Introduction

A cryptocurrency (“crypto”) is a peer-to-peer, decentralized, digital currency whose implementation relies on the principles of cryptography to validate the transactions and generation of the currency itself. To guard against digital counterfeiting cryptos use a proof-of-work or proof-of-stake scheme. The first appeared on the scene in 2009.

Most cryptos are designed to gradually introduce new units of currency, placing an ultimate cap on the total amount in circulation. This is done to mimic the scarcity (and value) of precious metals and to avoid hyperinflation.

There are now a wide range of crypto specifications and protocols, many of which have been derived from the first fully implemented crypto, Bitcoin, created by a developer operating under the pseudonym Satoshi Nakomoto, which used SHA-256 as its proof-of-work scheme.

With the Interest gaining, through media attention, and recent endorsement by respected businesses and the US administration, there has been a rapid price rise of Bitcoin. With the increased circulation of other cryptos, such as Litecoin and Peercoin, the time is right to produce a series of indices to act both as a benchmark and the basis for tradable financial instruments.

  • The Crypto ETF series have been created with the objective of measuring the performance of baskets of cryptos. They are designed to be an investable basket that can be used to act both as benchmarks and the basis for tradable financial products.
  • The CryptoComposite Index Series currently consists of two indices
    • The CC10 Index will consist of the largest 10 cryptos by market capitalisation and will be weighted accordingly. This is designed to be an investible index.
    • The CC10x Index will consist of the constituents of the CC10 excluding Bitcoin and will be weighted by market capitalisation. This is designed to be an investible index.
  • The CryptoComposite Index Series is only calculated as a Price Index.
  • The CryptoComposite Index Series is calculated in USD.
  • The CryptoComposite Index Series values are calculated on an intraday basis and published every 15 seconds. The market never closes so the index is calculated 24/7. This is in line with the continuous trading nature of cryptos.
  • Data products are produced at the end of each working day with closing values for that day.

Construction of the CryptoComposite Index Series

Crypto Elegibility

Crypto Definition
  • Cryptos that are to be included must be ‘minable’. This means they are supported by an open-source architecture. Ripple, HashDollar and Ven are not deemed to be cryptos for the purposes of our indices.
  • A crypto is defined as a peer-to-peer, decentralised, digital ‘currency’ whose implementation relies on the principles of cryptography to validate transactions and the generation of the ‘coins’.
  • Cryptos are also known as ‘digital currencies’ or ‘alternative currencies’ and these alternative names are used interchangeably.
Size Selection
  • The market capitalisation of the crypto must be greater than or equal to USD500k to be included in the selection universe from which the index constituents are selected.
Active Trading Criteria
  • The crypto must have been in actively trading for more than a month to be eligible for entry into the universe.
Index Crypto Selection
  • The CC10 Index will consist of the largest 10 cryptos by market capitalisation and will be weighted accordingly.
  • The CC10x Index will consist of the constituents of the CC10 excluding Bitcoin and will be weighted accordingly.
  • Other indices will be created as it is deemed that cryptos outside of the CC10 become sufficiently large enough in market capitalisation to become investable. There is also potential for style or genre indices.
Fast Track Entry
  • If a crypto has been in existence for less than a month (2.1.3) but is sufficiently large that it falls into the top 10 by market capitalisation it will qualify for fast track-entry.
Price Source
  • A price must be available from a reliable exchange and preferably more than one source.

Calculation Methodology And Index Algorithm

Prices

  • The CryptoComposite Index Series will use a volume weighted average last trade price, where available for each crypto.
  • The prices are sourced from multiple exchanges listed in Appendix A: 7.2 and are volume weighted over the last 24 hours (Appendix A: 7.3).

Index Coins

The number of coins used in the index calculation for each crypto is available from CryptoComposite. Adjustments to the index coins shall not be taken into account until the day they are updated according to the Changes to Constituent Weights (see section 5 below).

Base Date And Base Value

The Base Value is the starting value for the index and may be adjusted due to the split or consolidation of Index Values. The CC10 and CC10x Indices have a base value of 1000.00 on the base date 31 December 2013.

