How Cryptocurrency Price Indexes Work
Cryptocurrency price indexes are a crucial part of the crypto industry. Today, we’re explaining everything you need to know about cryptocurrency price indexes and how they work – including how you can read crypto price indexes to invest more intelligently.
What is a Cryptocurrency Price Index?
Any website that lists the price, market cap, and other information about cryptocurrencies can be considered a cryptocurrency price index.
Our website is a cryptocurrency price index. Coinmarketcap.com is a cryptocurrency price index.
You can visit an index to get instant price information about the crypto industry, including details on all coins and tokens. Some price indexes highlight every token on the market. Others focus on the top 10, 50, or 100 cryptocurrencies.
Monitoring a cryptocurrency price index is a great way to get at-a-glance information about the status of the crypto industry without manually checking the price on an individual exchange.
How is a Cryptocurrency Price Index Different from a Traditional Stock Market Index?
A cryptocurrency price index is based on the same principle as a stock market index. Both indicate the financial health of an industry. Both provide at-a-glance information about market movements, prices, and conditions.
The obvious difference between a cryptocurrency price index and a stock market index, of course, is that a stock market index lists the price info for shares in companies while a crypto price index lists the price of cryptocurrencies.
Another difference is that crypto price indexes aren’t typically separated into different segments. We don’t typically have an index for security tokens, for example, and a separate index for cryptocurrencies. Instead, all coins are listed under one index. On stock markets, we have different price indexes for different segments of the market. The Standard & Poor’s 500 Index (S&P 500), for example, lists the top 500 companies in the United States by market value. You can gauge the health of a market based on the value of some of the largest publicly-traded companies.
You can also find industry-specific price indexes. The London Stock Exchange, for example, has the FTSE techMARK 100 index, for example. This index tracks the top 100 innovative technology companies listed on the London Stock Exchange.
Various segmentation systems have been proposed for the crypto industry, but we do not yet have separate price indexes. It seems inevitable, however, that they’ll come in the future. The HOLD10 index is one proposal: it tracks the top 10 largest cryptocurrencies by market cap. Other proposals track the top 50 or top 100 largest cryptocurrencies.
What Information Can You Get from a Cryptocurrency Price Index?
A cryptocurrency price index typically focuses on price, market capitalization, and other trading-related information.
How much did someone pay for a particular digital asset the last time it was traded? That tells us the price. How many circulating tokens are there? By multiplying the number of tokens by the current price, you can get the market capitalization for a particular digital asset.
Many cryptocurrency price indexes also list the 24 hour trading volume of a digital asset. This is the total trading volume of the specific coin across various markets over the past 24 hours. High trading volumes might indicate a surge of news related to a particular digital asset. Low trading volume could indicate waning interest.
Typically, a cryptocurrency price index will let you click on an individual coin to get more information. You can view that coin’s price history over time in the form of a chart, for example.
Some cryptocurrency price indexes go into further depth about the features of each coin. An index might discuss whether it’s a PoW or PoS-secured coin, for example, or whether it’s a security token, a cryptocurrency, a utility token, or some other digital asset.
Where Do Cryptocurrency Price Indexes Get Their Data?
Typically, a cryptocurrency price index will get its data from a cryptocurrency exchange.
Most reputable price indexes will take data from multiple exchanges. Coinmarketcap, for example, aggregates data from 3 or 4 of the largest cryptocurrency exchanges in the world. This prevents a price surge on one exchange from affecting the rest of the market. Prices will always vary slightly between exchanges, which is why aggregating data is important.
Essentially, a crypto price index will track the price of the coin the last time it was traded. How much did someone pay for that token the last time it was sold? The exchange reports this information to the crypto price index website.
Most exchanges will make their trading data available through open APIs, or Application Programming Interfaces. With an API, a crypto price index website doesn’t have to manually check the price on each exchange every time it wants to display price data. APIs allow this data to be transferred automatically.
What Kinds of Data Do Exchanges Provide to Indexes?
Cryptocurrency price index websites can collect all sorts of data from the exchange. Typically, however, the price index will collect the following types of data:
Trade Price: How much was someone willing to pay for the token the last time it was traded?
Transaction Volume: How many times has a token been traded over the last 24 hours? The last 7 days? The last year? What is the total volume of these trades?
Coin IDs: Each coin has its own unique symbol. Bitcoin Cash has BCH, for example, while Litecoin has LTC.
Trade IDs: Trade IDs are unique trade identifiers that establish trade volume of a digital asset.
Timestamps: Timestamps record the exact moment a trade transaction took place. Indexes can use timestamps for various purposes, but they’re generally used for real-time pricing info, accurate opening and closing data (over a 24 hour period), and similar figures.
Exchange Rates: Finally, indexes will track the exchange rates between digital assets and various counterparts. Bitcoin might be traded with the USD on one exchange and the EUR on another exchange, for example. Another exchange might only offer ETH/BTC trades. Indexes track the value of each digital asset relative to other fiat currencies and cryptocurrencies.
How Do Indexes Use this Data to Calculate Price?
Indexes calculate the price of a specific cryptocurrency using a 24-hour volume weighted average (VWA). This provides an accurate overall picture of the price of a digital asset over a longer period of time.
Obviously, crypto markets never close – unlike traditional stock markets. That means indexes will need to track crypto prices over a pre-determined length of time. Typically, an index will track crypto prices over a rolling 24 hour time period.
Are Cryptocurrency Price Indexes Accurate?
Can you trust cryptocurrency price indexes? Is their price information accurate?
Typically, the information on major cryptocurrency price indexes is completely accurate. These indexes connect directly to major exchanges via an API. The information is sent instantly from the exchange to the index. Good indexes, as mentioned above, aggregate data from multiple exchanges, which means small differences between exchanges are smoothed out.
Of course, not all cryptocurrency price indexes are 100% accurate. There are lower-quality index that only track data from a single exchange, for example. A blip in the price on one exchange might be reflected in the index’s price even though other exchanges don’t have this blip.
Crypto price index data can also become less accurate when looking at lower volume pairs. Bitcoin and Ether, for example, are traded across hundreds of different exchanges. It’s easy to get accurate price data for bitcoin, Ether, and other major cryptocurrencies. Some other cryptocurrencies, however, are only available on a small number of exchanges. IOTA, for example, is not available for trading on as many exchanges. This can make price indexes for smaller market cap cryptocurrencies less accurate.
Ultimately, there’s no way to get an exact price for every coin at every instant across all markets. However, today’s major cryptocurrency price indexes do their best to provide up-to-date, accurate information about the price of digital assets.