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Benchmarks and Indexes in the Cryptocurrency Market

  • Stavros Georgiadis
    ⭐ Features

    The cryptocurrency market is highly volatile but the need to evaluate and measure performance is also both useful and practical for professional traders

Benchmarks and Indexes in the Cryptocurrency Market
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Contents

In any financial market, traders should have a metric of performance to evaluate their trading results. The cryptocurrency market is highly volatile but the need to evaluate and measure performance is also both useful and practical for professional traders, institutional trading desks and sole traders.

Having a portfolio of cryptocurrencies measured against a valid benchmark and index provides both analysis of the excess alpha and a documented track record of investing. This can help to analyze scenarios about the investing strategy chosen, the risk management, the profitability, and provide very important feedback for portfolio managers and professional investors.

For benchmarks to be valid they need to exhibit the following characteristics:

1.   Unambiguous. The identities and weights of securities or factor exposures constituting the benchmark are clearly defined.

2.   Investable. It is possible to forgo active management and simply hold the benchmark. That is, investors can effectively purchase all securities in the benchmark.

3.   Measurable. The benchmark return is readily calculable on a reasonably frequent basis. A good benchmark will have a transparent set of public rules and, therefore, predictability for investment managers.

4.   Appropriate. The benchmark is consistent with the manager’s investment style or area of expertise.

5.   Reflective of current investment opinions. The manager has current investment knowledge (be it positive, negative, or neutral) of the securities or factor exposures within the benchmark.

6.   Specified in advance. The benchmark is specified prior to the start of an evaluation period and its calculation methodology is known to all interested parties.

7.   Owned. The investment manager should be aware of the strengths and weaknesses of any benchmark they are asked to replicate or be judged against. It must also accept accountability for a client’s portfolio performance against that benchmark and be ready to explain to the client any variance from the benchmark. Consideration of the benchmark should be embedded in and integral to the investment process and portfolio construction conducted by the investment manager.

A high-quality benchmark or index should have the following characteristics:

1.  Free of conflicts of interest

2.  Provide independent review/pricing; and

3.  Have transparent methodology

The regulatory authorities can place a lot of emphasis on the following topics:

·    Ensuring benchmark administrators are free of conflicts of interest and that they employ relevant governance and controls

·    Ensuring that the data used to calculate benchmarks are enough and that the calculation methodologies are robust

·    Ensuring that any contributors to benchmarks have adequate controls and avoid conflicts of interests.

There are several benchmarks and indexes in the cryptocurrency market. We will refer to three of them as a starting point for performance evaluation:

·    The Bletchley Indexes

·    CME Group Indexes

·    The CCi30 index, https://cci30.com/

CCI30 chart

The above chart is the daily chart for the CCi30 index. As of Dec. 13, 2018, the index in real time is at 1,839.83, -35.59, -1.93%. CME Group Indexes are the most standardized reference rates and spot price indexes, and as mentioned “CME Group and Crypto Facilities created the reference rates to be transparent and meet industry best practices for financial benchmarks”.

They also mention that “[t]he real-time index is suitable for marking portfolios, executing intra-day transactions and risk management.”

In conclusion, any benchmark or index related to the cryptocurrency market should be simple, transparent, flexible to changes, and easy to understand, and able to be applied to measure any portfolio performance compared to the index.

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Question of the Day: Can Stablecoins Accelerate Cryptocurrency Adoption?

  • Yuri Molchan
    ⭐ Features

    Stablecoins show hardly any volatility compared to Bitcoin and altcoins, many are hoping that they will be able to bridge new crypto economy and regular fiat money

Question of the Day: Can Stablecoins Accelerate Cryptocurrency Adoption?
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Contents

Bitcoin, the father cryptocurrency, emerged in hope that it will remove all intermediaries in electronic commerce that cut off their share of payments. BTC was perceived as a P2P way to replace fiat cash in an electronic format, which would enable one party to pay another without any financial institution or payment platform which would demand its share of a transaction as a reward for its services.

What is wrong with Bitcoin

For quite a while Bitcoin was performing the way the crypto community expected. But the situation changed later – BTC rate became weaker, thus bringing down its financial and economic reliability, when it gets to be used as a regular means of payment.

You cannot have a currency that would cost like a British castle today, a gram of gold – tomorrow and a pack of French fries the day after.

At that point practical fintech minds came up with an idea of creating something which would become a breakthrough in the universe of crypto – a so-called stablecoin.

Will stablecoins solve the volatility problem?

Technically, stablecoins are protected from the volatility roller-coaster that Bitcoin and other cryptos love to ride. They are programmed to keep their prices stable and investors now are largely attracted to this new type of digital assets.

Stablecoin does not show any volatility in its monetary value, since it has a fixed connection to an asset it is pegged to. The major goal of using stablecoins is taking the best from decentralized crypto coins and combining it with a constant value. Thanks to it, stablecoins can be used as a reliable means of trade.

Asset-pegged stablecoins

Asset-backed ones get their value from an asset as can be understood from the name. An asset provides the necessary value to a coin, as well as the necessary legitimacy.

A great example of an asset-pegged stablecoin is Tether (USDT). In spite of a series of scandals at the end of last year, it remains the most popular stablecoin in the crypto market.

Recently, it has partnered with the Tron Foundation to launch a Tron-based stablecoin.

Other examples are TrueUSD (TUSD), USD Coin (USDC), the Gemini Dollar (GUSD), and the Paxos Standard (PAX). They are all pegged to the USD.

Crypto-backed stablecoins

Some digital coins work in a similar way to fiat-backed ones, however, they are pegged to collateral crypto. That means that crypto assets that ensure the value of such stablecoins are stored in a wallet similar to escrow.

A good example of a crypto-pegged token is Maker, which is ranked 16 on CMC.

Algorithmic stablecoins

Even though, stablecoin can be interesting at first thought but the way they are built goes against the principle of decentralization that crypto coins have as a foundation. Thus, many crypto fans and evangelists are positive that stablecoins must be linked towards not a centralized asset but a computer algorithm which takes value from a balance between supply and demand.

Basis is now considered the most promising algorithmic stablecoin of all.

👉MUST READ John McAfee Says Exactly When Bitcoin Will Hit $1 Mln, IBM’s Jesse Lund Goes for More Modest Forecast

Can stablecoin ensure smooth future for the crypto industry?

The primary goal of all crypto assets was and remains to come up with virtual asset that would be liquid enough and not vulnerable to market volatility. From this point of view, stablecoins are a dream of all crypto fans and evangelists of a decentralized economy.

Apart from the potential to conduct crypto transactions smoothly, experts believe it can bridge the two worlds – fiat and crypto, bringing them a mutually beneficial coexistence. However, that may take time.

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