Pantera Capital Just Launched a New Index to Track the Crypto Market. Here's What Crypto Investors Need to Know.

A new crypto index launched on July 20, and it excludes the market's largest cryptocurrency. Pantera Capital, the S&P Dow Jones Indices, and Artemis collaborated on the S&P Pantera Digital Asset Index, which focuses on revenue-generating digital assets.

Pantera aims to solve one of the main complaints institutional investors have with investing in cryptocurrency: the lack of compelling index products. Other crypto indexes are often a mishmash of legitimate projects, meme coins, and inactive blockchains, providing little value. Here's a primer on Pantera's crypto index and how it could help investors.

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The selection criteria

Pantera based its selection criteria on those of the S&P 500, particularly its financial viability requirements. Inclusion requires consecutive quarters of positive protocol revenue, and revenue must accrue to token holders via buybacks, staking, distributions, or token holder-controlled treasuries. Pantera also requires that cryptocurrencies are listed on a regulated exchange and have a circulating market cap of over $500 million ($250 million for existing constituents).

Weighting in the index is based on adjusted market capitalization. The largest constituent is capped at 35% of the index, and all others are capped at 20% on rebalance. The index rebalances on a quarterly basis.

The coins that made the cut -- and the surprising exclusions

The S&P Pantera Digital Asset Index started with 18 constituents. A full list of constituents isn't publicly available as of July 30, but the five largest holdings are Ethereum, Binance Coin, Solana, TRON, and Hyperliquid. Aave is also a confirmed holding.

It doesn't hold Bitcoin (CRYPTO: BTC), XRP, meme coins, or stablecoins. Bitcoin and XRP are the two most notable exclusions, as both are top-10 coins, and Bitcoin accounts for about 59% of the entire crypto market.

Despite Bitcoin's status as the No. 1 cryptocurrency, its exclusion is understandable. It doesn't generate any revenue and instead serves as a form of digital gold -- an asset with built-in scarcity through its supply limit of 21 million coins.

Although Pantera and the S&P Dow Jones Indices haven't provided a specific reason for XRP's exclusion, it presumably failed to meet the protocol revenue requirement, either by not earning enough or not returning enough value to shareholders. Either way, it's a disappointing outcome, given that real-world utility is supposedly a major selling point of XRP.

What it means for crypto investors

The S&P Pantera Digital Asset Index is an exciting development for the crypto industry. It shifts the conversation about cryptocurrencies from hype and market cap to whether they make money and return value to token holders.

You can't buy any index funds tracking this index yet, but it's a useful reference point if you want to build a crypto portfolio of revenue-generating projects. The index has done well in backtests, outperforming the S&P's Broad Digital Asset Index, with and without Bitcoin, over the trailing five years. Backtests aren't a guarantee of future performance, in fairness.

Still, a crypto index with this kind of well-defined selection criteria could serve as a benchmark, similar to the S&P 500's role with the broader market. And when index funds tracking the index launch, retail and institutional crypto investors will have more investment options available.

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