Understanding IC15, India’s first crypto index

What is the news?

Superapp CryptoWire recently launched India’s first cryptocurrency index, IC15. It will measure the performance of the 15 most widely traded cryptocurrencies listed on leading crypto exchanges by market capitalization.

Aim: a) To increase awareness and knowledge of the cryptocurrency and blockchain ecosystem, and b) To help investors understand how virtual coin trading works.

How is IC15 constructed?

An Index Governance Committee (IGC) of domain experts, industry practitioners, and academicians will select cryptocurrencies from the top 400 coins in terms of market capitalization. It will also be in charge of monitoring and maintaining the index, including reshuffling of the top 15 cryptos.

The index has a low correlation with other asset classes, as gains in IC15 would not mirror gains in other asset classes.

As of January 1, 2022, Bitcoin, Ethereum, Binance Coin, and Solana are sitting on the top four positions on the IC15 index.

Eligibility conditions: The eligible cryptocurrency

– should have traded on at least 90% of the days during the review period and

– Should be among the 100 most liquid cryptocurrencies in terms of trading value.

– Should be in the top 50 in terms of the circulating market capitalization.

The committee will then select the top 15 cryptocurrencies. The index will be reviewed quarterly.

What is its significance?

According to CryptoWire, IC15 can be replicated for creating index-linked products such as index funds or exchange-traded funds (ETFs).

IC15 is the first index in India that can act as a benchmark of the underlying cryptocurrency market and the performance benchmark for fund managers.

Moreover, robo-advisors, which provide financial advice with moderate to minimal human intervention, can use this index to create investment products at lower costs.

Can index-based crypto investing reduce risks?

Index investing can be an effective way to diversify against risks, as a fund invests in a basket of assets against a few limited coins.

However, index-based investing may not fully remove risks associated with investing in crypto assets. For instance: IC15 saw a 50% plunge in 2018, whereas other asset classes have seen a maximum drop in the range of 3-4%.

Further, bitcoin and Ethereum have a combined weightage of 77% in the index, making it highly vulnerable to any volatility in these two coins.

Can Crypto funds be launched in India?

Securities and Exchange Board of India chairman recently asked mutual fund houses not to launch crypto-based funds until the Centre comes out with clear regulations.

This means asset management companies for now won’t be able to launch crypto funds based on IC15.

However, in the absence of any regulations, crypto platforms can offer products based on the index. For instance: Global crypto investment platform Mudrex, in 2021, launched Coin Sets—crypto funds based on themes such as decentralized finance or market cap.

Source: This post is based on the article “Understanding IC15, India’s first crypto index” published in Livemint on 5^th Jan 2022.