Indexes are pivotal in asset markets as the cornerstone of financial market growth and an essential tool for investors. In crypto, however, the nascent state of index availability and adoption is a significant impediment for investors.
Indexes are essential for the growth of the crypto market, as they provide a reliable foundation for investment decisions, facilitate price discovery, and enable benchmarking and investment products. Without indexes, investors struggle to determine fair values, compare different investment products, assess risk, and create a common language among market participants.
We summarize the impact of index adoption in the following six sections:
Price discovery and credibility: Indexes facilitate price discovery by aggregating data from multiple sources and calculating a representative value. Professionally managed indexes instill credibility, bolstering confidence in retail and institutional investors.
Benchmarking and investment products: Indexes provide benchmarks against which asset performance can be measured. This allows for the creation of investment vehicles like derivatives and cryptocurrency ETFs, which could attract significant retail and institutional capital.
Risk management and transparency: Indexes help investors assess the risk and volatility associated with an asset. Fully transparent indexes enhance risk assessment by improving asset allocation models and contributing to market stability and a more informed investment process.
Market research and analysis: Indexes offer valuable data for academics and analysts to study market trends, correlations, and behaviors. This research informs strategies and contributes to a deeper understanding of the asset class.
Standardization and language: Indexes promote standardization in measuring and evaluating market performance. Established indexes create a common language and universal standard among market participants.
Institutional participation: Professionally managed indexes attract institutional participation, enhancing market liquidity and stability.
Indexing is vital for the advancement of new asset classes like crypto. Despite the absence of regulatory guidance, the industry must continue to push forward with the development of indexes.