Inside the Mechanics of Crypto Indexes - How Are They Actually Constructed

The trend everybody is noticing is that crypto is starting to be viewed as a real asset class, similar to real estate, stocks or bonds – as the market is maturing, more and more people are going to be including crypto in their portfolio. 
 
Regular people who aren’t traders or “crypto nerds”  have a tough time choosing in which coins to invest, so the most appealing way for them to invest are crypto indexes – but what exactly are they, and how do they work?

Table of Contents

What are Crypto Indexes

At their core, crypto indexes are investment products that allow you to invest in a group (or “basket”) of cryptocurrencies instead of just one. 
 
Similar to how the S&P 500 tracks stocks of the 500 largest U.S. companies, a crypto Top10 index, for example, will allow you to split your investment across the top 10 coins, with just 1 click. 
 
Let’s break down what goes into one: 

1. Investment Universe

Every index starts by defining which assets could potentially be included in it- the list of all the assets is called an “Investment Universe”.

You may choose to include all coins listed on your platform in your Investment Universe, or you may exclude some, like stablecoins (since they don’t move with the market) or meme coins (too volatile). 
 
Once defined, an Investment Universe is going to serve as a pool of coins indexes can select from.

2. Theme

Indexes can follow the broad market or a specific niche. For example:
 
  • All coins index: tracks the full market, or a subset of the largest coins which serve as an approximation of the wider market
  • Altcoin index: focuses only on non-BTC assets. 
  • AI index: includes only tokens linked to AI projects. 
  • Real World Assets (RWA) Index: includes tokens that connect traditional assets like real estate with blockchain technology (e.g., ONDO, MKR, CFG, RIO).
  • Yield-bearing index: combines volatile coins with yield-bearing stablecoins for more consistent returns.
 
Virtually any combination is possible, and in general, indexes can be divided into: Pure strategies (only volatile coins) which provide higher returns in good market conditions, and mixed strategies (including yield-bearing stablecoins) which reduce drawdowns – similar to balancing equities with bonds.

3. Methodology & Weighting

Weights show what percentage of the portfolio each coin represents – if a $1000 portfolio is comprised of $500 worth of BTC, $300 worth of ETH and $200 worth of SOL, the weights would be as follows: BTC 50%, ETH 30%, SOL 20%
 
Methodology is the “recipe” that decides how much of each asset the index holds, i.e. which decides the weights.

Common methodologies include:

Market-cap weighted:

bigger coins, with larger market-caps (like BTC, ETH) get a higher share. Example: if BTC = 50% of total crypto market cap, it represents 50% of the index.

Equal risk contribution (ERC):

every coin adds roughly the same “risk impact” to the overall index - the more volatile the asset, the smaller the weight.

Equal weighted:

each coin has the same share - for example, 10 coins = 10% each.

Caps and floors

are also used - for instance, setting a 20% max cap per asset prevents one coin from dominating the portfolio.

4. Indicators

Indicators are data signals that help an index decide when or how to adjust its holdings 
 
The set of indicators that are used by Veli’s strategies were developed and backtested by a team of Quant PhD’s, and based on them indexes can be divided into:
 
  • Passive (the index follows fixed rules, no matter what the market does.) or
  • Smart (these indexes follow the live market movements and pick the right moment to enter or exit the market).
 
Smart indexes are an easy way to invest “on autopilot” without having to constantly monitor the markets – which is quite attractive for the majority of users, but the fees for smart indexes are somewhat higher than for the passive ones.

5. Rebalancing Frequency

Rebalancing adjusts the weights to keep the index aligned with its proposed methodology. 
 
Let’s use an example of a Top10 equal weighted index – If Bitcoin’s price rises, and it grows to 12% of the index instead of the target 10%, at the end of the month rebalancing would sell a small portion of Bitcoin to bring its weight back down to 10% – keeping the index aligned with its original plan. 
 
Additionally, at the time of writing, the 10th coin by market cap is ADA, and 11th is HYPE – if ADA falls to 11th place, rebalancing would replace ADA with HYPE in our imaginary Top10 equal weighted Index. 
Rebalancing is what separates good indexes from bad ones. 
 
A more correct term for indexes that don’t rebalance is “baskets” or “bundles”. The Top10 basket would take a snapshot of the market in 2025, but in 5 years those coins might be obsolete and replaced with totally different ones. 
 
In 2017 one of the hottest coins were LTC or IOTA. A crypto basket that didn’t “kick them out” as they started to fall in popularity and price would perform significantly worse than an automatically rebalancing index. 
 
Most crypto indexes rebalance weekly, monthly or quarterly. The more frequent rebalancing is done, the more fees your platform will generate, but doing it too frequently could hurt users’ returns, which is why it’s important to find the right balance.

6. Fees

Indexes typically generate three types of revenue for exchanges/brokers: 
 
  • Entry fee and Exit fees are charged at the moment when the investor is purchasing or selling the index.
  • AUM fee is a yearly fee that is charged on assets under management
  • Performance fee is collected only when investors make a profit. It is applied on the amount of profit generated.
  • Rebalancing fee is charged during index rebalancing and on the amount that is being swapped.
You can test out the real life numbers using this calculator: veli.io/sva-calculator 
 
The fee structure is something that can significantly impact the performance of an index, which is why we have in depth talks with our clients to help them find the best solution for their platform.

Benefits for users and exchanges

For platforms

Indexes transform passive users into recurring revenue streams - because even when investors “do nothing,” the system rebalances and collects small fees. This way, you are monetizing your existing user base, without additional sales efforts. This has proven to be a good way to generate sustainable revenue during slowdowns/bear markets.

For users

This is the simplest and most popular way to invest in any asset class. Diversification provides an aspect of safety, while automatic rebalancing allows users to always have the most up-to-date coins in their portfolio (and not continue holding bags of poor performing coins).

Overall, indexes are an excellent product, both for users and for platforms, which is why early indicators are showing that the next wave of crypto adoption is going to come through crypto indexes (on crypto platforms) and ETFs that follow a crypto index (on traditional financial investment platforms).

Launch Your Own Crypto Index with Veli

If this sparked an idea for an index – whether it’s a DeFi Leaders Index, AI Tokens Basket, or a Strategy with Yield-bearing coins – our team at Veli can help you design and launch it fast.

You can reach out anytime – we’re always happy to help you build and test an index concept before it goes live.

Schedule a call

Latest Articles

See all articles