By Herbert Law, Founder and CEO of Crypto Price Index (CPI)
One of the most effective ways for retail investors to make money in the stock market is to invest in index funds, which have been found to generally outperform mutual funds over time. To date, the lack of a comprehensive index fund for crypto assets akin to those based on the S&P 500 in legacy financial markets has held the crypto market back; however, before crypto can effectively offer such opportunities to everyday people, the market needs a trustworthy index to accurately represent the state of the market. Such a measure would enable retail investors to make more informed decisions and perhaps entice institutional investors, such as pension funds and endowments, to make the leap into crypto.
Why Indexes are Important in Any Market
A comprehensive index of the stock market can be used as an indicator for the health of the market and overall trajectory. The Dow Jones Industrial Average (DJIA) and S&P 500 are the most well-known stock indices. The DJIA includes 30 of the most influential blue-chip stocks chosen by the editors of the Wall Street Journal. The S&P 500 tracks the top five-hundred stocks by market capitalization. Though these measures are not perfect reflections of the market, they have proven to be fairly accurate indicators of market health over time, since they are based on actual trades and not public sentiment.
Index funds are based on the underlying stocks included in the corresponding index. Warren Buffet has said, “ ‘Consistently buy an S&P 500 low-cost index fund. […] I think it’s the thing that makes the most sense practically all of the time.’ ” Given most people cannot accurately predict which stocks will perform best, and the management fees involved with mutual funds diminish ROI, index funds are great options for anyone who lacks the time, expertise, or resources to invest and manage stocks themselves. The indices themselves serve as invaluable reference points for institutional investors and professional traders as well.
Why Crypto Needs a Universal Market Index
Given the core tenets of investing hold true for fiat and crypto markets, it should go without saying that a comprehensive crypto index would greatly advantage the industry. Though a number of crypto index coins exist, most include 20 cryptocurrencies or less. With over 3,000 cryptocurrency assets on the market in a fast-growing sphere, the greater crypto community would benefit from a more comprehensive index akin to the stock market’s S&P 500.
Just as Bloomberg, Fox Business, and CNN Markets, and other media refer to the DJIA and S&P 500 on a nearly 24/7 basis, it’s as important for crypto traders and investors to have easy access to accurate information on the state of the industry—a comprehensive crypto index would achieve that for retail and institutional investors alike.
The impact of a comprehensive crypto index is hard to measure, but it would certainly mark another milestone in the maturation of an ever-evolving industry. Crypto-focused publications and media outlets aiming to inform their audience on the most up-to-date market insights, trends, and predictions could incorporate the index into their sites. Retail investors would benefit from more accessible information on the state of the market. Finally, a comprehensive crypto index could further the case for mass adoption by enticing more cautious institutional investors, such as endowments and pension funds, to invest in digital assets, given the availability of a more overarching market indicator.