In this week’s State of the Network we are excited to announce the release of the CMBI Multi Asset Series, the first industry indexes that weigh cryptoassets by their Free Float Market Capitalization.
We are particularly excited to bring these indexes to market after almost a year of design and methodology testing, and to share the design considerations and unique data constructs utilized in the index calculations. Cryptoassets are here to last, and as such, Coin Metrics determined it imperative to design a methodology that meets the standards of traditional capital markets and takes the next step towards professionalization of this asset class.
Throughout this feature, we will discuss the key and unique data components used in the determination of CMBI products, elaborate on the importance of each design consideration, and share the performance of the methodology relative to current standard practices.
The initial indexes that form part of the Coin Metrics Bletchley Index (CMBI) Multi Asset Series include:
- CMBI Bitcoin and Ethereum (CMBIBE)
- CMBI 10 (CMBI10)
- CMBI 10 Excluding Bitcoin (CMBI10EX)
- CMBI 10 Even (CMBI10E)
These new indexes broaden Coin Metrics’ Index services, and join the already live CMBI Single Asset Series (CMBI Bitcoin and CMBI Ethereum) and CMBI Mining Series (CMBI Bitcoin Hash Rate and CMBI Bitcoin Observed Work).
The Need for Crypto Indexes
Well-designed and independently administered indexes are an important aspect of capital markets. They help to bring transparency and clarity to markets that investors wish to better understand and potentially invest in. This particularly rings true in the cryptoasset industry which can be confusing to new investors given its nascent form. The spot price of cryptoassets can vary globally, the on-chain characteristics of cryptoassets can be opaque, the market’s trading activity can be misrepresented, and many trading venues still operate in loosely regulated environments.
The Coin Metrics Bletchley Indexes (CMBI), administered by Coin Metrics, have been designed to provide the cryptoasset market with a formalized, transparent and robust set of benchmarks on which to conduct research, measure performance, or create institutional quality financial products. The CMBI Principles outline the ethos and act as a guideline that informs the design of all CMBI products.
The most common path for many new retail and institutional investors looking to allocate to crypto is to first acquire Bitcoin and maybe Ethereum. As such, Coin Metrics’ first fore into indexes was to develop robust Bitcoin and Ethereum Indexes that were:
- Designed in line with traditional capital markets best practices, such as the IOSCO Financial Benchmarking Principles.
- Manipulation resistant to severe and outlier market conditions.
- Transparent and rules based to enhance investor comfort.
- Aligned with current regulatory concerns such as the potential for market close manipulative practices.
However, as investors become more familiar with cryptoassets, there is an increasing desire to broaden their exposure to multiple cryptoassets. This was most recently evidenced in Fidelity’s 2020 Institutional Digital Asset Investor Survey, which suggests as many as 2/3 institutional survey respondents indicated interest in diverse cryptoasset exposure.
Granted this, the logical next step for Coin Metrics was to explore designing and developing a series of multi asset indexes for these investors to back-test strategies and allocate capital as and when they are ready to do so.
The Coin Metrics Approach to Index Design
Throughout the process of designing all of our indexes, Coin Metrics has continually challenged industry standards and processes to establish our own methodologies that align with the CMBI Principles. Whilst this approach has typically resulted in a slower time to market for our index products, we believe the improvements to index design and the increased transparency and consistent application of methodologies have resulted in more investable and robust indexes.
Our vision for Indexes started in early 2018 when Coin Metrics acquired the Bletchley Indexes. Shortly after, whilst designing the CMBI Single Asset Series, it became imperative to better understand how Coin Metrics would determine a robust aggregate price of a cryptoasset. Perhaps even more importantly given institutional and regulatory concerns, was designing a robust, manipulation resistant and market representative ‘close’ price for indexes and financial products. This led to the design of both the CM Real Time Reference Rates for index intraday pricing and the CM Hourly Reference Rates for index close pricing. To understand how these methodologies perform in varying market conditions please refer to some of our previous blog posts (When Markets Misalign: Mispricings and Reference Rates and CM Real-Time Reference Rates Research Summary).
