Coinbase recently introduced a price index called the Coinbase Index. The Coinbase Index gives crypto investors a standardized way to measure and track the overall crypto markets.
The index was introduced to the public on March 6, 2018 and tracks the prices of a basket of cryptoassets over time. At the time of launch Coinbase, only had four cryptoassets in their index: Bitcoin, Litecoin, Ethereum and Bitcoin Cash – with plans to add more in the future. The prices of all four of these cryptoassets are consolidated into a single number. As this consolidated number is tracked over time, investors can see a more accurate representation of how the crypto markets are performing.
Coinbase Index asset allocation as of April 10, 2018
Moving beyond measuring market performance with market capitalization
Most crypto investors use the total market capitalization of all cryptocurrencies and tokens to describe the state of the markets. Looking at market cap is useful, but it is flawed. The Coinbase Index aims to solve this issue.
What is the issue with looking at total market cap?
Consider this hypothetical scenario as an example: Assume the total market cap for all cryptocurrencies is $500,000,000,000 ($500BN) and there are a total of 1,700 cryptocurrencies and tokens that sum up to this figure. Over the course of the next 24 hours the price of the 1,700 cryptocurrencies don’t change. They don’t gain in value or fall in value. Price movement is 0%.
Let’s say that over the course of this same 24-hour period, a token that completed its Initial Coin Offering (ICO) a few months ago is now being released to token-holders and available for trading on exchanges. This project raised over $1BN in its ICO. Upon hitting crypto exchanges, the market cap for this token is $1BN. There is now a total of 1,701 cryptocurrencies.
In this new scenario, no coins changed in price, i.e. 0% price movement. Due to this new token entering the market, total market cap has increased by $1BN. The total market cap is now $501BN. The market cap has increased by 0.2%, even though nothing has changed in price.
Reputable Price Indices
More and more crypto tokens are created daily. In the near future, the market cap of all cryptoassets could be in the tens of trillions (just as the stock markets are). As the industry continues to grow, market cap will no longer be appropriate to describe market performance. We’ll need reputable price indices like the Coinbase Index.
The Coinbase Index uses a traditional price index approach to more accurately describe what the typical investor in crypto would experience. It removes this artificial inflation that a market cap approach experiences. Price Indices standardize the measurement of asset price movement. Traditional stock markets have been using indices to track share price movements for over a century and this approach is starting to make its way into crypto.
Stock Market Indices
A stock market index helps to explain the current and historical state of the stock markets. If you follow traditional financial media, commentators often refer to a “market index” when talking about the stock markets. Some popular stock market indices include:
- S&P 500 – Tracks the largest 500 publically traded companies in the U.S
- Dow Jones Industrial Average – Tracks a basket of 30 large U.S based companies
- NASDAQ Composite index – Tracks the performance of all common stocks listed on the NASDAQ stock exchange.
- FTSE 100 Index – Tracks the 100 largest companies on the London Stock Exchange
One of the oldest stock market indices is the Dow Jones Industrial Average. Founded in 1885 by Charles Dow, Edward Jones and Charles Bergstresser, it initially tracked the price of 14 stocks. People used it as a way to track the health of the U.S economy. It is inevitable that these types of market indices would seep into the world of crypto.
Using the Coinbase Index to measure alpha
In the traditional world of finance, mutual funds and hedge funds use a metric called Alpha to measure the success of a fund’s performance. Alpha is the measure of investment return over a benchmark. Traditionally the benchmark is an index such as the S&P 500. For example, if the S&P 500 returned 12.5% over the last year and a fund returned 17%, the fund created 4.5% in Alpha.
2017 saw an explosion in the value of cryptoassets, and along with it an explosion of crypto-focused hedge funds. As a result, these hedge funds saw enormous gains in 2017, but how much of their success was luck vs. skill? Measuring alpha helps us tease out the best performing crypto hedge funds.
Maturing crypto markets and future investors
Alongside its Index, Coinbase is launching an index fund that mirrors the performance of their index. The index started tracking prices from January 1, 2015, with an initial value of 100. As of April 5, 2018 the index was at 2850, i.e. at a 28x return over a 39-month period.
The Coinbase Index is the most notable index in the market. It represents a single number that helps us understand where we currently are in relation to the history of cryptoassets. This single number that helps us put our current times in context for future generations of crypto investors and traders.