Royalton CRIX Index of crypto markets was developed by professor Wolfgang Härdle and his team of researchers from Humboldt University in Berlin and acquired by Royalton Partners
in 2021. The index allows to trace the evolution of diverse and fast changing crypto market with small number of constituents.
The cryptocurrency market is unique: volatile with frequently changing market structure where new cryptocurrencies emerge and vanish daily. Following market developments becomes a challenge.
As cryptocurrencies became an investable asset class, a need for an index product emerged.
Some currency indices already exist. Fiat currency markets have SDR offered by the IMF. Prior to the launch of EUR, the ECU existed, which was an index representing the development of European currencies. Typically, index providers decide on a fixed number of constituents to represent the market. It is usually a challenge to agree on a fixed set of constituents and rules. In the frequently changing cryptocurrency market, this challenge is even more severe.
ROYALTON CRIX INDEX SOLUTION
An intuitive choice of index constituents would consider a large number of coins in order to represent the underlying market well. Conversely, financial practice has shown that inclusion of too many smaller coins creates liquidity and tradability issues. Given the rapidly evolving nature of many cryptocurrencies in conjunction with possible liquidity problems for smaller index candidates, the necessity for a tradeoff is evident.
The diversified nature of the cryptocurrency market makes the inclusion of smaller coins in the index critical to improve tracking performance. The research of professor Härdle has shown that assigning optimal weights to selection of constituents helps to reduce the tracking error of a cryptocurrency portfolio, despite the fact that market caps of some constituents are much smaller relative to Bitcoin.