Designing the CMBI Multi Asset Series
The next logical step for Coin Metrics was to develop multi asset indexes and launch both a Bitcoin and Ethereum index as well as a market capitalization weighted large cap index (Top 10). Yet again, during our discovery phase, we found data gaps in the market that we felt needed to be overcome to meet the requirements of institutional investment markets. Specifically, we were not able to identify a consistent and standardized approach to estimating cryptoasset supply in markets. This led to the development of a standardized methodology for the determination of cryptoasset free float supply. The methodology was designed to leverage many of the lessons learned from supply determination in traditional capital markets (as described in this blog post), which we believe to ultimately provide a more consistent representation of liquidity and market supply dynamics.
Applying such a methodology can yield different perspectives of supply available in the market by removing categories of tokens from the total supply that are deemed to not provide short-medium term liquidity to markets. Categories removed from free float supply include tokens that are:
- Inactive on-chain for over 5 years (considered to be held by long term strategic holders that do not provide liquidity to markets or lost)
- Owned by company/foundation addresses
- Owned by company team members and insiders
- Visibly vesting on-chain
- Provably lost (>0.1% of total supply)
- Burned
- Forked and have been inactive since the time of the fork
Once free float supply had been designed and determined for the top cryptoassets, we were finally ready to launch the CMBI Multi Asset Series.
The CMBI Multi Asset Series
CMBI Bitcoin and Ethereum (CMBIBE)
After applying free float weightings, the new CMBIBE weighs Ethereum more heavily than a traditionally weighted index which utilizes total on chain market capitalization. This is primarily due to the large amount of Bitcoin that has been inactive on-chain for over 5 years and thus considered to be lost or belong to long term strategic holders that restrict supply from markets.
Note: Data as of October 1, 2020
CMBI 10
Similarly, after applying the free float methodology to all assets, the CMBI 10 index results in quite different weightings to what the industry standard has been to date, as demonstrated below.
| Asset | Ticker | CMBI 10 Weight (Free Float Market Cap) |
Reported Market Cap Weight |
| Bitcoin | BTC | 69.6% | 72.8% |
| Ethereum | ETH | 17.6% | 14.7% |
| XRP | XRP | 3.2% | 4.0% |
| Polkadot | DOT | 1.7% | 1.4% |
| Chainlink | LINK | 1.7% | 1.2% |
| Stellar | XLM | 1.4% | 0.6% |
| Litecoin | LTC | 1.4% | 1.1% |
| Bitcoin Cash | BCH | 1.3% | 1.5% |
| Binance Coin | BNB | 1.3% | 1.5% |
| Bitcoin SV | BSV | 0.8% | 1.2% |
Note: Data as of October 1, 2020
The intention of most market cap weighted indexes is to be an accurate representation of a market, so that investors can passively obtain broad exposure to the underlying market. By taking this approach, Coin Metrics believes the CMBI Multi Asset Series provides a better representation of liquid markets, and helps to reduce management costs and tracking error.
CMBI 10 Excluding Bitcoin (CMBI10EX)
Given the size dominance of Bitcoin in cryptoasset markets, most market cap indexes are naturally heavily weighted towards Bitcion (60-80%). Many institutional investors will initially get exposure to cryptoassets through Bitcoin only products (e.g. CME, Bakkt, Bitcoin only Funds). As such, if they decide to broaden their exposure and invest in non-Bitcoin cryptoassets, they might face potential diversification issues if most of the passive strategies are market cap weighted indexes with large exposure to Bitcoin (like the CMBI10 which is 70% Bitcoin).
Recognizing this, Coin Metrics has also launched the CMBI10EX. The constituents of this index are the exact same as the CMBI 10, except as the name suggests, Bitcoin is excluded. Similarly to the CMBI 10, the CMBI10EX weights constituents by their free float market capitalization.
Note: Data as of October 1, 2020
This index is designed to help asset managers and investors allocate exposure to large cap assets outside of Bitcoin, without having to add a weight cap and potentially distort the market liquidity dynamics of an index. This way, investors can create their own customized weightings in Bitcoin and a non-Bitcoin cryptoasset basket as they desire. For example, an investor that only had exposure to Bitcoin could allocate new invested capital to the CMBI10EX to start to build exposure to alt coins without having to realize capital gains on their Bitcoin investment.
