Bringing Transparency to Cryptocurrency with a Digital Currency Index
— October 3, 2017
The cryptocurrency surge is slated to be the like the Internet boom of the 1990’s, with a possible market growth of trillions of dollars in just a few short years. Wall Street and Main Street investors are ready to cash-in on the possibilities, but there is one huge hurdle to overcome. Out of the 2,000 plus coins on the market, which ones are the sure winners? Bringing transparency to cryptocurrency with a digital currency index is the key.
The exploding prices of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) over the past year has caused the little-understood industry to catch the attention of increasing numbers of investors. Bitcoin has surged 588% in the past year and the second largest coin, Ethereum, has risen an astounding 2,500%.
With these gains has come attention that has taken the emerging market from an arcane speculative investment that most people outside of technology were not familiar with, to now becoming a serious investment vehicle for both professional investors and mainstream consumers alike. At one point, billionaire investor Michael Novogratz was reported to have 10% of his net worth invested into cryptocurrencies. But the challenge for both professional and retail investors remains that the majority of individuals without an expertise in technology simply do not understand how cryptocurrency works. This is likely the next cottage industry to form in financial services.
Establishing a Benchmark and Transparency to Cryptocurrency
Perhaps most prominent to emerge is the Digital Currency Index, which seeks to be the first widely accepted market index for tracking the cryptocurrency market. Similar to an equities index such as the Dow Jones Industrial Average or the NASDAQ, the Digital Currency Index (DCI), which was released in July, is a weighted average of the top 30 cryptocurrencies based on a variety of qualitative and quantitative prerequisites.
The list of prerequisites includes the quality of the project the cryptocurrency represents, the development team, the cryptocurrency’s market cap, expected return, and degree of volatility. It is freely available for the public to monitor online and allows investors to track the overall direction in prices of the crypto market and also analyze past price action to identify possible trends.
There has not yet been a major market index for cryptocurrencies that the industry and investors widely accepted. Prices of cryptocurrencies have become so volatile that not being able to keep up has been a common complaint of those interested in investing in the space. Further, with the prices of many of the currencies having inverse relationships, it has been even more difficult to gauge the overall direction, flow of funds and health of the market.
DCI was developed by tech entrepreneur and investor Roger Bryan and his team originally for the purpose of creating their own internal tool to monitor their crypto investments. “The cryptocurrency market is heading towards a $ 1T valuation, but before we get there, 90% of today’s coins will disappear. We needed a way to track which will stick around and which projects will fail”, says Bryan.
Improving Access for Mainstream Investors
The DCI team has since announced that it will be developing its own digital currency, called the Index Coin (XIC), that will take advantage of the diversification provided by the DCI algorithm. They are planning an ICO (initial coin offering) that will allow accredited investors to purchase a coin that acts essentially as an index fund tied to the Digital Currency Index.
They believe it solves a crucial need in the market, which is access for mainstream investors who do not have the time or desire to study the arcane in’s and out’s of blockchain. “A key purpose of the DCI is the diversification of a very volatile cryptocurrency market.
This allows for an investment in the entire cryptocurrency space, without the risk of betting on a single coin, and without the hassle of holding coins from different exchanges or in different wallets. There are many coins available, some are very valuable investment vehicles, however, others are highly volatile and frankly, others are worthless. The goal of DCI is to manage an index fund of coins that is the weighted average of the top 30 coins,” explains DCI’s chief data scientist, Michael Stansky.
The Future of Crypto and the Digital Currency Index
The current state of the cryptocurrency market is meant for the investor who likes to take risks and is not afraid to lose. It is possible the investment climate may stabilize as it matures, but that is still uncertain at this point.
The unknown variables to this industry include the increasing number of coins flooding the market and the future of government regulation. However, this market space has already grown over 500% in the past year, and shows no clear signs of slowing down.