What Is a Crypto Index?
[Disclaimer: this article is not financial advice. It is an educational resource that should never be interpreted as an endorsement to buy any of the digital assets mentioned. It is always recommended that individuals do their own research before making any investment decisions.]
Index funds play an essential role in traditional finance (TradFi) markets. Individuals and investment funds alike have used popular index funds like the S&P 500 as a way to benchmark trading performance since 1957. This article will explore what exactly an index is, and how they are used in the crypto industry.
Put simply, an index fund tracks the aggregated, or collective, performance of a basket of assets. For example, the S&P 500 is a basket of the 500 largest companies on stock exchanges in the US. Traders use this index to get a general idea of how well stocks and the US economy at large are performing.
It is easy to see how this tool could be useful in cryptocurrency markets. However, a big problem global crypto investors have is the overall youth of the crypto industry: reliable aggregates of data, like indexes, are still hard to find. A well-managed index could quickly decrease the opacity of the value of the crypto market, and attract more market participants.
How Can Users Benefit from Crypto Indexes?
Many newcomers to cryptocurrency trading may be too shy to invest in highly-volatile crypto assets. For the under-initiated DeFi investor, prudence is well-advised, as it is not difficult for someone new to DeFi to make unforced errors. For example, it is not unheard of for a newbie to fat-finger a Decentralized Exchange (DEX) trade and wind up with fewer coins than what they wanted.
Trading with a crypto index can help solve this problem for curious investors who wish to test the waters in crypto more broadly. It is less likely that index coins make a dramatic short-term price move either up or down, which is good for investors who just want to get their feet wet. Unlike some shady altcoins in the market, index coins have virtually no chance of going to $0 because of the way they are built. Additionally, obtaining these coins is usually an introductory exercise in DeFi that requires learning basics like staking collateral and minting new coins.
How it Works
Given this potential, it makes sense that crypto indexes and index tokens have started to emerge as integral market sensing tools for crypto analysts and investors. TradFi indexes can be traded on by investing in an index fund, whereas cryptocurrency indexes can be traded on with index coins. Index coins represent the value of their index and change in price as the value of the index changes.
Some indexes track large market capitalization (large-cap) crypto assets, while others follow particular niches like DeFi coins, memecoins, stablecoins, and more. Regardless of what assets an index tracks, their tokens help investors gain exposure to the broader crypto market without requiring them to hold a large number of cryptocurrencies. Holding index tokens is essentially the same as taking a long position on a basket of assets, since the value of the token changes in tandem with the aggregated value of those assets.
Crypto indexes offer a way for analysts to study the cryptocurrency market while also providing investors exposure to it. This may appeal most to under-initiated investors worried about taking a position in a more volatile cryptocurrency. “Going long” on the market by holding index coins is similar to the common TradFi strategy of gaining exposure to top-performing stocks through the SPY ETF (the index fund that is aligned with the S&P 500) in order to bolster portfolio strength.
Gaining Broad Exposure and Benefit with Cryptex's TCAP Index
With the basics on crypto indexes covered, you might be ready to start doing your own research to find out where you would be comfortable investing. One leading example of a crypto index and what they can offer is Cryptex’s Total Crypto Market Capitalization Index (TCAP). This index fills the need for a single definitive index from which investors can extract market data. The TCAP index and the TCAP token ($TCAP) give holders real-time exposure to the composition and capitalization of the total crypto market.
The TCAP Index has been audited by Quantstamp and derives its price data from industry-leading Chainlink smart contracts. To provide extra stability for investors, $TCAP is a collateralized asset. This means that in order to mint one TCAP, users must provide collateral to secure the coin in addition to purchasing the coin at market value. The collateralization rate of TCAP is 200%, so if one TCAP is $200, users must provide $400 in collateral to mint the coin.
At the time this article was written, the top coins making up the TCAP index are Bitcoin (45%), Ethereum (17.7%), Binance Coin (3.26%), Tether (3%), and Cardano (3%). Long-term investors who want to take a long position on the viability of the entire cryptocurrency market may find $TCAP to be the ideal index token.