Since the launch of the S&P Cryptocurrency Indices in 2021, we often get asked about the difference between a price (more formally known as a reference rate) and a single-coin index.
So, let me unpack this into three questions:
- What is a reference rate?
- What is a single-coin index? And especially, why is it different from a reference rate?
- What is the value of an index overall?
Crypto Reference Prices
Simply put, a reference price for a cryptocurrency is the price for which one can buy that coin (or token) from an exchange. This is often referred to as the crypto price.
Beyond that, cryptocurrency pricing is anything but straightforward.
In fact, in cryptocurrency markets, we believe that one of the biggest challenges is access to robust, transparent pricing.
- The cryptocurrency market is decentralized, with hundreds of exchanges operating globally 24/7. This means there is no one definitive market price nor the concept of a “consolidated tape,” as exists for equity prices.
- The quality of exchanges varies widely—in terms of operational aspects, the regulations to which they are subject, their governance practices, and the security and robustness of their platforms.
- Exchanges vary in terms of the robustness of their trading volume, liquidity and pricing.
- It is a challenge to obtain a unique indication of price from these exchanges.
S&P DJI’s selection of Lukka, an institutional-quality crypto price aggregator, as our price provider for the cryptocurrencies used in our indices gives us the ability to use standardized cryptocurrency data selected from a set of comprehensive and reliable exchanges in our indices.
The goal of a single-coin index, unlike a crypto reference price, is to reflect what happens if a single user buys a single coin and what its returns are from that point on. The S&P Bitcoin Index is intended to do this for Bitcoin.
While the concept is quite simple, making sure that the methodology is rules based and the calculation is accurate requires a number of adjustments to ensure the index fully reflects returns on the asset and its value over time. As part of the index methodology, S&P DJI takes Lukka’s price and applies a base value to it. For the S&P Bitcoin Index, the base value is 100 on Jan. 1, 2014. The level of the index is calculated to represent the changes in the reference price from day to day and shows the change in relative value over time.
In addition, the S&P Bitcoin Index, as well as the other S&P Cryptocurrency Indices, adjust for coin supply (akin to shares outstanding) and coin events (akin to a corporate action). Coin events include forks, air drops and staking rewards (see page 12 of the methodology for more details). These features all distinguish a single-coin index from a reference price and make the index value different than a reference price.
Index Benefits and Uses
The benefits of an index are to bring transparency and accessibility to markets. Indices allow market participants to understand the relative growth of an asset class. In the case of crypto, the S&P Cryptocurrency Indices help clarify the relative growth of various cryptocurrencies and the overall cryptocurrency market over time.
Many investors benchmark their investments to indices to determine whether their investments are outperforming or underperforming the markets in which they invest. Other investors want the precision of an index when they benchmark their returns—for example, price return versus total return, time of the index, and type of pricing (fair market value, volume-weighted average price, etc.).
Most importantly, for financial institutions looking to create an index-linked investment product—such as a Bitcoin ETF—an index is a necessity.
Learn more about the S&P Cryptocurrency Indices here.The posts on this blog are opinions, not advice. Please read our Disclaimers.