nifty smallcap, nifty midcap, and other indices which are specific to the sectors like IT, Health, Banking, etc. These indices represent a specific segment of Industry the performance of which can be judged distinctly by the leaders who are performing extraordinarily.

It is always good to have an index to act as a representation of the overall market scenario as it guides us to assess the way the market is going. Also, any Index will provide a reasonable estimate of the overall performance of the Constituents of the market representing the Index.

Although news and events have different impacts on different Crypto Assets, there is always a general trend that follows after the news or event. An analysis of the change in the Index can make the users deduce the right course of action to follow in case of any given situation.

 

Conclusion

Although any Index does not represent the performance of the complete market it gives a fair estimate of the trend that can be analyzed to have a reflection of the way in which the market is going.

Also, since the Indices are an easier way to assess the changes and act accordingly, it's better to follow an index for better comprehension.

But we need to keep a few things in mind before relying on any Index:

1.       The constitution of the Index

2.       The basis behind the inclusion of constituents

3.       The weights are given to such constituents

Because, if the investments that you made are having a fair representation in the Index, then only that Particular Index is good for you. Else, go for something else that reflects your investments fairly.

Coin Gabbar is coming up with a number of Indices that investors can choose on the basis of their portfolio and interest. The Indices will be the true representation of the category-wise scenario of the market progress.


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