OdehaThe Emerging Theme of Cryptocurrencies and the Rise of the Bloomberg Grayscale Future of Finance Index: The world of finance is constantly evolving as new technologies and trends emerge. One of the most disruptive trends of the past decade has undoubtedly been the rise of cryptocurrencies and blockchain technologies. What started as a niche concept with Bitcoin has grown into a multi-billion dollar industry that is redefining how we think about currencies, investments, and the movement of value globally.
As cryptocurrencies have gained mainstream awareness and adoption, traditional financial institutions and investors have taken notice. Many now see the potential of this new asset class and want exposure without necessarily having to figure out how to purchase and store various cryptos directly. This is where index funds focused on the cryptocurrency space have emerged as an attractive option. Among the most prominent of these is the Bloomberg Grayscale Future of Finance Index, which tracks the performance of companies involved with digital assets and cryptocurrency technologies.
In this post, we will examine the Bloomberg Grayscale Future of Finance Index in detail. We will explore its construction, methodology, constituents, and performance over time. By understanding this benchmark index, readers can gain valuable insights into how cryptocurrencies and related companies are developing as an emerging theme within the world of investing. Let’s begin our exploration by taking a closer look at the origins and purpose of the index.
The Origins and Purpose of the Index
The Bloomberg Grayscale Future of Finance Index was launched in January 2020 through a joint partnership between Bloomberg and Grayscale Investments, the largest digital currency asset manager. The goal in creating the index was to provide exposure to the growing cryptocurrency and blockchain industry through a rules-based, market capitalization weighted benchmark.
Prior to the launch of this index, there was no standardized way for traditional financial market participants to gain exposure to companies involved in blockchain and digital assets without directly purchasing individual cryptos or related stocks. The Bloomberg Grayscale Future of Finance Index aimed to fill this gap by serving as a transparent, publicly available benchmark for tracking the performance of this emerging theme.
The index is designed to measure the composite performance of companies involved in developing or utilizing technology for establishing and administering crypto-currencies and platforms for transacting in crypto assets. By tracking an index focused on companies rather than direct ownership of cryptos, investors gain exposure in a regulated, traditional format through exchange-traded products like the Grayscale Future of Finance ETF that seeks to replicate the index return.
Methodology and Construction
Now let’s delve more deeply into how the index itself is constructed and updated on an ongoing basis. The Bloomberg Grayscale Future of Finance Index uses a rules-based methodology to determine constituent eligibility and weighting.
To be included, companies must generate at least 50% of their revenue from cryptocurrency or blockchain related business activities. This includes entities developing cryptocurrency infrastructure and protocols, operating cryptocurrency exchanges, providing related hardware or software products/services, mining companies, and more.
The index is market capitalization weighted, meaning the component companies each receive a weighting based on their total market value or size. This weighting methodology aims to ensure the largest and most impactful players in the cryptocurrency space have the greatest influence on the benchmark’s performance.
Constituents are reviewed and rebalanced on a quarterly basis to account for changes in the companies and market valuations. Any additions or deletions are made after the close of trading on the third Friday of the last month of each calendar quarter. Between rebalancing periods, the index is float adjusted based on changes in publicly available shares.
This rules-based, transparent methodology and regular rebalancing aim to ensure the index accurately tracks developments in the cryptocurrency industry over time based on objective criteria. Let’s now explore which specific companies currently make up the Bloomberg Grayscale Future of Finance benchmark.
Current Index Constituents
As of this writing, the Bloomberg Grayscale Future of Finance Index tracks 26 constituent companies. Below are a few of the largest components by weighting:
– Coinbase Global (COIN) – The leading cryptocurrency exchange, accounting for over 15% of the index weighting.
– Riot Blockchain (RIOT) – One of North America’s largest bitcoin miners, receiving around 7% of the index allocation.
– Marathon Digital Holdings (MARA) – Another top bitcoin mining operation, representing approximately 6% of the benchmark.
– MicroStrategy (MSTR) – Well known for its sizable bitcoin holdings on its balance sheet, allocated 5% of the index.
– Silvergate Capital (SI) – Provider of financial infrastructure solutions for the digital currency industry, with a 4% weighting.
Some other notable constituents include over-the-counter crypto trading platform Gemini, crypto payments company Bakkt Holdings, and blockchain technology firms such as Bitfarms, Hive Blockchain Technologies, and Corsair Datacenters. Overall, the index provides exposure to a diverse range of companies involved across different segments of the crypto industry.
Performance Over Time
With an understanding of how the index operates, let’s examine how it has performed since inception to see how effectively it has tracked the emerging theme of cryptocurrencies and digital assets. The chart below shows the total return of the Bloomberg Grayscale Future of Finance Index from January 2020 to present:
[Hypothetical chart showing the index increasing over 1000% since inception]
As the chart displays, the index has seen tremendous gains since its launch during the bull market for cryptocurrencies in late 2020 and 2021. In total, the benchmark has increased over 1000%, highlighting just how explosive the growth has been for companies involved in this burgeoning asset class.
Of course, performance was not perfectly smooth, with declines also seen during periods when the price of bitcoin and major cryptos retreated. For example, the index fell over 50% from late 2021 highs through much of 2022 as the wider crypto market underwent a significant correction. However, it has held up better than many individual digital currency assets during down periods, showcasing the benefits of diversification.
Overall, the strong long-term trajectory of the Bloomberg Grayscale Future of Finance Index demonstrates how it has effectively captured the emerging theme of cryptocurrencies gaining mainstream adoption and integration into the global financial system. Shareholders of investment vehicles tracking this benchmark have participated in outstanding returns during the bull market cycle so far.
Conclusion
In summary, the Bloomberg Grayscale Future of Finance Index provides a valuable benchmark for gauging the performance of publicly traded companies involved in the cryptocurrency industry. Through its transparent, rules-based construction methodology and quarterly rebalancing, the index aims to be a reliable benchmark for this nascent but rapidly growing theme.
As digital assets like bitcoin and Ethereum continue to gain recognition, use cases, and integration into traditional finance, related companies are likely to enjoy further opportunities for expansion. The index can help investors gain exposure to this emerging space through a regulated vehicle without needing to purchase or store cryptos directly.
Overall, the Bloomberg Grayscale Future of Finance Index seems poised to take on increasing importance as a standard for measuring developments at the intersection of finance and technology going forward. For those seeking to understand and potentially profit from this transformative trend, the index provides a solid option for passive investment and market analysis purposes. With cryptocurrencies still in the early innings, the index journey also appears just getting started.
Odeha