The digital asset industry’s explosive growth has given rise to significant complexity. To help investors gain a better understanding of this space, CoinDesk Indices introduced the Digital Asset Classification Standard (DACS). DACS provides the market with a dependable structure and transparency to simplify and categorize the industries within the asset class. Furthermore, the CoinDesk Market Index (CMI) benchmark, which is used for performance measurement, and the CoinDesk Select Indices, which are used to develop investment strategies, both rely on the underlying framework provided by DACS.
This paper outlines the process used to select digital assets for investable indices. It details how DACS defines and organizes digital asset industries, and then sets forth minimum eligibility requirements for inclusion in benchmarks to facilitate market measurements. Finally, it explains the more stringent criteria for inclusion in investable indices.
CoinDesk Digital Asset Classification Standard (DACS)
The practice of using a classification standard to define markets is not new. Equity investors have used the Global Industry Classification Standard (GICS), developed by MSCI and Standard & Poor’s in 1999, to categorize publicly traded companies globally. Studies have shown that GICS helps investors understand important drivers for company valuations, identify relative value opportunities, and develop sector-level macro insights for making asset allocation decisions. In addition, sector indices developed based on GICS have become a crucial part of investor allocation, risk, and performance-evaluation models. According to a recent survey by the Index Industry Association (IIA), nearly half of all available equity indices are sector- or industry-based indices calculated daily.
Similarly, while the Digital Asset Classification Standard (DACS) is unique to digital assets, it serves many of the same functions as classification systems used for traditional asset classes. DACS provides a transparent and standardized method for determining sector and industry exposure, facilitating portfolio attribution analysis, and pinpointing investment opportunities.
The CoinDesk Market Index (CMI) Family is a benchmark for measuring the performance of the digital asset market and its various segments. The CMI Family includes four benchmarks that provide different levels of market coverage and granularity. These benchmarks are:
- CoinDesk Bitcoin Index (CBX): This benchmark tracks the price of Bitcoin, the largest and most well-known digital asset by market capitalization.
- CoinDesk Ethereum Index (CEX): This benchmark tracks the price of Ethereum, the second-largest digital asset by market capitalization.
- CoinDesk 20 Index (CD20): This benchmark tracks the price of the top 20 digital assets by market capitalization, as determined by DACS classification.
- CoinDesk Large Cap Index (CLC): This benchmark tracks the price of the top 100 digital assets by market capitalization, as determined by DACS classification.
For digital assets to qualify for inclusion in the CMI Family benchmarks, they must satisfy certain criteria, such as being covered by CoinMarketCap.com, ranking within the top 500 digital assets by market capitalization, and being classified by the DACS system. Additionally, assets must have a reliable and transparent price feed, a liquid market, and a certain level of the trading volume.
When calculating the CMI Family benchmarks, we employ a market capitalization-weighted methodology. This means that the index gives more weight to digital assets with larger market capitalization. We rebalance the benchmarks quarterly to ensure that they remain representative of the market they are designed to measure.
Overall, the CMI Family benchmarks provide investors with a transparent and reliable way to measure the performance of the digital asset market and its various segments. Investors can use the benchmarks as a tool to allocate their portfolios, manage risks, and evaluate their performance.
CoinDesk Market Index (CMI) Family
CoinDesk Select Indices
The demand for investable indices has increased with the introduction of new financial products such as derivatives, ETFs, and tokenized funds. While traditional and alternative asset classes have seen significant growth in index strategies, the digital asset indices that underpin investment products are relatively new due to specific investor requirements. CoinDesk created the Select Indices to meet these requirements and to measure the performance of the largest and most liquid digital assets classified in DACS that meet specific trading and custody requirements.
The eligibility criteria for the Select Index Universe are stricter than just the availability of pricing and market cap data. When selecting digital assets, you must fulfill several criteria, such as ranking within the top 200 in the latest published DACS report, having access to custodian services from Coinbase Custody for US investors, and not being categorized as a meme coin or a stablecoin by CDI. Additionally, the digital asset must have a listing on an Eligible Exchange for at least 30 days. We determine the Selection Universe by ranking the top 20 digital assets from the Index Universe by market cap. Then, we select five to ten digital assets from this universe based on their median daily value traded and median market cap. Non-constituents are subject to higher thresholds than incumbent constituents.
Market cap weighting generally maintains sector exposures in proportion to the broad set of digital assets, although the selected assets can be weighted in various ways. The Select Sectors narrows down the universe to 28 digital assets, covering just over 5% of assets but nearly 75% of the entire market cap, enabling investors to access the market beta with relatively few assets.