Indices are convenient tools to track the market performance of selected assets.
Eugene Fama, an American economist, was awarded the Nobel Prize in Economics in 2013 for his research demonstrating that new information is quickly reflected in the prices of securities, making it difficult to predict short-term changes in stock and other asset prices. As a result, it is almost impossible for an individual to outperform the market consistently.
How can an individual invest their own money in the markets knowing that he will likely end up underperforming them?
That is where Indices come into play.
What are indices?
An index is a measure of a group’s performance, such as a class of students taking a test. Imagine a class of 30 students passing a test. Each student will get his score, and their average grade reflecting the overall result is an index. The course takes the test weekly, so the index will constantly change, showing shifts in a student’s general performance over time.
Indices allow investors to track the performance of a group of assets, such as a basket of securities, without investing directly in each asset. This enables investors to gain broad exposure to markets and use indices as benchmarks to compare the performance of their investments to the overall market. Investing in indices is a convenient and efficient way to own multiple assets and diversify risk without the need to constantly monitor market developments and manage the volatility of individual assets.
“As an investor, your presumption should be that passive will beat active, and if you make that presumption — for almost everywhere in the world, asset class and [time] period — you’ll be vindicated.” — Craig Lazzara (Managing Director at S&P Dow Jones Indices).
Indices can be used to build a diversified portfolio in the stock market, such as the Dow Jones, S&P 500, and Nasdaq Composite, which cover the overall U.S. stock market. This same concept can be applied to the cryptocurrency market using a crypto index that includes a selection of popular assets, such as Bitcoin, Ethereum, Solana, Cardano, and Polkadot. This can help both amateur and experienced investors approach the cryptocurrency market and easily diversify their portfolios to reduce risk from the high volatility of cryptocurrencies.
Is There a Cryptocurrency “Index”?
While hundreds of stock market indices can be used to measure the overall market’s performance or specific sectors, the cryptocurrency market’s indexing options are more limited and not as well-established. This is because the cryptocurrency market is relatively new and less developed than the stock market, and there is still a lot of uncertainty and volatility in the prices of this asset class.
As new cryptocurrencies are being introduced rapidly, holding a narrow and outdated portfolio can be risky. The cryptocurrency market is highly volatile, and diversification can help to:
1. Minimize your loss risk
2. Preserve your capital
3. Increase your returns
Failing to diversify your portfolio and investing in a narrow range of coins can leave you vulnerable to missing out on opportunities and experiencing significant losses if the performance of a single asset does not meet your expectations.
This is where NEX makes the difference.
NEX is a decentralized exchange providing indices based on in-house built oracles and curated third-party providers. Users can purchase an index with the same simplicity as buying a single asset.
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