What is Index Methodology?
At Crypto Asset Rating (CAR), we offer multiple indices that make it easier for investors to decide which tokens they should add to their portfolio. We offer indices based on the types of tokens which includes-
- 1. Composite Index
- 2. Utility Index
- 3. Security Index
- 4. Commodity Index
Indices allow investors to gain an insight into the performance of an asset class or a segment of that asset class. Indices are used as the underlying for various financial instruments and benchmark the performance of portfolios designed to replicate a given asset class's implementation.
Constructing the Indexes
The Indexes are constructed and maintained at an individual market level.
Below is the day-wise illustration as an example
|Number of Outstanding Tokens||Price per Token (t - 1)||Price per Token (t)||Market Cap (t - 1)||Market Cap (t)|
Note : Applicable to all Tables
|Token Market Cap (t - 1)||7,347,000,000|
|Token Market Cap (t)||7,533,000,000|
|Index Value (t - 1)||10,000|
|Index Value (t)||10,253.1646|
|Number of Outstanding Tokens||Price per Token (t - 1)||Price per Token (t)||Marfket Cap (t - 1)||Market Cap (t)|
|Token Market Cap (t - 1)||7,533,000,000|
|Token Market Cap (t)||73,585,000,000|
|Index Value (t - 1)||10,253.1646|
|Index Value (t)||10,015.6526|
Constructing the CAR's Indexes involves the following steps:
Each of these steps is described in detail below.
- • Defining the Token Universe
- • Identifying Eligible Tokens / Listing Criteria
- • Security Index
- • Classifying Tokens Utility/Security/Commodity
Defining the Token Universe
The Token Universe is represented by:
- 1. Identifying eligible Tokens, and
- 2. Classifying these suitable Tokens into the appropriate country/segments/Market capitalization.
Identifying Eligible Equity Securities / Listing Criteria
Supporting early-stage and mature tokens, CAR Listing criteria set out requirements to list with CAR Index. These requirements ensure the quality of the market that CAR operates. To record with CAR's Index, a company must satisfy the minimum admission criteria, including (i) Country of origin, (ii) Minimum Market Capital (iii) Minimum Trading length.
Each company and its token is classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.
Token Universe, a Token must have at least one eligible listing that meets the Minimum trading Requirement defined below.
- •Three months to 12 months Frequency of Trading.
The 3-month to 12-month Frequency of Trading aims to select tokens with a sound long and short-term liquidity. The 3-month Frequency of Trading is determined by dividing the number of days a token traded during a 3-12 month period by the maximum possible number of trading days within this period.
Defining Market Capitalization requirement – CAR will take the token, which has a minimum market capitalization of 1 million or more.
Classifying Token's Utility/Security/Commodity?
Identifying the Token as Security
CAR defines a token as security/Utility/Commodity based on the framework provided by U.S. Securities and Exchange Commission/CFTC.
A digital asset/Token should be analyzed to determine whether it has any product characteristics that meet the definition of "security" under the federal securities laws.
The transaction will be called an investment if it satisfies the following criteria:
- • It is an investment of money.
- • The acquisition is in a common enterprise.
- • Profit expectation from the work of the promoters or the third party.
- • Profits are expected from the investment.
If a transaction satisfies the above condition, it will be categorized as a "Security Token."
Identifying the Token as Utility
These tokens provide Investors with a product and service. The investor will be entitled to redeem them for the product or service when it becomes available later. Think of them as gateway tokens.
Since there is an upper cap on the maximum token availability, the tokens' value may go up because of the supply-demand equation. The idea is that the more the demand for an asset, the lesser its supply will be, which will shoot up its price. Unlike security tokens, these assets can be easier to sell on a secondary market, provided they have been listed on an exchange. Generally, those investing in these types of tokens are motivated by the prospect of their value rising substantially in the future.
Utility tokens can:
- • Give holders a right to use the network.
- • Give holders a right to take advantage of the network by voting.
Tokens need to fulfill one of the conditions:
- • They help in building an internal economy within the system.
- • They can give the holders to take advantage of a network by voting in it.
Identifying the Token as Commodity
To uniquely identify this type of tokens, we need to know three properties:
- • Not Governed - Commodity token is usually described as a virtual, decentralized, and (at first glance) anonymous token that is not government-backed or backed by any other legal entity and cannot be exchanged for gold or any other commodity.
