(Any views expressed in the below should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
It goes without saying that crypto markets can be volatile. Depending on your strategy, this can be more of a perk than a plague. However, no matter your risk appetite, it’s always advised to diversify your portfolio.
While many may see diversification as spreading your investments across different asset classes, diversification within one asset class is still important in order to manage risk, potentially mitigating the impact of price movements specific to a single underlying.
But if you don’t have the time to manage multiple crypto contracts, what options (trading pun intended) do you have? Well, a basket index might just be what you’re looking for.
Just what is a basket index? A good way to understand these products is to go back to where they were born – the traditional finance world.
A Brief History of Basket Indices in TradFi
“The Dow dipped 50 points”.
“General Electric has been booted from the Dow”.
You’ve probably heard statements similar to the above on the news, and might be left wondering what that even means. The Dow here refers to the Dow Jones Industrial Average, founded by Charles Dow in 1896.
The Dow is a weighted representation of a selected group of stocks – also known as an index. Originally consisting of just 12 companies, the index now includes 30 companies from major parts of the US economy. These companies are selected to be part of the Dow because they’re considered market leaders in their respective industries.
An index of market leaders is not the only basket of underlyings you’ll find. A basket index can be formed if the underlyings are related to a central theme, meet certain criteria, or if they’re part of the same industry group. You will see a lot of these basket indices in stocks, currencies, and other asset classes.
So, a basket index, rather than focusing on just one underlying’s performance, helps investors assess the overall performance of a market segment.
Trading a Basket Index
Alice wants to get involved in the US stock market, but can’t decide which particular stock to buy.
Instead of placing all her funds in the performance of one company, she decides instead to trade the SPDR S&P 500 ETF, which tracks the S&P 500 – a market index consisting of 500 of the largest US publicly traded companies.
By trading the basket of these companies, Alice now has diversified her exposure to the US market compared to trading a small number of companies. This could mitigate her losses should one of the small number of those companies’ price movements differ from the market as a whole.
Bob on the other hand doesn’t want to trade just any large company – he specifically wants exposure to the tech industry. Instead of splitting his funds across multiple contracts, Bob instead decides to trade the iShares Global Tech ETF – an index composed of global equities in the technology sector.
While Alice was unsure of which exact firm to trade, Bob did not want to deal with the hassle of trading the multiple different stocks he wanted exposure to. In both these cases however, a basket index met both their needs.
While the above examples refer to a basket of stocks, other popular basket indices include ones for currencies – like the DXY index and the MSCI Emerging Markets Currency index.
But what about cryptocurrencies?
Basket Indices with BitMEX
While common in the TradFi world, trading contracts based on basket indices in the crypto world can only be found on a very small handful of crypto exchanges. We want to change that.
That’s why we recently listed the .BALTMEX index and .BDEFIMEX index, which track the Altcoin and DeFi markets respectively. We’ve also launched the ALTMEXUSD and DEFIMEXUSD Perpetual Swap contracts which reference these basket indices. This means BitMEX users now have a way to obtain broad market exposure without having to juggle multiple trades.
We’ve built our indices by analysing cryptocurrencies that, in our opinion, have reliable price and volume data. From there, we select the initial constituents for our baskets based on an index theme and the market cap of each coin. The top 10 coins for each theme make up our index.
(For the full list of coins and weightage of each basket index, see our blog here.)
To account for an ever-changing market, we continuously monitor the performance of each coin in our basket indices and may add, remove, or adjust the weights of certain coins in each basket, during the quarterly rebalance or at other times if we have concerns about a particular coin, its market cap, or liquidity.
It is important to note that we apply a 20% cap to each coin’s weight to ensure a basket is not dominated by one or two coins.
Remember Alice from earlier? Let’s say she now wants to get involved in the world of DeFi.
Much like trading baskets in the TradFi world, trading our DEFIMEXUSD Perpetual Swap contract (based on our .BDEFIMEX. index) will give Alice exposure to the top 10 DeFi coins by market cap, without having to trade multiple contracts. It’s as simple as that!
If you believe the Altcoin or DeFi market will move a certain direction in the future, there’s now a simple and easy way to trade these sectors as a unit on BitMEX.
Instead of holding ten open positions on different coins, our simple ALTMEXUSD Perpetual Swap and DEFIMEXUSD Perpetual Swap will do the trick. Basket indices, and the contracts built on them, provide traders an easy and effective way to diversify their portfolio, and work exactly the same way as our other Perpetual Swap contracts.
This post is meant to serve as an introduction to the world of basket indices trading, but the best way to learn is to try it out for yourself. Good news – if you aren’t ready to use real funds yet, our basket indices Perpetual Swaps are available on our Testnet platform too.
Give it a shot, and if you have any questions, our Support team is ready to help.