With digital assets now topping USD 2.6 trillion[1] in total value and regulators bringing more transparency to the market, institutional investors are increasingly turning to this emerging and fast-changing asset class for various reasons.
But how can they screen out the best assets in terms of quality, financial clout and commercial activity? In other words, tokens that are akin to the blue chips of the equity world.
The STOXX® Digital Asset Blue Chip Index was introduced last year and provides several tools for investors in the crypto world. Firstly, as a benchmark, it aims to act as a barometer of the underlying market’s behavior. Secondly, it helps navigate the space through a systematic and clear industry structuring as is the Bitcoin Suisse Global Crypto Taxonomy (GCT). The index also ensures asset price trustworthiness through a process that vets exchanges by volume and reliability.
Finally, a comprehensive selection mechanism relies on crypto-native metrics to build a portfolio that is high-quality in the blue-chip sense, much like a similar equity portfolio will seek components with high revenues, established businesses, a large customer base and a solid balance sheet.
Constructing a blue-chip crypto index
A new report[2] delves into the STOXX Digital Asset Blue Chip Index’s asset selection process to unpick those metrics and understand the construction of a blue-chip benchmark in this segment. The asset characteristics considered in that process are:
Age: The age of a crypto asset helps gauge the commitment to the project and its adoption by the market.
Total Value Secured (TVS): The more value a protocol secures on its blockchain, the greater the trust, adoption and inherent applications the protocol has in securing transactions validity and immutability.
Active Addresses: The number of active addresses is used to measure adoption. This metric counts the number of unique sending blockchain addresses.
Economic Activity: Strong fee revenue denotes usage and adoption, in addition to gauging the ongoing concern of the protocol and resilience in a competitive market landscape.
Developer Community: The developer community is a measure of innovative activity, growth and ossification at the same time.
“Drawing direct analogies from the traditional equity markets while incorporating the intricacies of crypto is a challenge,” the report’s authors, led by Thomas Shuttlewood, Associate Principal for Product Research and Development at STOXX, write. “Blue-chip digital asset determination must consider the uniqueness of this distinct market, and must rely on criteria and fundamentals that are specific to the asset class.”
Sector leaders
For each metric, assets are assigned a score of 1 if they rank within the top 50% in their respective use-case sector: Cryptocurrencies, General Purpose Smart Contract Platforms, Decentralized Finance (DeFi), Utility and Culture. Those with a score of 4 or more are selected as constituents of the index.
Sector representation is an important consideration in benchmark creation and in representing the underlying economies and universe of the targeted asset class. To translate this notion into the digital asset space, one must rely on taxonomies that have been specifically created for this market, the authors explain. In likening crypto use cases to traditional industry sectors, one can select the leaders from each use-case sector into the index in much the same way as in the EURO STOXX 50® design.
Risk and returns
The authors then turn to analyzing the risk and return performance of the STOXX Digital Asset Blue Chip Index. The findings show that the index acts as a true reflection of the nature of the market, matching the average constituent return closer than any single component. In posting lower volatility than its individual components, the index’s standing as a blue-chip gauge is also enhanced. “A middling to strong returns for a relatively low level of volatility indicates that the index acted in a manner associated with a traditional blue-chip index in a defensive market regime,” the authors write.
Interest in the digital asset market is likely to continue gathering pace, so transparent and reliable data is vital. The space must be considered with the same respect as other asset classes, while still ensuring that its intricacies are included in the equation, the authors argue. An investment vehicle and market barometer in the shape of a blue-chip index allows this to happen.
We invite you to download the report and explore its findings.
[1] Source: CoinMarketCap.
[2] “STOXX Digital Asset Blue Chip Index: A Benchmark for the Crypto World,” STOXX, March 2024.