A Bitcoin Currency Basket Index

This is a proposal for a Bitcoin Currency Basket Index.

It is the equivalent of the Trade-Weighted US Dollar Index (DXY) which is an index (or measure) of the value of the dollar relative to a basket of foreign currencies.

US Dollar Index DXY

DXY on Bloomberg:

The Dollar index is a weighted mean of the dollar’s value relative to other select currencies:

  • Euro (EUR) 57.6% weight
  • Japanese Yen(JPY) 13.6% weight
  • Pound Sterling(GBP) 11.9% weight
  • Canadian (CAD) 9.1% weight
  • Swedish Krona (SEK) 4.2% weight
  • Swiss Franc(CHF) 3.6% weight

USDX goes up when the US dollar gains value compared to other currencies.

Source: Investing.com

USDX started in March 1973, soon after the dismantling of the Bretton Woods system of fixed exchange rates, when floating exchange rates were introduced and Gold-convertibility (the ‘Gold Standard’) was abandoned.

At its start, the value of the US Dollar Index was 100. It has since traded as high as 164 in February 1985, and as low as 70 on March 16, 2008.

The make up of the “basket” has been altered only once, when several European currencies were subsumed by the euro at the start of 1999. The make up of the “basket” is overdue for revision as China, Mexico, South Korea and Brazil are major trading partners presently which are not part of the index whereas Sweden and Switzerland are continuing as part of the index.

Bitcoin Currency Basket Index

To construct the Bitcoin Currency Basket Index four decisions are required:

A. Start Date

B. Price of Bitcoin at the Start Date

C. Choice of Currencies for the Basket

D. Assignment of Weights to those Currencies

A. Start Date : 1 January 2014

I have taken the decision to start the index at 1 January 2014. Its value is set to 100 at this start date.

From the launch of Bitcoin in 2009 until the bubble in December 2013/January 2014 the growth in the Bitcoin price was exponential; its price has been more stable in the period from 2014 to now. This is evident in the chart below, plotted against a logarithmic price scale. See how the curve has a steep positive slope before January 2014, and is rather flat, almost horizontal thereafter.

The problem with making an index with a start date preceding January 2014 is that changes in index values in the period 2014 to now would be negligible and uninformative.

B. Price of Bitcoin at 1 January 2014: Google Finance Price of $750.77

There are different prices of Bitcoin for 1 January recorded at different prominent sites.

Investing.com

The price of Bitcoin in USD at 1 January 2014 is $744.00

CoinDesk

There is no price for 1 January 2014.

The price at 30 December 2013 is $817.12

The price at 6 January 2014 is $881.66

According to the chart, the price at 1 January 2014 lies between these two prices.

Google Finance

The Price for 1 January 2014 is $750.77

As the Sheet at Blocklink.info is driven throughout by Google Finance prices, the Google Finance Historical Price for 1 January 2014 of $750.77 has been used to construct the index.

C. Choice of Currencies for the Basket

Normally foreign currencies will be selected for the basket, and weights will be assigned to those currencies according to the relative volumes of trade undertaken by an economy with different trading partners. The problem faced here is that Bitcoin is not used by any economy for trade and so this method is unavailable.

Currencies have been chosen and weights have been assigned depending on three factors. They are, in decreasing importance:

i. Bitcoin Trading Volumes

ii. Reserve Currency Status

iii. National Income (GDP)

i. Bitcoin Trading Volumes

Source: Bitcoincharts.com

Source: BitcoinCharts.com

This is the most important factor in assigning weights to currencies in the basket used for the construction of the Bitcoin Index.

Nearly all Bitcoin trading occurs at Chinese Exchanges and against the Chinese Yuan. The CNY must get the largest weighting in the index. #2 is the USD. #3 is the Euro. Too much attention is paid to the USD price of Bitcoin. It is the CNY price of Bitcoin that matters.

ii. Reserve Currency Status

Extra weighting is assigned to Reserve Currencies. A Reserve Currency is a one that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions and often considered a hard currency or safe-haven currency.

Currency composition of official foreign exchange reserves 2015

USD 64%

EUR 20.3%

GBP 4.7%

JPY 3.8%

Other (CAD, AUD, CHF, etc.) 7.2%

USD and EUR are assigned large weights due to their prominent reserve currency roles, although their weights are much smaller than that of CNY because trading volumes of BTCUSD and BTCEUR are very small in comparison with those of BTCCNY.

GBP and JPY also get included in the basket largely as a result of this Reserve Currency factor.

iii. National Income (GDP)

Weighting points are assigned proportionate to GDP National Income measured at Purchasing Power Parity exchange rates.

Note that the weighting for the EUR in this exercise depends on the size of the economy of the Eurozone, and not that of the European Union. The Eurozone economy excludes those economies in the EU that have retained their sovereign currencies, so it excludes the UK, Poland, Sweden, Hungary etc. The Eurozone economy is #3 in the list, below the US and above India.

GDP is the weakest factor in the assignment of weights to currencies in the basket. This is because trading volumes of Bitcoin are so small in all economies excluding China, the United States and the European Union. For example, in India, the #4 economy in the world (when the EuroZone is counted as an economy), there is negligible trading of Bitcoin.

India’s currency the rupee (INR) gets included in the basket on the basis of the size of the Indian economy.

D. Allocation of Weights to Currencies in the Basket

The Bitcoin index is a weighted geometric mean of the Bitcoin’s value relative to other select currencies:

  • Chinese Yuan (CNY) — #1 BTC Trading Volumes, #1 Economy: 43% weight
  • US Dollar(USD) — #2 BTC Trading Volumes, #1 Reserve Currency, #2 Economy: 25% weight
  • Euro (EUR) — #3 BTC Trading Volumes, #2 Reserve Currency, #3 Economy: 20% weight
  • Japanese Yen (JPY) — #4 Reserve Currency, #5 Economy : 7% weight
  • Pound Sterling(GBP) — #3 Reserve Currency, #9 Economy: 4% weight
  • Indian Rupee(INR) — #4 Economy: 1% weight

Calculation of the Bitcoin Currency Basket Index

The Bitcoin Currency Basket Index is calculated using real-time price feeds in this Google Sheet:

It is also available at Blocklink.info

Here is the Index today, 16 November 2016.

Source: Blocklink.info

It’s interesting to note that BTCUSD has declined since the start of the Index on 1 January 2014 (by 2.47%), but BTC priced in all other currencies has increased in value. This is because since 1 January 2014 the USD has gained value against Bitcoin, but all the other currencies included in the Basket have lost value against Bitcoin :

I’d be interested to hear Feedback. Do you agree with the weights? Should Gold (XAU) be included on the basis that it is an important Reserve Currency? Please press the Green Heart to Recommend.

Like what you read? Give BambouClub a round of applause.

From a quick cheer to a standing ovation, clap to show how much you enjoyed this story.