The Importance of Reliable Prices in a Fragmented Market
By Joy Yang, Global Head of Index Product Management
Digital Assets have some distinct characteristics which make them harder to launch financial products on. The fact that they are volatile, global, and trade on 24/7 markets creates issues that are increasingly being addressed. Digital assets based on public blockchains are described as decentralized because it is not possible to limit their exchange and transactions to a specific location or time. For example, Bitcoin is traded on hundreds of exchanges worldwide around the clock – measuring price is challenging. As a decentralized asset, trading across centralized and decentralized exchanges, how can investors determine the “fair value” of bitcoin?
On October 21, 2021, a flash crash on one Bitcoin exchange caused Bitcoin’s price to plunge from $66,000 to $8,000 and bounce back to $65,000 within seconds, while it remained steady across other Bitcoin exchanges. The cause was reportedly due to a “bug in the trading algorithm”. Throughout the day, the MVIS CryptoCompare Bitcoin Benchmark Rate (BBR), maintained reliability in Bitcoin price.
Exhibit: Intraday Real-time Price for BTC-USD, BBR on 3 exchanges (October 21, 2021)
Source: MVIS, CryptoCompare, Data as of 10/21/21
The MVIS CryptoCompare Bitcoin Benchmark Rate is designed to be a robust price for Bitcoin in USD. The index is calculated as an average of 1-hour quantity weighted median prices, which are calculated for 20 3-minute intervals. . BBR sources Bitcoin prices from the top 5 exchanges ranked by CryptoCompare Exchange Benchmark. CryptoCompare scores each exchange on qualitative and quantitative factors across multiple dimensions of risk and quality using a comprehensive data set. The BBR price methodology ensures that the index is robust to outliers and aims to provide transparency for price consistency and price stability. It has been licensed to underlie financial products with currently USD 802.14 million in assets under management (as of April 2022).
Regulators want transparency and accountability around “robust” prices and “good” exchanges. In a rapidly evolving market, make sure the exchange selection makes sense for your digital asset investment solution.
About the Author:
Joy Yang is the Global Head of Index Product Management at MV Index Solutions (MVIS). She is responsible for managing MVIS products and services to accelerate innovation in financial index design and adoption. Joy brings more than 25 years of investment experience to MVIS, having led teams delivering index and quantitative-active investment solutions at Arabesque Asset Management, Dimensional Fund Advisors, Vanguard, Aberdeen Standard Investments, AXA Rosenberg, and Blackrock. Joy has an MBA from the University of Chicago Booth School of Business, and a BS in Electrical Engineering from Cooper Union’s Albert Nerken School of Engineering.
The article above is the opinion of the author and does not necessarily reflect the opinion of MV Index Solutions or its affiliates.