S&P Dow Jones Indices launched the S&P Cryptocurrency Indices in May. The indices have shown historically high annualized returns accompanied by significant volatility and downside risk. One of the goals of indexing is to bring accessibility and transparency to markets, and we believe that launching indices with a trusted price provider, Lukka, has allowed market participants to understand the relative growth of various cryptocurrencies, and the overall cryptocurrency market, over time. Our entrance into the market reflects our perception that the asset class is gathering broad appeal among market participants. According to a recent study by Fidelity, 70% of all institutional investors surveyed had a neutral-to-positive perception of digital assets.1 And as broad appeal increases, we believe the market and its surrounding ecosystem will continue to grow in size and complexity.
Our recently published paper, “Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices,” takes a deeper look at several issues to highlight some key features of this growing market.
Rapid growth of the asset class. One indicator of rapid growth is the number of eligible constituents for the S&P Cryptocurrency Broad Digital Market (BDM) Index. Exhibit 1 illustrates the number of constituents and market cap of the S&P Cryptocurrency BDM Index. This growth in constituents is largely driven by increased market cap (defined by coin supply x price) of many coins beyond Bitcoin and Ethereum. As measured by back-tested data, the number of coins meeting these criteria has grown over the years, especially over the period from March-June 2021. As of Sept. 21, 2021, there were 240 coins that met the minimum requirements to be eligible for the S&P Cryptocurrency BDM Index.
Asset-level characteristics. Cryptocurrencies are not identical in terms of what they offer. Many coins have features that provide utility beyond being a store of value. In general, a number of coins may be used to pay fees on a platform or network and given out as rewards for the operation of a network. These features, in addition to potential momentum created by investor interest, may add to their value as an asset. While these coins are not equity, holding them may allow a user to participate in the growth of a platform. Many coins perform non-financial functions as well—including governance, storage, infrastructure, gaming, and more. An analysis of the correlations among coins within the S&P Cryptocurrency LargeCap Index in the report showed a varied range, affirming our discussion that coins have different profiles.
Correlation. There is currently a low correlation between the S&P Cryptocurrency Indices and other asset classes, as shown in Exhibit 2. This low correlation can help provide strategies for diversification—an important consideration, as investors consider adding cryptocurrency exposure to their portfolios. In addition, Exhibit 2 shows that the S&P Ethereum Index has a lower correlation to other indices in the S&P Cryptocurrency Series. Relationships between cryptos and other asset classes are expected to evolve as this asset class matures.
For more information on comparative performance of the S&P Cryptocurrency Indices with traditional assets, liquidity of the index constituents, rolling correlations, and more, see our report “Bringing Transparency to an Emerging Asset Class: S&P Cryptocurrency Indices”.
Learn more about the S&P Cryptocurrency Index methodology here.
1 THE INSTITUTIONAL INVESTOR DIGITAL ASSETS STUDY, Fidelity Digital Assets, September 2021. https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/2021-digital-asset-study.pdfThe posts on this blog are opinions, not advice. Please read our Disclaimers.