A weekly newsletter decoding crypto, blockchain and the entire ecosystem.
By Rohas Nagpal
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Zooming rocket ships 🚀, epic crashes 🌊, dizzying waves of wealth creation and destruction 💥, and ads on television 📺 that talks up bitcoins ₿. Cryptocurrencies and blockchain, the underlying technology that is thought (by some) to hold great promise, have rocked our world in the past few years.
From believers who think cryptocurrencies will take over the world to sceptics who think the appropriate value of Bitcoin is zero, opinion is sharply divided. The two sides are also fond of exchanging barbs on social media, making this entire space, with its memes, insider lingo and roller coaster charts, a fun space to watch, especially if you are not invested in crypto.
That’s why Mint is bringing you a new weekly newsletter on crypto, blockchains and everything associated with these spaces. Authored by technologist Rohas Nagpal, Crypto Notes will cover the developments in this heady world and explain their meaning.
Last week we discussed metrices and this week we look at crypto indexes. Depending on the part of the world you live, you’ve probably heard of the Sensex, S&P 500, or the Nikkei.
These are Indexes. An index is a mathematical method for tracking the performance of a group of financial assets, e.g. stocks, metals, cryptos, etc.
Before we dive into the crypto indexes, let’s quickly go over some recent crypto developments:
Top crypto exchange Binance’s legal problems are growing worse. Italy’s securities market regulator has warned that the Binance Group companies are unauthorized to provide investment services and operate in Italy.
Binance has stopped offering tokenized stocks of companies like Apple and Tesla after regulatory concerns in multiple countries.
An Indian “multistate credit co-operative society” is trying to become the “world’s first cryptocurrency financial institution with physical locations”. Let’s wait and watch how the Reserve Bank of India reacts to this.
China has completed 34.5 billion yuan of transactions of its digital currency. A total of 70.8 million payments have been made across stores, restaurants, public transportation, utility bills, and government services.
USDC may soon overtake USDT as the most popular stablecoin on Ethereum. No new USDT has been minted on Ethereum for almost two months now!
What is a crypto index?
A crypto index is a mathematical method for tracking the performance of a group of cryptos.
A crypto index can be broad-based (covering hundreds of cryptos) or specialized (covering a category of cryptos, e.g. Non-Fungible Tokens). Either way, an index serves as a benchmark against which you can evaluate the performance of your portfolio. You can also “replicate” or “mirror” an index by buying the constituent cryptos.
A crypto index can be unweighted (all cryptos are equally represented) or weighted and can be based on price or market capitalization.
Let’s build a simple index
Let’s take a simplified example of an unweighted market capitalization index comprising Bitcoin (BTC) and its four most important forks - Bitcoin Cash (BCH), Bitcoin SV (BSV), Bitcoin Gold (BTG), and Litecoin (LTC).
We are creating this index today, so 21 July will be the base date.
Let’s first calculate the market capitalizations (that’s price x circulating supply) for each of the five index constituents. Then we add these market capitalizations up. Say the result is $1 trillion. We consider this amount to be the base (represented as 100).
Now say that on 22 July, the total market capitalization of these five cryptos is 1.1 trillion. The index value for 22 July would be calculated as
New Index value = (New Marketcap / Base Marketcap) x 100
The result is 110. This signifies a 10% increase in the combined market cap of the constituent cryptos. If the index is 95, it signifies that the combined market capitalization of these five cryptos is 5% lower than the combined market cap on the base date.
Indexes make it easy to understand how a bunch of cryptos is performing.
Future Money Index
Most indexes are based on one market and one jurisdiction. For instance, the US SPX 500 is based on the stock price of US publicly traded companies, while the London Metal Exchange Index comprises six metals.
Now let’s take a real-world example of the Future Money Index (FMI) that I am designing. FMI is the first of its kind index based on multiple assets from multiple money classes from multiple economies.
This is a weighted price index based on:
1. Corporate Money (30%)
2. Individual Money (1%)
3. Intrinsic Money (30%)
4. Math Money (5%)
5. Political Money (30%)
6. Privacy Money (4%)
Corporate Money, in turn, comprises the share prices of 10 stocks - Amazon, Apple, Facebook, Google, Microsoft, Netflix, PayPal, Pfizer, Tesla, and Twitter. Individual Money comprises the Basic Attention Token (BAT). Intrinsic Money comprises Gold, Palladium, Platinum, and Silver. Math Money comprises Bitcoin (BTC) and Ether (ETH). Political Money comprises the Chinese yuan, euro, Indian rupee, and Japanese yen. Privacy Money comprises the most important privacy coins - Dash (DASH), Decred (DCR), Monero (XMR), and Zcash (ZEC).
The base date of FMI is 22 June 2021. Suppose that the index value today is 102. This means that if you had invested $100 in the Future Money Index constituent assets on 22 June 2021, your investment would be worth $102 today.
If you were to design your crypto index, what would you base it on?
On a side note, Jackson Palmer, one of the creators of Dogecoin, went on a Twitter rant recently. He said that cryptocurrency has taken the worst parts of today’s capitalist system and then used software to technically limit the use of protections or safety nets for the average person. What’s your take on this issue?
What topic would you like me to cover in the next edition?