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Explaining DataLight indices

January 24, 2019


Explaining DataLight indices

DataLight’s professional indices give market participants a quick and concise impression of the direction of the relevant market segment, serving as a reference point for index investments. Even though the cryptocurrency market is highly speculative, and fundamental cryptocurrency valuations are not very well developed, we propose a methodology to better understand the performance of the market.

Given that the crypto market is still in its infancy, we use the well-established approaches of traditional markets in our crypto indices. A cryptocurrency index models changes in the price of cryptocurrencies in the same way as a stock market index records changes in the value of a portfolio.

The following is a summary of how we perform our indices calculations:

CVIX (Crypto Volatility Index)

CVIX (Crypto Volatility Index) is an analogue of the classic stock market index – the CBOE Volatility Index (VIX) – which computes implied stock market volatility based on prices from the S&P 500 index options market. The VIX provides a theoretical expectation of stock market volatility in the near future.

The CVIX shows the volatility of the total market capitalisation and is calculated as the standard deviation (the degree to which the prices vary from their average) over the last 30 days. CVIX cannot be constructed in the same way as the VIX due to the underdeveloped nature of the crypto options market. CVIX reflects the current volatility of crypto prices and its formula is:

where is the mean of the price over the last 30 days, xi is each recorded value, N is the count, calculated as the price of cryptocurrency every five minutes over 30 days, and i=1refers to the fact that we start at the first value (first day, first five minutes), so we include them all.

Sharpe ratio

Sharpe ratio is yet another index coming from traditional finance and it examines the performance of an investment adjusted for its risk. When assessing an asset, some investors look at its profitability, but forget to evaluate the risk. Taking into account the riskiness of an asset by the volatility of its profitability increases the objectivity of the asset quality indicator.

The index measures the risk premium per unit of deviation in a cryptocurrency, i.e. how well the investor is compensated for the risk when buying a crypto asset (the higher the Sharpe ratio = the better return for the same risk). So, the higher the Sharpe coefficient is, the better the profitability indicators for the portfolio investments are. On the other hand, a very low Sharpe index indicates that the investment will result in no profit.

The index is calculated as follows:

where Rais the return, E[Ra]is the expected value of the excess of the asset return over the benchmark return and ais the standard deviation.

BTCX (Bitcoin Index)

BTCX (Bitcoin Index) is a counterpart of the very well-known crypto market indicator, the Total BTC Dominance, but with one difference. In BTCX the bitcoin capitalisation is divided by the capitalisation of the top five crypto assets. This approach reflects a more accurate picture of the relationship between bitcoin and the market, since the ratio of the bitcoin capitalisation share to the total market capitalisation depends on the addition of new coins.

The name BTCX takes its origin from the US dollar index USDX and DXY, where bitcoin plays the role of the dollar as a reference to the whole market.

The index is calculated using the following formula:

where BTCc is the bitcoin capitalisation and yc is the capitalisation of the top five crypto assets.

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