A New Crypto Index Just Launched. Here's Why That's Bullish for Ethereum, Solana, and Hyperliquid.

On July 21, the new S&P Pantera Digital Asset (SPPDA) Index launched, and with it, investors everywhere now have a quick reference that tells them which cryptocurrencies are probably worth paying attention to. In short, the index's inclusion criteria call for only admitting an asset to the index if the protocol backing it earns real revenue. Ethereum (CRYPTO: ETH), Solana (CRYPTO: SOL), and Hyperliquid (CRYPTO: HYPE) all cleared that bar, but Bitcoin and XRP did not.

The SPPDA stands to benefit Solana, Hyperliquid, and Ethereum, not to mention a couple of other coins that it tracks. Here's why.

Image source: Getty Images.

What goes into the index?

The new index tracks the largest cryptoassets that are economically productive, as defined by their protocol revenue, weighted by their market cap.

Protocol revenue (also called chain revenue) is the fees users pay to a network to execute transactions. The index also explicitly seeks to not include those assets that are speculative or uninvestable, like meme coins. Bitcoin, for its part, was excluded because its fees flow to its miners rather than holders, so it has no protocol revenue.

The SPPDA is itself targeted at institutional investors, who need an easy proxy for how the most productive cryptocurrencies are doing as a group.

It includes protocols with a market cap above $500 million that have two straight quarters of positive revenue, ranks them by revenue, and then weights the rest by their adjusted market value, capped at 35%. The process is less complicated than it sounds; most crypto projects are excluded by default because they either generate no meaningful revenue or fall below the market cap requirement. XRP only brought in a piddling $313 in protocol fees on July 29, so it didn't make the cut. The five largest coins in the index at present are Ethereum, Binance Coin, Solana, TRON, and Hyperliquid.

Take a look at how their protocol revenue stacked up in Q2:

Data source: DeFiLlama.

As you can see, there's a very wide range of revenue among the biggest constituents. Now, let's turn to why being in the index is bullish for them.

Being in the index could pay off, but it'll be a while

An index is just a measuring stick that's designed and maintained by someone else.

But a coin in an index marketed toward institutional investors, like the SPPDA, means the asset has essentially been pre-curated for certain characteristics. In this instance, the index's chosen characteristics are thought to correlate with the quality and viability of the underlying assets. So they're on a short list of assets that are less likely to be lemons compared to the assets that aren't on the list.

That could also lead to future capital flows, and it probably will.

But investors' preferring the assets in the index because of the quality signal is only one of the possible mechanisms for these coins to benefit.

If a crypto exchange-traded fund (ETF) is ever built on the benchmark, which is already under discussion among asset managers, it would buy the index's constituents by weight, favoring the largest capped names, and likely buoying prices directly. And if the ETF(s) are ever marketed to the public as a smart way to get exposure to the best of crypto without needing to have any exposure to the dreck, being included in the index could, in retrospect, be a very important development for holders.

A nuanced additional issue is that generating protocol revenue at all is a design choice.

Networks can opt to raise (or cut) their fees as they prefer, or to reapportion the distribution of incoming fees to favor different classes of participants, potentially before the revenue is even recognized as such. Thus, the creators of the index have now, at least to a degree, introduced a new incentive for chains to generate fee revenue rather than keeping fees minimal for users, as XRP does on purpose.

Of course, the assets currently selected for the index may not be in it forever, as it's regularly rebalanced. For now, listen for any news of filings related to future ETFs tracking the index -- those funds could well take off, if they ever launch.

Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, Hyperliquid, Solana, and XRP. The Motley Fool recommends BNB and TRON. The Motley Fool has a disclosure policy.