In the rapidly evolving world of cryptocurrencies, one area that is getting a lot of attention is altcoins (or alternative coins). Generally, altcoins refer to cryptocurrencies other than Bitcoin. There are thousands of distinct cryptocurrencies that offer a wide variety of exposures. For instance, altcoins power decentralized finance (DeFi), infrastructure, gaming, the metaverse,1 and more. With cryptocurrencies, it’s especially important to understand what a particular coin does, as well as its associated risks, rewards, and other features. At S&P DJI, we offer a variety of cryptocurrency indices of varying coin capitalization ranges and other characteristics.
To that end, we’re excited to announce the launch of two new indices in our cryptocurrency series—the S&P Cryptocurrency Top 5 Equal Weight Index and the S&P Cryptocurrency Top 10 Equal Weight Index. These indices are designed to measure the performance of the largest 5 and 10 cryptocurrencies by market capitalization. They also differentiate themselves with two key criteria: 1) providing substantial exposure to altcoins due to being equally weighted and 2) enhancing investability by requiring all coins to be held by at least two institutional grade custodians.
Equal-weight indices give the same exposure to each constituent, regardless of size. This is notable because Bitcoin and Ethereum dominate the marketplace with approximately 60% of total market capitalization (as of January 2022). It’s worth noting that this number has decreased from about 80% one year ago—showing both growth of the overall market and the next tier of coins. In a market-cap-weighted top 10 index, once Bitcoin and Ethereum are included, exposure would be limited for the next 8 coins. By contrast, in an equally weighted index, all constituents receive a fixed weight—10% each in a 10-coin index at each rebalance. This provides much more exposure to the next cohort of coins.
With respect to the custodian screen, we have included this to address the many challenges of cryptocurrency custody. We have touched on some of these in an earlier blog. By screening coins for custodians meeting certain criteria, we are measuring a set of coins that might have more utility for an institutional audience that may appreciate added safeguards around evolving technology—mitigating risks like hacks, lost private keys, access difficulties, etc. To that end, many banks and asset managers are integrating with digitally native third-party custodians—that is, firms created specifically to service blockchain infrastructure.
As part of the index methodology, each constituent coin must be covered by a minimum of two custodians that demonstrate both appropriate technology security (either multi-party computing [MPC] or MultiSig) and information security standards (defined by SOC II or ISO27001). Appropriate custody makes it easier for asset managers to hold and invest in the coins.
For S&P DJI, these new indices represent one more way to bring transparency to this emerging asset class. Stay tuned for additional crypto indices launching soon!
1 “The metaverse is a digital reality that combines aspects of social media, online gaming, augmented reality (AR), virtual reality (VR), and cryptocurrencies to allow users to interact virtually. Augmented reality overlays visual elements, sound, and other sensory input onto real-world settings to enhance the user experience.” (Source: Investopedia, https://www.investopedia.com/metaverse-definition-5206578.)
S&P DJI relies on reporting from its cryptocurrency pricing provider, Lukka, Inc. for custodial screens. For more information about Lukka, please refer to the website: https://data.lukka.tech/prime/. S&P Global, Inc., the parent of S&P Dow Jones Indices LLC, is an investor in Lukka. For information on S&P Global’s investment in Lukka, please see here. In addition, representatives of Lukka may provide consultative services to the S&P Digital Assets Index Committee from time to time.
For more information on the indices, please see the methodology for the S&P Cryptocurrency Top 5 Equal Weight Index and the S&P Cryptocurrency Top 10 Equal Weight Index.The posts on this blog are opinions, not advice. Please read our Disclaimers.