Recently Bloomberg and Galaxy Digital Partners announced a partnership to provide an index to the digital asset space. They have initially decided to include 10 of the largest cap cryptocurrencies for exposure to this new asset class. Although this is not the first index for the digital asset space, the partnership with bloomberg and their reach to the financial community lends credibility and a higher probability of adoption. What problem does this specifically answer and why might this be important? First , this allows investors a way to gain exposure to an asset class without having to specifically pick winners and losers. Secondly, this provides a benchmark where other investors and traders can qualify there risk adjusted returns.
What is an Index?
An index is a sample of a larger data set which is meant to track and measure the performance of an asset. It is a a statistical measure of a composite of holdings and can be comprised of equal weighting, percentage weighting or market cap weighting. The first index was the Dow Jones Industrial Average created by Charles Dow in 1896 which tracked the 12 most important stocks. Indices can be stand alone benchmarks or they can be invest-able through many types of securities. Today there are indices on almost anything and is important part of the rise in passive investing and exchange traded funds (ETFs).
Why it matters
Indexing not only allows for passive investing , it also sets benchmarks to measure performance of traders and funds. In fact the performance measure has led to the terms Beta, meaning the index or market return and alpha which would be excess return over the index. More importantly, indices bring many different types of investors and speculators that are looking for new avenues of returns whether it be retail clients or large institutions. So what happens when there is a universally accepted index for an asset class? Indices entice hedgers, traders and speculators along with investors who are looking for diversity across their portfolios in either real or risk adjusted returns. This is also truly the engine of Wall S.t as they act as middlemen in providing access and liquidity to markets. The index will include Bitcoin and Ethereum at 30% weighting followed by Ripple at 14.4%. Bitcoin Cash, EOS, Litecoin, Dash, Monero, Ethereum Classic and ZCash round out the index in smaller weightings and its defined in US Dollars.
Proof of work
Looking back and examining the most profound indices as they emerged may possibly shed light on the the future of digital assets. An argument can be made that indices have had a direct impact on these asset classes and have been profound in its growth. The main asset classes are equities, fixed income, commodities, cash and their equivalents and real estate. The NAREIT index for commercial real estate provides some insight into the return profile, however it really is just a tracking index and not viably invest-able. It's worth noting that there has been an explosion of Real estate investment trusts (REITs) over the last 30 years with most of them having an equity type of profile. So lets take a look at equities, fixed income and commodities and how they developed after having benchmark indices:
1) S&P
The S&P 500 was first established in 1957 as a 500 stock cap weighted index, although its predecessor was an composite index of 10-90 stocks dating back to the 20's. The index opened an Jan 1, 1957 at 386.36 and doubled over the next decade. Having the bench mark of 500 stocks has led to futures trading, derivatives and ETFs which have all helped to grow the equity market profoundly both domestically and internationally. The Chicago Mercantile Exchange(CME) introduced the S&P 500 futures contract in 1982 and a mini contract a few years later which has fueled trading volumes and new instruments like options and volatility.
2) Lehman Brothers Aggregate bond index
This index was created in 1986 as a way to benchmark to investment grade bond investing. The bond market in 1980 stood at @ 3 trillion dollars and was a sleepy coupon collecting mechanism. Over the next 35 years the bond market grew to 35 trillion with 300 trillion of notional traded through derivatives that hedge interest rate risk and credit risk. Sub indices now exist as markets grew in high yield, municipals and sovereign debt.
3) GSCI Goldman Sach Commodity Index
In 1991 Goldman Sachs created a weighted index of 20 commodities that are traded as futures contracts. With an invest-able index, commodities became an appealing option for institutions looking for non correlated returns and inflation hedges in their portfolios. Volume and prices for the West Texas intermediate (WTI) and the Henry Hub Natural gas contracts on the NY mercantile exchange (NYMEX) exploded as energy became deregulated. Electricity also became a trad-able commodity and the CME, who purchased NYMEX, now handles 3 billion energy contracts a year. The ability to mitigate price risk in turn has been a boom to oil and gas exploration with new emerging technologies emerging.
