How to Create a Custom Cryptocurrency Index [Tutorial]

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Cryptocurrencies are a volatile asset class. A single day could see assets climbing or plunging over 50% in value. 

The thought of losing half your portfolio value within hours is frightening

Thankfully, there are tools which can help you diversify your portfolio. Instead of manually executing trades to construct a custom index, these services automatically manage this process. 

Why Index the market?

Indexing can be used to provide wider market exposure, lower operating expenses, and reduce portfolio turnover. Index funds have proven to be one of the most effective long-term strategies available to investors in the traditional financial system. When compared to actively managed funds, which have management fees and expenses, index funds tend to produce higher returns. In the case of cryptocurrencies, indices can also help reduce asset-specific risk by diversifying a portfolio into multiple similar alternatives. This lessens the impact of a single poorly performing asset within the index. Traditional investors, who are generally put off by holding risky positions may find this to be an attractive way to stay in the market without drastically increasing their risk profile. 

This chart compares the S&P500 Index with the average actively-managed hedge funds.

This chart compares the S&P500 Index with the average actively-managed hedge funds.

Throughout the rest of this article, we will discuss the process for setting up your own automated indexing strategy. 

Indexing the Market with Shrimpy

Now that we understand why indexing is an important strategy, let’s dive into the way we can index the market. The following guide will use the Shrimpy application. 

Shrimpy is a free service which allows anyone to quickly implement an indexing strategy, customize rebalances, and manage their portfolio across exchanges. 

The Shrimpy team has an entire telegram group dedicated to indexing. We encourage you to join the group here.

Sign Up for Shrimpy

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Sign up at https://www.shrimpy.io/.

Enter Exchange API Keys

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Once you’ve signed up for Shrimpy, the page you’ll see after logging in for the first time is shown above. In the provided input fields, populate your public and private API keys for the exchange you would like to link. If you are new to API keys, there are detailed articles on how to get started here.

Create an Index

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Navigate to the Portfolio tab and select to Create a New Portfolio. Once you reach the above page, click the orange Create Index button. 

Configure the Index

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Configure the dynamic index by selecting the number of assets, the minimum percent allocation for each asset, the maximum percent allocation, and any assets you would like to exclude

Select a Rebalance Period

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Once you’ve saved the allocations, select a rebalance period that fits for your strategy. If you can’t decide on a rebalance period for your index, read some of the studies which discuss optimal rebalancing periods here

Rebalance vs. HODL: A Technical Analysis

Allocate Your Portfolio

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At any time you can use the Rebalance Now button on the dashboard to buy and sell the assets you own to construct your desired index. Subsequent clicks of this button will realign your portfolio to the target allocations. 

Enjoy!

Now that you have set up your first index, explore everything Shrimpy has to offer. Indexing is only one aspect of the Shrimpy application. Some of the other core features include the Shrimpy Social, Insights, and Backtesting features!

Shrimpy Social: Browse leaders who have shared their portfolio, follow their live changes, and discuss strategies. 

Shrimpy Insights: Leverage aggregated statistics from traders on the Shrimpy application to make better decisions. 

Advanced Backtesting: Backtest up to 5 years of historical data to evaluate custom portfolio allocations. 

Additional Good Reads: 

Creating a Crypto Index on Coinbase

An Analysis of High-Frequency Rebalancing

Portfolio Rebalancing for Cryptocurrency