Rounding

Index Values are calculated internally to 15 decimal places and published rounded to two decimal places.

Calculation Methodology

The indices measure the performance of a set of cryptos over time. The CryptoComposite Indices are calculated using Laspeyre’s concept of a weighted arithmetic average together with the concept of chain-linking.

  • The indices are calculated in USD on an intraday and End of Day (EoD) basis.
  • As the market for cyptos never closes the index is calculated 24/7 every day of the year.
  • The index is published intraday every 15 seconds.
  • There are two methods of calculating the index level:
    • Market Cap/Index Divisor Method
    • Contribution Method

Market Cap/Index Divisor Index Calculation Method

The Indices are calculated based on the sum of the market capitalisations of the constituent currencies divided by an index divisor adjusted for changes in index constituents. The formula is as follows:

Indext=i=1n(pitcifit)d
  • where:
  • n = Number of constituents in the index
  • t = Calculation time Intraday every 15 seconds
  • i = Index constituent The crypto in the Index
  • p = Price The latest volume weighted price of the crypto in BTC
  • c = Coins The number of coins used in the index calculation as defined above in the Ground Rules
  • f = Exchange Rate The forex cross-rate used to convert BTC to USD
  • d = Index Divisor A figure that represents the total market capitalisation of the Index at the base date. This is adjusted to allow for changes in the composition of the Index and the periodic updating to the number of coins used for the index calculation to be made without distorting the Index

Contribution Index Calculation Method

One way to calculate the index is to use the initial weight and price return of the individual cryptos in the index:

IndexUSDt=IndexUSDt1c=1n(1+CryptoPriceContributionToIndexUSDt)
  • where:
  • n = Number of constituents cryptos in the index
  • t = Current calculation time
  • t1 = Previous calculation day
  • IndexUSDt = Current Price Index Level in USD
  • IndexUSDt1 = Previous day’s closing Price Index Level in USD
Crypto Price Contribution To The Index
CryptoPriceContributionToIndexUSDt=InitialCryptoWeighttCryptoDailyPriceReturnUSDt
  • where:
  • CryptoDailyPriceReturnUSDt = Price return in USD of crypto cat time t
Initial Crypto Weight
InitialCryptoWeightt=EndofDayNoCoinst1PricePerCoint1nc=1EndofDayNoCoinst1PricePerCoint1
  • where:
  • EndofDayNoCoinst1 = Number of coins of crypto c at the end of day t1
  • PricePerCoint1 = Price per coin of crypto c at time t1
CryptoDailyPriceReturnUSDt=[PricePerCointPricePerCoint11]100
  • where:
  • PricePerCointt = Price per coin of crypto c at time t
  • PricePerCoint1 = Price per coin of crypto c at time t1

Initial Index Calculation

In order to start the index calculation it is necessary to determine the number of coins for each crypto in the initial constituents of the indices which will be used up to the first periodic review (Jan 2014).

Cap/Index Divisor Calculation Method
  • Calculate the initial index divisor
dinitial=ni=1(pit0cift0)1000.00
  • where:
  • n = Number of constituents in the index
  • t0 = Base Date 31 Dec 2013 (23:59 UTC)
  • i = Index constituent The crypto in the initial Index composition
  • p = Price The closing price of the crypto in BTC
  • c = Coins The number of coins used in the index calculation as at 31 Dec 2013
  • f = Exchange Rate The forex cross-rate used to convert BTC to USD
  • dinitial = Index Divisor A figure that represents the total market capitalisation of the Index at the base date
  • Calculate the Index value up to the first periodic review using the initial index divisor.
  • Following the first periodic review, the new index divisor will be calculated according to the ground rules in section 4.

Index Maintenance

General Overview

The rules for inserting or removing cryptos from the Indices on a periodic basis are designed to provide stability in the selection of the index constituents whilst ensuring that the indices continue to be representative of the investable crypto market. This is achieved by inserting or removing those cryptos whose market capitilisation hassignificantly risen or fallen subject to buffers to reduce turnover.

Review Timing And Index Rebalancing

Reviews of the CryptoComposite Index Series will take place quarterly in March, June, September and December.