-for more info: (https://us.spindices.com/index-family/commodities/sp-gsci)-
Why you should care
Coinmarketcap.com lists 1601 separate coins with a total market cap of 290 billion, down from its highs of 800 bln with BTC accounting for a dominant 40%. The space, although arguably in a bear market or correction territory, remains robust in interest and new projects. What is truly exciting is that everything needs to be built and developed including an accepted index. So what conclusion can we draw from having an established index? Well, If history tells us anything, watch for the digital asset space to grow exponentially. We should expect more trading around the index and look for a 10x growth of digital derivatives as new players emerge creating a 3 trillion dollar market. The market will also grow substantially organically as traditional securities markets tokenize, leading to a 30 trillion plus market of digital assets.
It's hard not to be optimistic about this growing market and it's potential. Perhaps, to use a baseball reference, this seems like we are in the top of the second inning of what will surely be an exciting and action packed game.
Advertising can be a both clever and effective way to grow a business. Iconic ads have become part of the of the cultural fabric, especially in television and print. Digital advertising, although at times effective, hasn’t found the same place in the hearts and minds of consumers. In fact, polls show that banner ads and pops ups have created contempt and a negative user experience for content users In a recent survey, 82% of all users have said that they would pay to see their favorite content if there was a way to eliminate these unwanted ads and interruptive experiences.
Well, it seems like the technology of blockchain may offer a solution for a better user experience while still keeping site revenues intact by harnessing your unused CPU/GPU computing power and leasing it out to content providers in exchange for an ad-free experience. The content providers, in turn, use that idle computing power to mine crypto in order to create a revenue stream that replaces advertising. This may seem far fetched, but in fact, if you use an ad blocker on Salon's website you may be prompted to make such a deal. Salon, the online magazine, has seen ad revenue growth slow and has looked for creative ways to combat stagnation and has partnered with Coinhive to make this reality.
Blockchain technology and digital assets are often argued to be either evolution or revolution depending on who you speak to and what industry your involved with. What is hard to argue against is the lasting disruption and the change the way we do business across many industries. Commercials and ads versus a subscription is already a viable business model with firms like Pandora and Spotify. How we pay for that subscription will be the new normal through blockchain technology.
So is ad-free internet in exchange for unused computing power the new business model for internet content? Only time will tell.
Updated: Oct 1, 2021
Update
With 5,000 megawatts of excess power burning a hole in the Quebec authority's proverbial pocket, reaching out to the crypto mining space seemed like a perfect solution. The access to cheap electricity and cold weather, to cool the mining equipment, may have been a bigger carrot than Quebec expected. A hundred miners seeking 10,000MW seems to have over whelmed the Q authority while a dry winter that stretched peak demand has given them second thoughts. There has also been a renewed discussion of the proper use of resources questioning the social, economical and environmental issues around crypto mining. This discussion has lead to a three month moratorium in one area while others consider raising rates on the miners. Perhaps this is another sign that the crypto space will have to alter their model away from a energy hungry approach such as proof of work. This may also further the conversation towards proof of stake (POS) over the more energy dependent POW when it comes to consensus or put another way confirming a transaction. As the Quebec authority decides its next move, crypto miners are finding "not welcome" signs in more countries and perhaps are left muttering qu'est-ce que c'est!
Previous
China and the PBOC are apparently trying to crack down on bitcoin mining due in part to the large volume of energy being consumed. There are sources that have maintained that 80% of all mined bitcoin are coming from China. Whether that number is true, inflated, is bitcoin or many different tokens seemingly is all up for conjecture. What we do know is that China's cheap electricity comes from their abundance of coal, est. 73% of production, and that China has struggled with horrific air pollution.
This week coincidentally Hydro-Quebec rolled out a 5000 Megawatt red carpet to crypto miners. Apparently the state owned utility is suffering financially and tax payers could be on the hook for surcharges unless the utility can find another outlet to distribute its hydroelectric power. CEO Eric Martel has reached out to energy consumers like website servers hoping to attract them with their cheap, clean excess electricity. In the meantime China may just have thrown Mr. Martel and tax payers a life line while the miners get the opportunity to turn water into gold.
