The cryptocurrency world has seen a plethora of unique coins appear during the past few years. It is estimated that the crypto market has over 1000 tokens and a total market cap of about USD 260 billion as of November 2017. This translates to a 1200 percent increase from what the value was worth twelve months ago.
These numbers are quite impressive, and as Bitcoin continues to surpass many other tradition assets, it’s no surprise that investors from all corners long for cryptocurrency exposure. What is the role of cryptocurrency price index?
Cryptocurrency Price Index: What is It?
It is defined as a platform or website that lists information regarding the price and capitalization of several cryptocurrencies. Sites such as CoinMarketCap, CryptoCompare, and WorldCoinIndex are popular examples that provide useful information on multiple cryptocurrencies. They are also great sources of information for monitoring, benchmarking, and comparing the overall growth of several cryptocurrency assets.
The nature of the list of price indexes will determine whether the platform will provide information on all tokens and coins available on the market or only those that meet the standards such as being present on public exchanges with enough trading volume.
In most cases, cryptocurrency price indexes list most of the coins present on the market which is a good way to ensure you remain informed on how the crypto market is doing at a certain time without compiling any data manually from a list of cryptocurrency exchanges.
Cryptocurrency Price Index Vs. Traditional Stock Index
Both of them show the financial health of a given market where investors have invested.
But the main difference is that traditional stock market indexes only list the price details for shares in a given company while cryptocurrency price index list price info for crypto assets of specific block-chain networks.
Similarly, while the crypto price indexes list the information of most virtual currency tokens available on the market, traditional stock indexes only list a limited amount of stocks, with a common denominator such as the size of company or type of sector between them. These indexes help investors to know the overall health of the market they are dealing with.
Details on Cryptocurrency Price Indexes
In most cases, you will find details about the current cryptocurrency price, the market cap (multiple of current price and circulating supply), and the 24-Hour Volume which denotes the total volume of specific coins traded in different markets in the last 24 hours.
To find more information, click on each coin. The info will display the current circulating cryptocurrencies in the market, a list of the exchanges or markets available where each coin is traded, and a detailed graph to track the price performance of these coins over time.
This is part of the information that you will find on these platforms, but every website has a different setting and layout thus you may find different materials based on their client base. For instance, if a certain index is designed for day traders, it is possible to find the highest and lowest price of a certain coin being displayed as a computation of the last 24 hours. On the other hand, another platform that targets serious and long-term investors may provide information on specific features of a specific coin. This includes whether it is a proof-of-stake (POS) or proof-of-work (POW) coin, or if it is designed for payment or tokenization of assets, and so on.
Data Sources for Cryptocurrency Price Index
Cryptocurrency exchanges are the main sources of data for crypto price indexes. These exchanges can be termed as ground zero for the most part of the trade. Once the price of an individual coin is established, depending on the buying and selling price, traders can accept to trade in that specific market. In that case, exchange prices are the key determinant of the achievable value of a coin’s market value as well as the best place to collect data.
The prices of some coins may vary from one exchange to another depending on the market. Therefore, cryptocurrency price indexes will gather this data from different exchanges to come up with the most accurate price. By navigating to the market’s tabs of a specific coin, you can view the exchanges used by an index to collect data. This will present a list of all the exchanges the coin has traded on. You can gather the information you require.
Bitcoin is one of the most traded coins and has several markets, but a coin like IOTA though popular has less than 30 markets. Using open Application Programming Interface (APIs), the exchanges ensure the trading data is available to make it easy for price indexes to gather the necessary data.
An API is a set of protocols, routines, and tools for building an effective software application. Basically, it allows two application to interact with each other. APIs are commonly used when programming graphical user interface (GUI) components. When using a good API, it becomes easy to develop a new program to provide all the building blocks.
Data Collected by the Indexes
The nature of data used in cryptocurrency depends on the type of information the indexes makes available to users. Apart from the common information related to trade price and amount of some transaction, other elements of data include:
Coin IDs: These are crypto symbols used to recognize specific coins such as XRP or BTC.
Timestamps: They help to record the time a certain transaction occurred, and it’s used to provide the exact pricing information, accurate 24-hour trading volume, and precise OHLC (opening-high low-closing).
Trade IDs: They are trade identifies to help determine the trade volume.
Exchange rates: Maintains updated exchange rates between BTC/USD or ETH/USD as well as other cryptocurrency assets and trading pairs including BTC/ETH, ETH/XRP, and more.
Are the Cryptocurrency Indexes Prices Accurate?
The price assigned to crypto indexes represent the overall condition of the market. But, it is common to see the same crypto coins listed at different prices on different indexes. This is because platforms that deal with individual indexes collect information from a variety of different exchanges.
These exchanges have to trade in different markets using different currencies such as US, GBP, EUR, JPY, and more. The price used for calculation on a specific cryptocurrency index is influenced by different factors such as the nature of the market, liquidity of a coin, the trading volume, the transaction fees charged by a certain exchange and the frequency of requesting and sending information after a specified time limit.
To assign a value for a specific coin at a particular time in the market will not be an easy task and it won’t be necessary provided that the user is aware that the price on the exchange they’re trading on is precise for a certain market.
Risks Associated with Crypto Price Index
The popularity of cryptocurrencies has increased recently. Most investors should be aware of the underlying risks associated with this market. The risks affect any index related to the virtual currency market.
The main risks that affect this market are increased volatility in market prices and liquidity, as well as the uncertainty that comes from the regulatory bodies around crypto coins.
As a result of the supply nature of most of the cryptocurrencies and their unending demand, prices may change randomly. The volatility of crypto coins such as Bitcoin is the result of its inbuilt quantity commitment. The varying demand for Bitcoin is covered by the price variations. When there is an increase in demand for cryptocurrencies, there is almost a zero increase in quantity to help reduce the surge in the price of this coin and vice versa. Issues related to liquidity and volatility can be caused by alterations in prices and in severe cases, investors can be able to either close or open a position. In this case, investors need to choose whether to hold their virtual currencies investment in Bitcoin or build a diverse cryptocurrency index.
Another risk is the regulations and interventions by the government. Currently, Bitcoin’s legal status including other virtual currencies may vary from country to country. Although most of the Western countries’ government may tolerate these currencies, a substantial amount of countries hasn’t issued a legal judgment on the issue or placed a complete ban on their use. These regulatory uncertainties could hugely affect the price of these cryptocurrencies.
For instance, when regulatory laws were enforced in China on ICOs where they were declared an unauthorized public financing activity, Bitcoin’s price dropped drastically in less than 24 hours.
A major challenge that may affect the cryptocurrency market price index is potential errors that may occur in data sources or those that may affect the components of the index.
The cryptocurrency space is evolving rapidly. Similarly, the supply of financial products related to cryptocurrency has potential to grow even further. The cryptocurrency price index has set the pace towards achieving an advanced, user-friendly cryptocurrency market. It’s a proven approach that is recommended for investors who are willing to learn more about the cryptocurrency market and use it as an allocation method or as a benchmark for the management of active groups.