CMBI 10 Even (CMBI10E)
The CMBI10E is considered to be more of a benchmark index given the distorted weightings of assets relative to their size and liquidity in trading markets. The index constituents are the same as the CMBI 10, but each constituent is weighted equally (10%) at the start of every month.
Measuring Performance
Multi asset indexes tend to perform best during bull markets. This is evidenced by the outperformance of the CMBI multi asset indexes in the last year and since inception. The 2 year annualized performance, which captures most of the recent bear market, further demonstrates this, as indexes that most heavily weight Bitcoin performed the best.
| Annualized returns | CMBIBTC | CMBIBE | CMBI10 | CMBI10E | CMBI10EX |
| 1 Year | 29% | 39% | 36% | 57% | 56% |
| 2 Year | 28% | 28% | 14% | -3% | -3% |
| Since CMBI10 Inception (Jan-3-2017) | 87% | 94% | 89% | 126% | 124% |
Note: Data as of 4pm NY Time, 30 September 2020
Whilst cryptoassets are still largely correlated, the Sharpe Ratio of multi asset indexes indicate that there may be opportunistic times where a multi cryptoasset strategy provides greater risk adjusted returns than a Bitcoin only strategy. Such multi asset strategies seem to have historically performed best during bull markets, demonstrated below where the CMBI10E and the CMBI10EX have the highest 1 Year Sharpe ratios.
Over the longer term (~3.5 years), it is interesting to observe the closeness in Sharpe ratio between indexes despite the significantly higher annualized return of the CMBI10E and CMBI10EX. This highlights the additional volatility and subsequently risk associated with these returns.
| Sharpe Ratio | CMBIBTC | CMBIBE | CMBI10 | CMBI10E | CMBI10EX |
| 1 Year | 0.71 | 0.82 | 0.79 | 0.96 | 0.96 |
| 2 Year | 0.68 | 0.68 | 0.57 | 0.38 | 0.38 |
| Since CMBI10 Inception (Jan-3-2017) | 1.14 | 1.18 | 1.14 | 1.29 | 1.27 |
Note: Data as of 4pm NY Time, 30 September 2020
Further, investigating the impacts of utilizing Coin Metrics’ design features such as free float supply, we see that there are additional benefits from both the net performance and the risk adjusted returns.
Annualized Returns |
CMBIBE | CMBI10 | ||
| Free Float Weighted | Reported Supply Weighted | Free Float Weighted | Reported Supply Weighted | |
| 1 Year | 39.5% | 38.7% | 35.4% | 33.1% |
| 2 Year | 28.0% | 27.6% | 18.7% | 14.4% |
| Since CMBI10 Inception (Jan-3-2017) | 93.7% | 93.4% | 88.5% | 89.1% |
Note: Data as of 4pm NY Time, 30 September 2020
Sharpe Ratio |
CMBIBE | CMBI10 | ||
| Free Float Weighted | Reported Supply Weighted | Free Float Weighted | Reported Supply Weighted | |
| 1 Year | 0.74 | 0.71 | 0.71 | 0.68 |
| 2 Year | 0.71 | 0.71 | 0.61 | 0.58 |
| Since CMBI10 Inception (Jan-3-2017) | 1.31 | 1.30 | 1.26 | 1.27 |
Note: Data as of 4pm NY Time, 30 September 2020
Conclusion
As cryptoassets continue to capture the attention of traditional markets, it is important to ensure that financial products designed for investors meet high standards and practices to provide the truest representation of markets. Coin Metrics has developed tools like reference rates and free float supply to ensure that financial products can exist, be transparent, and be fair to market participants.
Through the launch of these 4 indexes, Coin Metrics is excited to be able to provide markets with new institutionally designed and investable multi asset indexes and benchmarks. If you are interested in talking with Coin Metrics about CMBI Indexes, please reach out to [email protected].
