Light Bulb Moment: Nasdaq’s New BTC And ETH Liquid Indices May Clarify Pricing

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Partnering with Brave New Coin, Nasdaq wants to shed light on price discovery of liquid crypto assets.

Earlier this week, Nasdaq began listing Brave New Coin’s Bitcoin Liquidity Index (BLX) and Ethereum Liquidity Index (ELX). Brave New Coin (BNC) is now polishing its model for the Ripple Liquid Index (RLX), which is based on Ripple’s crypto asset, XRP.

On February 25, Nasdaq unveiled its data dissemination relationship with Brave New Coin by starting to dispense real-time Bitcoin and Ethereum index-level information on the Nasdaq Global Index Data Service (GIDS). That will sweeten the crypto scent for institutional portfolio managers who are already comfortable using Nasdaq, widely known as a global electronic marketplace for buying and selling securities as well as the benchmark index for US technology stocks.

Some context is useful. It’s known that Nasdaq is planning to launch a bitcoin futures platform this year. And when it does, if the BNC liquidity indexes gain traction, Nasdaq could be storming this stage.

Remember that the CME (Chicago Mercantile Exchange) in December announced the availability of BTC futures, which it says can be used to “hedge Bitcoin exposure or harness its performance.” Before that, CME Group and Crypto Facilities Ltd. had already launched two bitcoin pricing products that can help professional investment managers assess crypto asset price risk and/or capture short-term trading gains. The CME bitcoin pricing products include a spot price index called the CME CF Bitcoin Real Time Index (BRTI) and a reference rate called the CME CF Bitcoin Reference Rate (BRR). The real-time index, BRTI, and the reference rate index, BRR, are both meant to further enhance market participants’ risk management involving digital assets by providing credible reference rate and real-time price sources. Both are designed to help accelerate the professionalization of bitcoin trading.

Futures Trading and Crypto Asset Pricing

The crypto ecosystem is expanding into the institutional space, slowly perhaps, but surely. A central aspect involves futures that are meant to offer a fast, cost-effective way to trade on financial and commodity markets. Futures are standardized contracts to buy or sell a particular asset at a set price, on a set date in the future, of a predefined quantity and quality. Traders worldwide use futures.

Liquid crypto assets become useful to money managers who want to add a negative correlation to the asset prices of traditional securities they own, such as company equity shares, commodities, and currency futures.

Piotr Wojdat, the Warsaw-based managing partner of Blockchain Asset Management Fund, explains that one crucial indicator used by portfolio managers in evaluating securities is the Sharpe Ratio:

“This indicates the relationship between potential risk, measured by the price volatility of a given asset, and the expected return on investment. In short, the Sharpe Ratio helps investors determine whether the fund manager is taking the appropriate risk in relation to expected return on investment.”

A portfolio manager can seek relatively high returns in alignment with his/her desired risk level by adding uncorrelated assets to the portfolio. That’s where cryptocurrencies, which typically sport low or negative correlations with traditional financial assets, can come in handy.

Well, let’s not forget the “hot money” crowd looking to book fast gains by spotting bitcoin trading anomalies or various price-spread opportunities. In this context, we can see how Nasdaq’s new liquidity indexes could play a key role by shedding light on the real-time prices of BTC and ETH – and soon, perhaps, XRP. In turn, that will attract the speculators as well as actively managed fund managers looking for investment gains that will stick around longer than a few hours or days. All these converging forces are further proof that the crypto ecosystem is attracting fans with traditionally deep pockets.

Mary Driscoll covers finance and business trends as a staff writer for ETHNews. She formerly served as an editor for management and finance at the Economist Intelligence Unit and a research principal at APQC. In addition, she has written for The Wall Street Journal CFO Report, HBR-online, and strategy + business. Her book on corporate treasury management was published by John Wiley & Sons, Inc. Mary enjoys hiking and skiing in the Sierras with family. Her goal in life is to win big on Jeopardy.

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