The data for the periodic review is taken at the end of day (23:59 UTC) on the last Friday of each month using the last block of the day.

The governing committee will vote electronically based on the suggested changes to the indices based on the outcome of the rules based review. This will minimise leakage ahead of the press release.

Details of the outcome of the periodic review will be published as soon as practicable after approval by the governing committee at 12:00 (noon) UTC.

An abstention by a committee meeting will be deemed to be a ‘yes’ vote to the proposed changes.

A majority ‘no’ vote will delay the rebalancing by 24 hours. A press release will be sent out notifying market participants of the delay.

Following a 24 hr delay the committee will meet on the following day and a press release concerning the outcome will be released at 12:00 (noon) UTC.

The index rebalance will be implemented at the beginning of the first Tuesday (00:00 UTC) of the each month that follows the periodic review.

If there has been a 24 hour delay the rebalance will be implemented the next business day.

Responsibilities And Reporting

CryptoComposite will be responsible for conducting the periodic review of the constituents of the CryptoComposite Index Series.

CryptoComposite will recommend to the governing committee constituents to be inserted or deleted as part of the periodic review.

CryptoComposite is responsible for publicising the outcome of the periodic reviews as soon as possible after the review through the media or by electronic communication by e-mail or other digital services.

The Periodic Review Process

Ranking Of Cryptos By Market Capitalisation

At the end of the data cut-off day (see 4.2) all cryptos are ranked from largest to smallest by full market capitalisation using the number of coins in supply and closing price in USD, T; the crypto having the largest market capitalisation assigned the rank of 1.

A screen is applied to filter out cryptos that have not achieved the minimum days of active trading criteria.

Current index constituents that are ranked 12th or below are automatically excluded from the index and those non-constituents that are ranked at 8th or above are automatically included.

If one or more non-constituents are ranked at 8th or above but there are no current constituents meeting the automatic exclusion criteria, the lowest ranked current constituents are excluded from the index in order to keep the number of index constituents in the CC10 to 10.

If one or more non-constituents are ranked at 12th or below but there are no current constituents meeting the automatic inclusion criteria, the highest ranked non-constituents are included from the index in order to keep the number of index constituents in the CC10 to 10.

If there are no automatic inclusions and exclusions then there will be no changes to the constituents of the indices.

The governing committee then approve the changes and the relevant notice of the changes is then published to the media.

Deletions and additions to the Indices are applied at the start of the first Tuesday in the month following the periodic review.

To ensure continuity of the index value between the close of the first Monday in the month following the periodic review and the start of the first Tuesday in the month following the review with the new index composition, a new index divisor is calculated as follows:

dnew=ni=1(pit1cift1)Indext1
  • where:
  • n = Number of constituents in the index
  • t1 = Previous Close Close of first Monday in the month following the periodic review
  • i = Index constituent The crypto in the new Index composition
  • p = Price The latest volume weighted price of the crypto in BTC
  • c = Coins The number of coins used in the index calculation as defined above in the Ground Rules
  • f = Exchange Rate The forex cross-rate used to convert BTC to USD
  • dnew = Index Divisor A figure that represents the total market capitalisation of the Index at the base date. This is adjusted to allow for changes in the composition of the Index and the periodic updating to the number of coins used for the index calculation to be made without distorting the Index.

Monitored List

The appearance of new cryptos will be monitored by CryptoComposite. Any new cryptos will be added to the monitored list and the market capitalisation tracked. These new cryptos on the monitored list will then be included for consideration to entry into the CryptoComposite Index Series when the next periodic review is conducted.

Changes To Constituent Weightings

Index Coins

For the purpose of computing the CryptoComposite Indices, the number of coins in supply is quoted to the nearest whole number.

To prevent a large number of insignificant weight changes due to the ‘mining’ of new blocks and the creation of new coins within those blocks, the number of coins used in the index calculation is only amended once a month.

Updates to the number of coins used in the index calculation will be made at the same time as the monthly review is effective i.e. the beginning of the new day on the first Tuesday of the month proceeding the periodic review (00:00 UTC).

