Creating The Fowl Five Crypto Market Index

by Dan McKeown

Feb 07, 2018

Fowl Five Index at 11:09 a.m. PST Feb. 7, 2018
I wanted to create a market aggregate index so I picked five cryptocurrencies that I thought represented a solid basket of relatively high-capitalization items.
First, Bitcoin is the largest and most prominent cryptocurrency, at least at the moment. In a way, it serves as the current market bellwether just by itself. There is no getting around its considerable effect on the Fowl Five Index, since the basket of cryptos is weighted roughly by market capitalization and Bitcoin's market cap is so large. Given its size, it serves as the benchmark against which the other four cryptos are adjusted against when calculating the index.
Ethereum is the second cryptocurrency in the index given its clear #2 position in size and prominence. It also has a somewhat different set of features from Bitcoin and will sometimes move in an uncorrelated way so it is a useful signal to include.
The third cryptocurrency is Bitcoin Cash, which has had a rough patch in the last few months in terms of price but which retains a large market cap and continues to seem to undershoot or overshoot overall market trends on many days possibly due to the back-and-forth of mining rewards levels.
The fourth cryptocurrency is Litecoin, which has become a fairly well-known cryptocurrency with a visible founder, Charlie Lee, and has seen some interesting run-ups in the last several months as Coinbase users and others have poured into it. Given its low expenses for sending money and its first party wallet apps, it may well continue to receive attention from a growing audience that has some cross-over from the Bitcoin community but also includes a different segment of users.
The fifth cryptocurrency is Dash, which is a more privacy-focused example than the others. While it is the smallest in the index, it represents a type of crypto not otherwise found in it.
When calculating the Fowl Five Index, the latest prices and market capitalizations of these cryptocurrencies are looked up from the web and then fed into the formula which rebases their prices against their weighted market capitalization and feeds those values into an aggregate total. Roughly speaking, the Fowl Five Index should show a positive correlation with the relative level of total growth in the prices of the cryptos.
Bitcoin's special place in the index is assured in the short term, but what about further out? The formula would no longer work as intended if it were no longer the highest-cap crypto in the basket. In the plausible but not-guaranteed scenario that Ethereum were to pass Bitcoin (it is now more than halfway there), I would probably swap the order in which they were fed into the function and make Ethereum the new standard.
During the crypto market panic of a few days ago the Fowl Five Index dipped below 1000, while today it is hovering around 1134.
For creating future indices, it is easy to conceive of the value of a broad-based aggregate that took in data from dozens of cryptocurrencies. For now, given the top-heavy nature of the market, the Fowl Five Index provides a good indicator of overall crypto price trends.
If you want a Fowl Five widget like the one on this blog for your app or blog sidebar, you can get the code here.