Summary
- Digital asset benchmarks can differ meaningfully in what they measure, ranging from single-coin constituents to broad universes with varying methodologies.
- Many digital asset benchmarks emphasize market capitalization but provide limited insight into the economic viability of blockchain protocols.
- The S&P Pantera Digital Asset Index applies rules-based eligibility, financial viability and revenue criteria to measure productive, or revenue-generating, segments of the blockchain economy.
Distinguishing Market Cap from Economic Activity
Market participants assessing digital assets face a common challenge: many available benchmarks reveal minimal information about the underlying economic viability of the constituents they measure. Several basket crypto indices heavily weight toward large-cap coins and include tokens with no discernible economic function.
Without observable fundamentals, market participants may find it difficult to assess value across the productive blockchain economy. Benchmarks that distinguish payment and utility assets from revenue-generating protocols by applying financial viability criteria can provide a framework for measuring this segment of the market.
Identifying the Need for a Fundamentals-Based Approach
Many broad-based digital asset benchmarks are weighted by market capitalization, which can result in significant concentration in individual constituents such as Bitcoin. As the original cryptocurrency, Bitcoin serves primarily as digital money or a digital store of value, often described as “digital gold.” This function differs fundamentally from that of blockchain protocols designed to generate revenue. Beyond Bitcoin, broad benchmarks may include a wide range of constituents, from revenue-generating smart contract platforms to tokens, such as meme coins, with no identifiable financial viability.
Grouping assets with materially different economic characteristics can make it difficult for allocators to distinguish cryptocurrencies. This may also complicate efforts by market participants to discern value when fundamentally dissimilar assets are included within the same universe being measured.
Recent research suggests a gap between market participant interest in digital assets and current implementation. Bank of America, for example, recommends a 1%-4% allocation to digital assets in a portfolio. According to J.P. Morgan Private Bank, 89% of family offices currently don’t hold digital assets. Although several factors may contribute to this gap, one consideration may be the availability of frameworks for evaluating digital assets with the rigor applied to other asset classes.
Applying Financial Viability to Digital Assets
A fundamentals-based digital asset benchmark can draw on transparent data, specialized market knowledge and established index governance. Together, these elements can support a rules-based framework for assessing protocol revenue and financial viability.
The S&P Pantera Digital Asset Index provides an example. S&P Dow Jones Indices, alongside Pantera Capital, a digital asset-native investment firm, developed the index to help market participants identify and measure the productive blockchain economy. Rather than measuring the digital asset ecosystem through price weight and token popularity, the index applies a fundamentals-driven methodology that screens for observable and recurring economic activity at the protocol level.
