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Using price indexes to invest in cryptocurrency

Golden bitcoin coins (BTC) on background of banknotes US 100 dollars bill with President Benjamin Franklin.

Although cryptocurrencies have been having a relatively turbulent time in 2022 — which has led to the prices of many cryptocurrencies falling sharply following their historic highs in November 2021, both professional and amateur investors around the world have continued to view these digital assets as a prime investment opportunity.

Despite the fact that cryptocurrency prices have hardly instilled confidence in investors in recent months, interest in the sector remains relatively strong. Thanks to a combination of continued institutional investment across the financial services sector and the gradual development of new regulations to protect investors, the future still looks bright for cryptocurrencies.

Regardless of the turbulence we have seen in the crypto market recently, there is still a considerable amount of investment being poured into the crypto space.

Those of you looking to invest in cryptocurrencies for the first time might have found yourself wondering what information you need to base your decision on. After all, not only do you need to know which of the thousands of cryptos out there to invest in, but also when the best time to invest is.

One valuable source of information you can use to help guide this decision is a price index. Price indices are a quantitative metric that potential investors and market watchers can use to keep track of the direction of the markets. Although they can’t necessarily predict specifically where the Smooth Love price will be in six months’ time from now, they can still be used to inform your overall investment strategy.

But what exactly are price indexes, and how can they inform your crypto investment strategy?

What is a price index?

A price index is essentially a normalized average of price relative to a specific class of goods, services or assets during a given interval of time. In economics, a price index is a statistic that is designed and used to help compare how, when taken as a whole, these price relatives differ between various time periods or even different parts of the world.

Price indices have several uses for individuals looking to do economic or market analysis, although this will depend on the kind of price index you use and what it measures.

For example, a price index can be used to measure the price level of the entire economy or can track specific metrics such as cost of living. At the same time, a narrower price index can be used by different economic actors in drawing up their business plans or choosing their pricing structures for the upcoming year. As we will also see, price indices can be used just as easily to guide investment decisions!

Price index examples

As we have seen, price indices can track a wide range of different economic metrics depending on how they are formulated. But what are some examples of the different price indices available?

  • Consumer price index: A consumer price index (CPI) is a price index that uses a weighted average market basket of consumer goods and services that might be purchased by households. It is often used to track inflation and deflation at a macro level for the economies of specific regions.
  • Producer price index: A producer price index is a type of price index that measures average changes in prices received by producers for their output. It has a close relationship with the wholesale price index.
  • Wholesale price index: Much like the producer price index, the wholesale price index is the price of a representative ‘basket’ of wholesale goods. It is used by some countries to track inflation, although many have moved on from this metric.

Using a price index to invest in cryptocurrencies

Price indices can be used to measure a wide range of economic metrics and are frequently used to report on the inflationary and deflationary forces present in particular economies. They are even used by individual businesses to make investment decisions.

In much the same way, savvy crypto traders have also started using cryptocurrency price indices to measure the market movements of the crypto sector. A number of different companies have created their own crypto price indices, which track the performance of different bundles of cryptocurrencies. This might include the price of major coins such as Bitcoin, as well as smaller altcoins such as the Luna price.

They usually do this by calculating the total market capitalization of each individual crypto, and creating a benchmark that can be tracked over specified periods of time. By tracking this index, investors can quickly gauge the overall price movement present in the sector, as well as how volatile the markets are.

Although the price index isn’t the only source of information you should use when making your investment decisions, a well-designed price index can still be incredibly useful when used with caution.

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