The Rhea Crypto 20 will be a capitalization-weighted index of the top 20 cryptocurrencies. The higher the market capitalization of a cryptocurrency, the higher its weight in the index. The price of the index at a given point in time will be obtained by summing the current
market capitalization of the constituents. Here is an example of how this will work.
- Suppose there exists an index of 3 cryptocurrencies. Currency A’s price is $5 with 10 million in circulating supply, equal to a market capitalization is $50 million, Currency B’s – $30 million ($6 price and 5 million supply) and Currency C’s – $20 million ($1 price and 20 million supply). Their weights can be obtained by dividing their respective market capitalizations by the sum of the three. Therefore, the weights are, respectively, 50%, 30% and 20%.
- Next, we have to determine the starting point i.e. the price at which the index starts. For simplicity, we will take the sum of the market capitalizations ($100 million) and divide them by 1 million, thereby obtaining $100. This will be our first price.
- Now suppose Currency A’s price increases by 5% to $5.25, Currency B’s drops by 2.5% to $5.85 and Currency C’s drops by 7.5% to $0.925. Consequently, the total market capitalization will now be $100.25 million. To calculate the new price of the index, we use the following formula:
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛/ 𝐵𝑎𝑠𝑒 𝑡𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑐𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 ∗ 𝐵𝑎𝑠𝑒 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒
Thus, our new index value is: 100.25/100∗ 100 = $100.25
We are going to rely on several pricing feeds for the calculations, so that in case one source is unavailable, we can instantly switch to a different one. In addition, the rebalancing of weights will occur at least daily, depending on the Tier reached on the Milestone Map. By
offering a capitalization-weighted index with daily or even hourly rebalancing, investors will gain access to the most accurate tool for tracking cryptocurrencies. If a new cryptocurrency penetrates the top 20, it will be included in the index as soon as the next rebalancing is scheduled to take place.
Frequent rebalancing is by no means an easy task. To see why, picture Example 1 from above but with 20 instead of 3 products. The calculation methodology will be the same, only more difficult due to 3 problems:
Having 20 constituents complicates the procedure of constructing the index. Smaller cryptocurrencies are generally less liquid, which leads to two issues: firstly, using one single price feed will be less reliable and secondly, it will be more expensive to obtain a feed.
Which price is the right one
There is a price discrepancy between exchanges. In contrast to equities, cryptocurrency markets are inefficient, which means that arbitrage opportunities exist. The Rhea platform will mainly rely on one price feed, but will have connections to several others. If the main source is not available, Rhea will use the product of the weighted average of price fluctuations (in percentage terms) from all other price feeds and the last known price from the main source. This will ensure that even if the price feed is down, the index will still evolve with high accuracy, as its price will be adjusted by the formula we just described. In essence, Rhea is sacrificing simplicity for quality of service.
As the Rhea platform becomes fully operational, we will quickly accumulate a lot of data, which will become progressively more difficult to store, analyze and interpret. Maintaining records for the index, the options and all trades is costly, but it is ultimately to the benefit of Rhea users. Full transparency is one of our three pillars and we will allocate as much capital as it is required to achieve it.
Depending on the milestone reached with the Rhea token, users will have tools at their disposal such as graphs and statistics of the index and all of its constituents, historical data on all constituents and backward reaching of the index ever since prices for at least 20 cryptocurrencies became available.
The Crypto 20 as a problem-solver
What are the problems with the cryptocurrency market nowadays? In contrast to equity markets, the world of cryptocurrencies has two major flaws, which still remained unresolved:
- Fragmentation – traditional markets are well structured and are covered by many indices, which give investors a clear view of where the market came from and an idea of where it is going. On the other hand, there is no universally accepted representation of cryptocurrencies. Even though several crypto-indices exist, they accepted as the portrayal of the whole market.
- Specific knowledge – most investors do not fully understand cryptocurrencies. It is very time consuming for anyone who is not familiar with the underlying concepts to be able to distinguish between the 800+ cryptocurrencies that exist today. As a result of the knowledge pre-requisite, investors are prone to making one of these two mistakes. Not investing in cryptocurrencies or investing without possessing the knowledge to make an informed decision
We want to remove these two barriers by introducing a transparent platform, with an easily tradable index via options for investors of all backgrounds. A frequently rebalanced top-20 index, with reliable live and historical data will solve the problem of fragmentation by creating a cryptocurrency standard – a measuring tool for the market’s performance and a means for performance comparison.
The opportunity of options trading on the Crypto 20 will eliminate the specific knowledge pre-requisite, as investors will speculate on the market’s overall direction, not one single cryptocurrency. The index-options tandem that Rhea offers will encourage people to invest in the potential that cryptocurrencies possess without spending precious time on individual specifics.
We envision the Rhea Crypto 20 as an integral part of the cryptocurrency market. Covered and quoted by all major data providers from the finance world. As the cryptocurrency market evolves, the Rhea Crypto 20 will become the comparison tool. Just as stocks compared to equity indices to which they belong. By gaining popularity, the Rhea Crypto 20 index will give retail investors or non-experts in cryptocurrencies the possibility to invest in the market.
The Rhea Crypto 20 is only the start – we intend to create a whole range of indices. Covering all sections of the market is one of our main objectives. Offering more products will enable investors to gain tailor-made exposure, concentrated on a very specific market tranche. All
of this relies greatly on the success of the ICO and the platform’s liquidity. The two following sections will introduce the concepts of options. And the Cryptofund on the Rhea platform, in which people will be able to invest.