When an investor has a certain amount of money, he asks himself two key questions:
1.What to invest in order to make a big profit in a growing market?
2.How to save funds if the market began to fall? How to mitigate the fall of your portfolio?
One of the most profitable solution is the index.
What is Index?
The index in the usual sense in the financial market is a certain indicator of the state of the securities/goods market. Using the index, a professional investor can see a mood of the market and can make informed decisions. Also, many investors and companies use the principle of forming indices for portfolio investment.
There are several well-known indices on the cryptocurrency market, including Cryptoindex.com(CIX100), CoinMarketCap(CMC200), Coinbase 12 and Huobi 10.
The most useful portfolio consisting of TOP-100 cryptocurrency coins in a certain proportion.
So let's get back to the history of indexes in traditional markets.
The first stock index was developed on July 3, 1884, in the United States by a newspaper journalist.
Wall Street Journalist - Charles Dow.
Then he created the Dow Jones Transportation Average Index, which was calculated by the 11 largest US transportation companies. Today it includes 20 companies.
In addition to DJIA, the famous stock indexes now are:
- S&P 500 ;
- FTSE 100 ;
- NASDAQ .
There are so-called “portfolio indexes”. Their goal is to repeat the composition of a particular stock exchange index.
For example, there is the S&P 500 index, which tracks the position of shares of 500 companies in the stock market.
You can create a portfolio that will repeat the S&P 500 index and contain all the papers from the index. You can create such a portfolio for yourself.
But it will be very difficult in the case of large and complex indexes, especially purchases.
For example, the Dow Jones Industrial Index consists of 30 companies and its cost is more than $ 26 thousands.
Why is rebalancing necessary?
Let's say the Index has 10 coins, 30% bitcoin; the rest is the first 9 cryptocurrencies by capitalization.
If the Bitcoin exchange rate grows, then its share in the portfolio increases, which violates the original balance.
To return a share of up to 30%, you need to sell part of Bitcoin. And over time, some cryptocurrency can get out of the TOP-10, and another will come in its place. In this case, it is necessary to sell one currency on time and buy another in order to support the initial TOP-10 index strategy.
This is meaning is rebalancing.
Index Calculation and Methodology
There are many methods for calculating indices:
1.Index weighted by price.
With this method, the market prices of all shares included in the index are added up, and the amount received is divided by the number of incoming shares (this is how the Dow Jones family indices are calculated).
2.Index weighted by capitalization.
The index value is calculated as the sum of the market capitalization of the companies in the list, divided by a divider.
A divisor is a value that is selected so that at the time, the index is calculated historically; its value equals some convenient number.
For example, for the S&P 500, the base value is 10.
Subsequently, the divisor is changed to maintain the continuity of the index value.
This allows you to take into account not only the price of shares but also their market share.
The most famous example of such an index is Standard & Poor’s 500 (S&P 500).
An index that is calculated by averaging percentage changes in stocks, regardless of their market capitalization.
The number of shares in the basket is selected based on the weight of each share in the total market capitalization of the index.
In simple words: when composing such an index, the price per share is taken into account. It is compared with the total capitalization of the index and the number of shares that the others will not outweigh is added.
Most commonly used indices, such as the S&P 500, offer equilibrium versions of indices in addition to market capitalization indices.
How to use Crypto Indecies?
In order to understand the mood of the market and its tendency and make a purchasing decision, we need to look at the general value of the index. The most common type from 0 to 1. For clarity, as an example, consider the CIX100 index of 100 cryptocurrencies, based on artificial intelligence. This index has no stablecoins and no coins with fake volumes, which increases the accuracy of the index compared to the rest.
On the chart, we see that the average value of the index ranges from 0.8175 - 0.8100. This means that the cryptocurrency market is now in a perfect mood and an experienced investor will wait for it to fall to buy assets cheaper and then sell them more expensive.
This chart is also convenient not only for long-term investors but also for traders because it shows the mood of the market in real-time, one minute, five minutes, hours, and one day.
In the next graph, we see how the index basket (CIX100) wins relative to the cryptocurrency market and Bitcoin. It means, if we allowed to invest $ 10 and distribute it precisely as this index, our investments would increase by more than 500% by January 2019, and at the peak of the market more than 3000%.
I think that the crypto market is still very young, so it needs such a powerful tool as a crypto index. Beginners and professionals will be able to make decisions more carefully and avoid coins with fake volumes.
In addition, if you don't use indexes, you should pay attention t unstable fact as capitalization.
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Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Please do your own homework.