In designing market cap weighted indexes, the primary goal of a benchmark administrator is to provide the most accurate representation of the underlying market through creating a robust methodology and leveraging high quality data. The two primary inputs into any market cap weighted index calculation are:
- Price data: Reliable and relevant pricing sources coupled with a robust pricing methodology is essential in order to represent the fair market value of the index.
- Supply data: Data that is reflective of market trading opportunities in order for index weights to accurately represent the supply / demand function of the market.
With the increase in quality global trading venues, trade volumes, order book depth and semi-regulated USD on-ramps, cryptoasset price discovery and aggregated price feeds are significantly better understood than they have been previously. The presence of institutional quality data feeds such as CM Market Data Feed and cross venue price aggregation methodologies such as CM Reference Rates demonstrate confidence that index price inputs are well on their way to meeting traditional capital market standards.
Supply, however, still remains a hotly debated topic within the cryptoasset ecosystem. While decentralized cryptoassets are, by definition, open networks with readily available on-chain data, reporting of token holdings is far from transparent (often very intentionally). Further, in these early and nascent stages of the ecosystem, multiple token economic models have been developed (fair launch, ICOs, IEOs, premines, hard forks, etc.), adding complexity to determination of assets that are considered ‘available’ for trade.
One of CMBI’s core principles is to design indexes that accurately reflect their underlying market. In the absence of transparent, independent and reliable supply metrics, Coin Metrics has designed the CM Free Float Supply to set a standard for the objective determination of a cryptoasset’s supply that is ‘available’ to the market. This newly designed metric will act as the basis for all CMBI Market Cap Weighted Indexes. Our supply methodology takes into consideration many of the best practices from equity markets and applies them to cryptoassets.
To learn more about Coin Metrics’ Free Float Supply methodology, read our latest piece: