Why a cryptocurrency index is an enigma

It is difficult, if not impossible, to bring transparency into cryptocurrencies by way of indices. It is even more difficult for investors to truly understand the risks which come with investing in an index of cryptocurrencies

Cryptocurrencies have been in vogue lately. While proponents are ‘holding on for dear life’ through the downturn, naysayers proclaim this to be the beginning of the end. The regulators do not know any better. On the one hand, China, Japan, Canada, and the United Kingdom have banned Binance (the largest cryptocurrency exchange), and on the other, we have El Salvador approving Bitcoin as legal tender. Believe it or not, we even have indices and derivatives on cryptocurrency now.

The S&P Dow Jones recently became the first major index provider to launch a family of cryptocurrency indices. In the words of Peter Roffman, their innovation head, “We look forward to further expanding our new family of Digital Market Indices and bringing much needed transparency to this exciting market”. This sounds like a noble endeavour. But, a cryptocurrency index is an oxymoron.

How would one bring transparency to a market which, in its current state, is inherently opaque at multiple levels?

Let’s start with the user’s perspective. When a user sends a digital currency to another user, the sender and receiver details are anonymous. Nobody in the world — no regulator, no intermediary — knows the details. You could be sending the money to a social service organisation or a terrorist group, and no one would know. One could argue that this is by design. But, this lack of intermediary and/or regulator is what makes holding cryptocurrencies extremely fragile.

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