In 2009, Bitcoin came into being attracting much attention. With its unique features such as decentralization, Bitcoin has upgraded people’s understanding of currency and caused in-depth thought on the currency issue.
Given that there is a great variety of digital currencies and their prices are volatile, this paper sets out to put forward a concept of the digital currency index to more accurately reflect digital currency price changes and provide a suitable market reference index to digital currency market participants at large.
Necessity of compiling Digital Currency Index
Digital currency as a new type of asset was deeply connected with the financial market in the early stages of its development. Thanks to the existence of investment products with easy access and excellent liquidity, digital currency has become a tool for many people to make asset allocation. The existence of ICO means that many enterprises (projects) in the block chain industry can actually make financing directly through digital currency. One example is Ethereum. Consequently, digital currency has also become a barometer in blockchain technology-related industries.
With the rapid development of the whole industry, digital currency (asset) variety has continuously expanded, while digital currency price has undergone frequent and drastic changes. One gradually emerging difficult issue is how scientifically and effectively to help general investors to learn about the overall development trend of asset investment and assist policy makers and industry participants in fast understanding industry developments.
Asia Blockchain Foundation (ABF) attempts to solve this problem by making reference to the problem-solving thinking of traditional financial market indices and through compiling a scientific digital currency index, so as to rationally reflect the economic development trend of digital currency and the blockchain industry and provide the whole industry with a valuable reference basis which could serve as a barometer.
Definition of the Digital Asset Index
The Digital Asset Index is a weighted comprehensive price index that takes typical and common sampled digital currencies into its scope of calculation and use the amount of circulation as the weight to reflect the general trend of the digital asset market.
With reference to the basic principles of constituent stock adjustment in international practices, this paper has formulated scientific criteria and selected digital asset samples systematically. Firstly, digital assets are assessed for possible inclusion into the index based on their time of launch into market, market size, liquidity and other factors. Then, candidate samples are determined based on the following factors:
(1) Market value in circulation and trading value of a digital asset;
(2) Representativeness and scope of influence of a digital asset;
(3) Market size of a digital asset;
(4) Technical reliability of a digital asset;
(5) Other temporary features of a digital asset;
Finally, the first batch of digital currency asset samples is determined, which includes BTC, LTC, and ETH.
The digital asset index is a comprehensive price index that is calculated using the Pasche Formula, with the amount of circulation in the reported period as the weight.
Digital asset index value = Pre-modification reference index × (pre-modification total market value + changes in total market value) / pre-modification total market value.
Total market value = ∑ (Market price × amount of circulation)
The initial index of benchmark date is 100 points
The benchmark date of this index is November 11 2016
When the total market value undergoes changes due to the non-trading factors, the divisor modification method will be adopted to modify the original fixed divisor to maintain the continuity of the index.
Based on the specific digital currency situation, modification will be made in any of the following circumstances:
(1) A new digital currency is included into the index;
(2) A digital currency exits the index;
(3) There is an abnormal increase in the digital currency circulation or currency burning;
(4) The currency quantity is adjusted daily;
(5) A new price is generated.
Incorporation of new digital currencies:
A new currency is included into the index the following day from its launch into the market. In other words, the new currency is not included into the index on the day of its launch into the market. The index will be modified after the closing of the day of launch of a new currency. The modification method is as follows: Current day’s total market value + amount of circulation of new currency × market price in circulation
Digital currency exit index:
The modification index before the date of digital currency’s exit from the market. The modification method is: Current day’s total market value - amount of circulation of new currency exiting from the market × market price in circulation
Natural mining adjustment:
Given the special nature of digital currencies, usually their total amount is changing all the time. Changes in the currency quantity should therefore also be introduced into the index on a daily basis.
The introduction of the digital currency index will play a role in guiding asset allocations in the digital currency industry and help outside investors, especially investors from outside the industry to judge the general trend of assets in the digital currency industry.