This New Index Could Be Crypto's Answer to the S&P 500

Crypto has always had plenty of price charts, but not an all-in-one benchmark like the S&P 500 that blends the coins people hold with the companies building the picks and shovels. Until now, that is.

On Oct. 7, S&P Global unveiled the S&P Digital Markets 50 Index (S&P DM50), an index that's a hybrid basket of 15 cryptocurrencies and 35 publicly traded crypto-linked equities, complete with a planned tokenized version so investors can buy it directly on-chain. If it catches on as a benchmark that investors use, there will be a handful of important implications for the crypto sector, so let's unpack what's going on here.

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Benchmarks are a sign of market maturity

S&P's new index uses capped weights of the assets it tracks to foster diversification, and follows a quarterly rebalancing schedule; no single asset can comprise more than 5% of the index. Stocks must have a market cap of at least $100 million to be included, and for cryptocurrencies, $300 million is the floor.

While the final set of constituents have not yet been announced, the framework is set, and there's a list of the usual suspects that almost certainly covers many of the ones that will ultimately be included. Expect for the index to feature assets like Bitcoin, (CRYPTO: BTC) Ethereum, (CRYPTO: ETH) Solana, (CRYPTO: SOL) Coinbase and perhaps even mining businesses and decentralized finance (DeFi) companies.

For the coins and stocks included in the index, the implications are positive because the tokenized version of the index will act like an exchange-traded fund (ETF) that gives investors diversified exposure. So they will be likely to experience capital inflows from investors looking for a big basket of crypto-related assets as a means of getting some upside from the crypto sector's growth over the coming years.

If the market responds well to the index and begins to use it as a real benchmark for the sector's activity, it could become the default data point for the crypto market in the way that the S&P 500 is for the stock market. Assuming that an ETF is eventually launched to track the benchmark, retirement accounts and financial institutions would gain an easy on-ramp, and it would increase the capital inflows even further. In short, there is a chance that such a product accelerates systematic allocations in a way that individual coin selection never could, boosting prices across the board.

How to use the benchmark

By design, this benchmark targets large, liquid assets across the entire value chain of the digital asset ecosystem.

Once the tokenized version of it is launched, if you want to diversify your crypto portfolio or get broad-based exposure to the sector, it could make sense to invest some of your capital in it gradually over time, much as how many investors dollar-cost average (DCA) into ETFs tracking the S&P 500. But you would need a crypto wallet to do that, so for many investors it might make more sense to wait for an index-tracking ETF launch, assuming that one is.

Beyond that, there's a wrinkle that you need to understand before thinking about buying the benchmark or using it as a metric for the crypto market (which is another use case that you should take advantage of).

In terms of the crypto sector's total size, Bitcoin still anchors crypto's market cap and mindshare, as it's worth $2.3 trillion, and the total crypto market cap for coins, including stablecoins, is about $3.9 trillion. Ethereum remains a primary settlement layer for real-world asset (RWA) tokenization efforts, but it's much smaller at $500 billion. Likewise, Solana continues to draw developers to high-throughput use cases, but its cap is only $110 billion. But on the basis of the the index's weighting limits, which top out at a maximum of 5% of the index, it is almost guaranteed that these three major coins will not affect the performance of the index as much as they impact the total market cap of the crypto sector.

In other words, there's no one crypto index to rule them all, and while this one will certainly be an important one because of its inclusion of the leading public digital asset companies, it won't be the only benchmark worth watching. Nor is buying its tokenized fund going to provide perfectly diversified exposure; it's a structured asset that is biased toward tracking the businesses competing in the crypto sector, with some representation of the most important crypto assets that those businesses rely on.

So, in closing, this is a modestly bullish development over the long term, and it shows that crypto is becoming more and more mainstream. If an ETF follows, and it might, expect the convenience factor to nudge more portfolios toward a small but persistent allocation to crypto, increasing prices in the process. Until then, be on the lookout for the index's launch, and the launch of the tokenized version, as both will be handy to have.

Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, S&P Global, and Solana. The Motley Fool recommends Coinbase Global. The Motley Fool has a disclosure policy.