In the last five years, the cryptocurrency world has seen a lot of coins/tokens appearing in the market. Currently, there are more than 1,000 coins/tokens and a total market capitalization of around $260B USD in the cryptocurrency market. This translates to over a 1,200% increase in the cryptocurrency market in the last year alone, according to the price index.
With these figures in mind, Bitcoin (BTC) continues to outperform most of the conventional assets in the world. It is not surprising that private investors want cryptocurrency exposure. Thus, a good strategy for private investors looking for steady long-term gains in cryptocurrency is the price index.
1. Meaning of Cryptocurrency Price Index
A cryptocurrency price index is a platform or a website that lists the price, market capitalization, and information on the total value of a company’s assets of various cryptocurrencies. CoinMarketCap, CryptoCompare, and WorldCoinIndex are examples of the most popular price indices.
These platforms serve to provide immediate price info on many cryptocurrencies and act as a good source of information for monitoring and comparing the rise of the various digital currency assets. They might offer information on the various coins and tokens on the market based on the listing method of respective price indices.
The majority of the good cryptocurrency price indices will list most of the digital assets available on the market. This is a reliable way of keeping yourself updated automatically of the goings-on in the whole cryptocurrency market instead of a manual compilation of data from the many individual crypto exchanges.
2. The Difference between Crypto Price Index and Traditional Stock Market Index
The traditional stock market index is similar to the cryptocurrency price index in the sense that both of them indicate the financial condition of an industry where an investor has made their investment. However, there are differences between them.
The major distinction lies in the fact that the traditional stock market index lists the price data for shares in companies, while a cryptocurrency price index lists price data for cryptocurrency assets of the many blockchain-dependent networks.
Again, the cryptocurrency price index lists most of the cryptocurrency coins/tokens available in the open market, while a stock market index lists a number of stocks with some common similarities among them such as company size or type of sector.
Another difference is that the cryptocurrency price index is not actually divided into different segments; all coins come under a single index. The stock market index has different prices indices for different segments of the market. For instance, the Standard and Poor’s 500 Index (S&P 500) lists the top 500 companies in the US by market value. Thus you can measure the robustness of the market based on the value of some of the big publicly-traded companies.
There is also the industry-specific price index. The London Stock Exchange has the Financial Time Stock Exchange (FTSE) techMARK 100 index which monitors the top 100 innovative technology companies listed on the LSE.
3. What Data is Available from a Cryptocurrency Price Index?
You can find information on price, market cap, and trades from the cryptocurrency price index. But that is not all!
The cryptocurrency price index hosts all information about current market capitalization or market price of the various cryptocurrencies. This is the aggregate trading volume of the particular coin/token in question across the respective markets in the last 24 hours.
More so, you can gather additional information about an individual coin. This includes a graph that monitors the price performance over time and current circulating supplies of the cryptocurrency. It also includes a list of all markets and exchanges concerned with the transaction of the coin/token.
Furthermore, every cryptocurrency price index is unique and provides different information based on their user-base. Some might offer to display the highest and lowest price achieved by a coin within a 24-hour period, while others might provide specifics on coin/token features such as tokenization of assets.
4. Where Does a Cryptocurrency Price Index Source Their Data From?
A cryptocurrency price index sources its data from a cryptocurrency exchange.
The majority of the reliable cryptocurrency price indices will typically collect data from many exchanges. This prevents a price increase on one exchange from controlling the entire market. Invariably, prices will change between exchanges in a light manner; this is the reason why aggregating data is quite important.
So, a cryptocurrency price index will watch the price of the coin/token the last time they traded it and the amount someone paid for it when it was last sold. The exchange will then report this information to the cryptocurrency price index website.
Many of the exchanges will make their trading information available through open Application Programming Interfaces (API). This ensures automatic data transmission to the cryptocurrency price index website.
5. What Types of Information do Exchanges Provide to Crypto Price Indices?
Cryptocurrency price index websites collect all manner of information from exchanges including the following:
Trade Identifiers – These are special identifiers used to establish the trade volume of crypto assets.
Trade Price – This considers how much an investor was willing to buy the token the last time they traded it.
Timestamps – This is a time-based data. It records the exact time a transaction takes place. Cryptocurrency price index uses timestamps for various purposes including real-time pricing data, accurate data opening and closing, and trading volume for a period of 24-hours.
Coin Identifiers – Each coin has its own special symbol, for instance, BTC for Bitcoin.
Exchange Rates – Cryptocurrency price index will monitor exchange rates between cryptocurrencies and available trading pairs. Also, it will monitor the value of each cryptocurrency with respect to other fiat currencies.
6. How do Crypto Price Indices Use Data to Calculate Price?
Indices use a 24-hour volume weighted average (VWA) to calculate the price of a particular cryptocurrency. This offers an exact overall picture of the price of the cryptocurrency over the trading period.
Crypto markets run for a rolling 24-hour period; the prices shown for cryptocurrencies are continuously updated.
7. How Accurate are Cryptocurrency Price Indices?
The data from most of the cryptocurrency price indices is quite accurate because these indices connect directly to main exchanges through an API. The data is actually sent immediately from the exchange to the index.
However, not all data from the cryptocurrency price index is 100% accurate. There are poor quality indices that only monitors information from a single exchange. Cryptocurrency price index data could become less accurate when you consider lower volume pairs.
So, there is no way to get an accurate price for every coin at every time across all markets. However, current major cryptocurrency price indices try hard to provide the latest accurate information.
This article should not be taken as, and is not intended to provide, investment advice. Users are ultimately responsible for the investment decisions he/she/it makes based on this information. It is your responsibility to review, analyze and verify any content/information before relying on them. Trading is a highly risky activity. Do consult your financial adviser before making any decision. Please conduct your thorough research before investing in any cryptocurrency and read our full disclaimer.
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