Crypto Index Builds See Limited Diversification

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Cryptocurrency indexes are picking up speed as more investors seek to benefit from the risk diversification that indexes can bring.

However, the diversity of a cryptocurrency index pales in comparison to the Wilshire 5000 Total Market Index or even the venerable S&P 500.

“Most people do not have to build a very diversified index,” Bill XIng, founder and CEO of crypto index-tool provider Panda Analytics, told IntelAlley. “They just need to build a five- or six-item index.”

Bitcoin has retained its dominance in most crypto indexes since the ICO boom and bust of 2017 and 2018, he added. 

The two-year-old startup’s platform, which debuted in March, lets users develop, balance, and backtest their index as well as supports the inclusion of up to 54 cryptocurrencies in an index. 
Crypto investors should be wary of cutting-and-pasting an equities index methodology onto a crypto index, according to Xing.

If an investor attempted to create a simple index that reflected the entire cryptocurrency market, it would drag down the index’s overall returns due to the presence of scammers in the markets as well as poor quality cryptocurrencies.

Not only are crypto indexes slimmer than their equities counterparts, but they also tend to be nimbler as well. Panda Analytics users typically have shied away from constructing passively managed indexes in favor of more actively managed ones.

“You cannot be a passive investor out there,” said Xing. “You need to manage the indexes that you use actively.”

Instead of rebalancing their indexes quarterly or annually, Panda Analytic users most often rebalance their indexes weekly, monthly, or sometimes even daily.

The platform does not support real-time capabilities currently.

As long as the cryptocurrency market continues to develop rapidly, Xing recommended that cryptocurrency investors monitor their indexes closely.