The cut-off for the number of coins will be the same as the monthly review at the day end (23:59 UTC or as close to midnight as possible) on the last Friday of the month before the review is implemented using the last block in the Blockchain for each crypto.

On a daily basis the real number of coins in supply will be monitored using the last block in the Blockchain for each crypto at the day (23:59 UTC or as close to midnight as possible) will be compared to the number of coins for each crypto currently used in the index calculation.

If the real number of coins in supply differs by more than those used in the index calculation by 10% or more the number of coins used in the index calculation is updated between the periodic reviews with two days notice given and implemented at the start of the new day of T+3, where T is the day that triggered the coin update.

All adjustments are made before the start of the index calculation on the day concerned (00:00 UTC or as close as possible).

The information and opinions contained in this document which has been prepared by CryptoComposite LLC (“CryptoComposite”) are not intended to be a comprehensive study, nor to provide any advice, and should not be relied on or treated as a substitute for specific advice. All information is provided for information purposes only. This document does not constitute an offer or form part of an invitation to buy or sell or a solicitation in relation to any financial product or strategy. No reliance may be placed for any purposes whatsoever in the information contained in this document or its completeness. No representation or warranty is given by CryptoComposite or any of the directors, officers or employees of the same as to the accuracy or completeness of the information or opinions contained in this document and no liability is accepted for any such information or opinions. Whilst every effort is made to ensure that all information given by CryptoComposite in this publication is accurate, no responsibility or liability can be accepted by CryptoComposite or any of their licensors for any errors or for any loss arising from use of this publication. This document and its contents may not be reproduced, redistributed, stored in retrieval system, or passed on, directly or indirectly, to any other person or published, or transmitted by any other form or means whether electronic, mechanical, photocopying, recording or otherwise in whole or in part, for any purpose without the prior written consent of CryptoComposite.

Appendix A

2014 Review Timetable

Data Cut Outcome Implementation Type
Date Day Date Day Date Day Period Update
31/01/2014 Fri 1/02/2014 Sat 4/02/2014 Tue Monthly Coin
28/02/2014 Fri 1/03/2014 Sat 4/03/2014 Tue Monthly Coin
28/03/2014 Fri 29/03/2014 Sat 1/04/2014 Tue Quarterly Coin+Cons
25/04/2014 Fri 26/04/2014 Sat 6/05/2014 Tue Monthly Coin
30/05/2014 Fri 31/05/2014 Sat 3/06/2014 Tue Monthly Coin
27/06/2014 Fri 28/06/2014 Sat 1/07/2014 Tue Quarterly Coin+Cons
25/07/2014 Fri 26/07/2014 Sat 5/08/2014 Tue Monthly Coin
29/08/2014 Fri 30/08/2014 Sat 2/09/2014 Tue Monthly Coin
26/09/2014 Fri 27/09/2014 Sat 2/10/2014 Tue Quarterly Coin+Cons
31/10/2014 Fri 1/11/2014 Sat 4/11/2014 Tue Monthly Coin
28/11/2014 Fri 29/11/2014 Sat 2/12/2014 Tue Monthly Coin
26/12/2014 Fri 27/12/2014 Sat 6/01/2015 Tue Quarterly Coin+Cons

Exchanges Used

The table below shows the current exchanges that are used for sourcing prices for the cryptos used in the CryptoComposite Index Series.

Exchange Address Country
Unavailable while in beta due to frequent changes/additions.

Volume Weighted Average Price

The prices used for cryptos in the CryptoComposite Index Series are a volume weighted average price. The average 24 hr volume is used as a basis for the weighting of prices from each of the above exchanges. The formula for the Volume Weighted Average Price is as follows:

Pvwap=ni=1pc,iVolc,ini=1Volc,i
  • where:
  • n = Number of exchanges
  • i = Exchange
  • Pvwap = Price Volume Weighted Average Price
  • c = Crypto The crypto whose VWAP is being calculated
  • pc,i = Price The price for crypto, c, at exchange, i
  • Volc,i = 24hour Volume The volume traded for crypto, c, at exchange, i, over the previous 24 hours.