Coinalgo NFT 250 Index
We are launching an NFT Index to better track the performance of the space. In this article, I will introduce myself and provide a brief overview of the Index.
Introduction
Perfection is the enemy of getting things done. This habit of striving for that incremental improvement is deeply rooted in my system, and it does inhibit my productivity. That said, for my line of work I view this habit as a blessing in disguise.
My professional career has involved a transition from financial services to entrepreneurship, and I currently run a big data analytics firm whose data forms the basis of investment decisions of some of the largest stock investors in the world. My credibility is my bread and butter. If my analysis is incorrect, I will not be able to pay my bills.
I plan to bring the same rigor to coinalgo.com, which will be a data platform for the NFT and Cryptocurrency space. We have commenced our journey today with the launch of the Coinalgo NFT 250 Index, something that has been missing from the space. Over the last few months, I have observed Twitter discussions on whether we are in a bull or bear market. I have seen people track Opensea volumes as a proxy for performance, and I have also seen numerous people share snapshots of Excel files that color-code daily price changes. While all these are good attempts at ascertaining whether we are in a bull or bear market, an Index is a better solution. Not only would the Index enable us to determine the overall direction of the NFT market, but the breakdown by categories (PFP, Gaming, etc) will also allow us to see more granular trends.
Below, we provide a brief overview of types of indices and a more detailed overview of the Coinalgo NFT 250 Index.
Types of Indices
There are quite a few types of Indices. We briefly overview 4 below, explaining our rationale for choosing the Market-capitalization weighting for the Coinalgo NFT 250 Index.
Equal-Weighting
All NFT collections have the same weight in the index. This would mean that Cryptopunks have the same weight as the collection ranked #250. Clearly, this does not make sense.
Price Weighting
The Dow Jones Industrial Average is the most famous price-weighted index in the world. Under this methodology, the constituent with the higher price has more weight than a constituent with a lower price. For our purposes, this methodology would disregard the number of NFTs in a collection and will under-represent the impact of a collection like CryptoKitties, which has 2+ million NFTs.
Market-Capitalization Weighting
Under this methodology, the weight is the market capitalization of the collection (price multiplied by the number of NFTs). This is superior to the two methodologies listed earlier as it would correctly ascribe more weight to collections such as Cryptopunks and Bored Ape Yacht Club, which have both a high price and number of NFTs in the collection.
Float-adjusted Market-Capitalization Weighting
Standard & Poor’s S&P 500 index, arguably the most famous stock market index in the world, uses this methodology. It involves adjusting the shares outstanding for shares held by insiders that are not available for trading. If we were to use this methodology for the Coinalgo NFT 250 Index, then we would be removing the staked NFTs from our market capitalization calculation. While we view this methodology as being superior to the pure “Market-capitalization Weighting”, it is operationally a little challenging to implement as the number of staked NFTs changes each day. We may move to this methodology in 2022.
Coinalgo NFT 250 Index Sub-categories
We have made an effort to classify the 250 collections into one of the following categories and sub-categories. This additional classification will enable investors to identify more granular trends. For instance, it might enable them to identify that PFPs were hot till September/October and Gamified has been hot since November. Such information would enable them to choose momentum or mean reversion trading strategies. We would also like to note that we have made a sincere effort at classifying the collections in various buckets. However, several collections are currently PFPs but their roadmaps include utility/staking that will be released down the road. As such, our classifications are subject to change. If you are one of the projects in the index and would like to reclassify your project’s category, please DM us on Twitter @NFTIndex.
Salient Features:
● As mentioned earlier, Coinalgo NFT 250 Index is based on market-capitalization weights.
● In the current form, we have calculated a Price Index and not a Total Return index — this means that currency generated by a staked NFT is not included in our figures. This will understate the return of an NFT such as the Genesis Cyberkong, which generates 10 $BANANAS per day (currently 1 $BANANA trades for ~$42). In other words, a Genesis Cyberkong generates slightly more than $150k per year in “interest” income. This is a major drawback of the current methodology. Starting from 2Q22, we will change the index to include the monetary value of the currency that staking generates (i.e. if that currency trades against BTC / ETH / USD and has monetary value).
● Since we rely on the index to determine the direction of the market, any NFT that does not trade for a prolonged time reduces our ability to ascertain the market trend. Resultantly, high liquidity is an essential criterion for inclusion in the Coinalgo NFT 250 Index. Based on this criterion, we have had to exclude some amazing collections that have a high-floor/market-cap but are illiquid. Some of these collections include Autoglyphs and Fidenza by Tyler Hobbs.
As you can see in the snapshot (from Opensea) below, Autoglyphs trades infrequently. The last NFT in the collection traded on Oct. 6, 2021, and the prior trade was on Sep. 30, 2021. Since we are relying on the index to ascertain the market direction, adding a highly illiquid collection defeats the purpose. The index is not a reflection on how bullish we are on the collection or how much we like the art; rather it is merely a tool for determining the market direction.
● From our overall index, we have also excluded large marketplaces/collections that involve an apples-to-oranges comparison. These exclusions include platforms, such as SuperRare, Rarible, Foundation (among others) and include Domain Name Services and Proof of Attendance Protocol. To better illustrate our point regarding the inorganic comparison, please consider the following scenario. On a certain day, artists such as Pak, who sell their work for a premium valuation, dominate the trading on SuperRare. The following day, the trading is dominated by Artists who are not as well-known and command a lower price. Under this scenario, we will end up comparing Pak with lesser-known artists and incorrectly conclude that the index traded down relative to the prior day. While we are not including such marketplaces/collections in our overall index, we will aggregate their data and present it in categories/sub-category indices.
● A drawback of our index, like any index, is survivorship bias. Since we will be selecting the top 250 NFT collections and rebalancing 10–20 collections in the index each quarter, we will end up excluding those collections from the index that perform badly. By selecting the best collections, we end up overstating the performance of the market. We will be releasing an All NFT collection Index in 2022, along with indices for collections where the floor or market capitalization is below a specified threshold.
What is the data telling us:
● We commenced the Index on 4/1/21 at a level of 100
● The Index includes 250 collections weighted by their market cap
● The median traded value in each collection is used to determine changes in the index level
● As per our Index, the NFT market peaked during Oct-21
● During Nov-21, the Index fell ~40%
● MTD Dec-21, the Index is up about 26.5%
● We will be sharing daily updates on Twitter at @NFTIndex
● Additionally, the Index data, including the sub-category indices, will be accessible at https://coinalgo.com before end of the month
Summary of Monthly Performance
The breakdown of index constituents
Future Plans:
We plan to build coinalgo.com into the pre-eminent data platform for the cryptocurrency and NFT space. While we have a lot of exciting things in the pipeline, we would love to hear your feedback on how we can improve. Please drop us a DM on Twitter at @NFTIndex or join our Discord Server: discord.gg/8D88vPVxrx.