- • No Intervention - The fact that the creation and the increase of such commodity tokens are automated and limited by the system implies no need for the intervention of a central entity /authority to issue tokens.
- • Limited Tokens - The limited number of tokens , together with the fact that conversion rates for tokens are determined by supply and demand, without a government body being able to intervene (e.g., by printing additional money).
Identifying the Token as Currency/StableCoin
Payment mechanisms all over the world have inefficiencies, and these inefficiencies have given birth to currency tokens. The most significant example of a currency token is StableCoin. Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin relative to some "stable" asset or basket of assets. A stablecoin can be pegged to a cryptocurrency, fiat money, or exchange-traded commodities
Currency tokens are used as an alternative means of payment for goods and services.
Tokens are classified as currency tokens based on the following conditions.
1. Payment mechanism: means of payment for goods and services external to the platform running the token
2. Store value
The CAR Indexes are maintained to reflect the evolution of the underlying Crypto markets on a timely basis while seeking to achieve:
- • Index continuity
- • Continuous constituents of the indexes, and
- • Index stability
An Index Committee maintains indices. Most committees are comprised of professional members of CAR. Members include the Financial Analyst team; they are primarily responsible for maintaining/calculating the index. The Steering committee's secondary responsibility, the committee members, consists of the professionals from the Corporate Advisors Team and the Financial Analyst Team. At each meeting, the Index Committee review pending actions that may affect index constituents, statistics comparing the composition of the indices to the market, companies that are being considered candidates for addition to an index, and any significant market events. Also, the Index Committee may revise index policy covering rules for selecting a token, treatment, or other matters.
The Internal Committee's objective is to systematically reassess the various dimensions of the Token Universe for all the indexes on a fixed quarterly timetable. A committee involves in a comprehensive review of the Indexes.
During each quarter, the token Universe is updated; the size Range is recalculated. Then, the following index maintenance activities are undertaken for each index:
- • Updating the Token Universe.
- • Recalculating the Market Cap for indexes.
- • Reassessing the Number of Companies.
- • Assessing conformity with token criteria Requirements listed above in constructing the index.
- • Updating the Token Universe
The token Universe is updated by identifying a new token that was not part of the Index Universe at the previous Quarterly Index Review.
- • Evaluating each token that is not a constituent of the Indexes.
New tokens are evaluated relative to this updated threshold, whereas all existing constituents will not be evaluated relative to this requirement.
Ongoing Event-Related Changes
This methodology document describes CAR guidelines for the treatment of corporate events within the CAR Indexes. It also guides the treatment of corporate events within CAR Capped Non-Market Capitalization Weighted indexes.
Overall, the methodology of the corporate event can be described in three broad categories:
- • Mergers and Acquisitions (M&As) and Spin-offs
- • Other Events Resulting in Changes in Number of tokens
- • Suspensions, Delisting and Bankruptcies
For instance, in the case of Merger and Acquisition;
- • If the acquirer and acquiree are both present in the index, both will be considered one from there onwards, and the new token will be replaced with old ones.
- • If the acquired is present in the index, but the acquiree is not, only the acquirer's market capitalization will change without any new token being added/removed.
- • Suppose the acquirer is not present in the index and the acquiree is present in the index. In that case, the acquiree will get eliminated from the index calculation, and a new token/company will get included in the index.
CAR communicates and consults with clients through various channels using index announcements, emails, and data distribution. Also, CAR has a designated client support team available to respond to inquiries. When a material change to an index methodology is considered, CAR will publish that on its website. A material change alters the index objective or changes the methods that affect the likelihood that the index will achieve its purpose.
All index constituents are evaluated daily for data needed to calculate index levels and returns. All events affecting the daily index calculation are typically announced via email to clients.
This document has been prepared solely for informational purposes based upon information generally available to the public and from sources believed to be reliable. The Content shall not be used for any unlawful or unauthorized purposes. CAR does not guarantee the accuracy, completeness, timeliness, or availability of the Content. CAR Parties/Members are not responsible for any errors or omissions, regardless of the cause, for the results obtained from the use of the Content.