Index perpetual contracts, or index perps, combine a crypto-native, leveraged futures product tied to the performance of a basket of correlated assets. This allows traders to diversify risk while speculating on the overall performance of a segment of the industry, rather than individual tokens themselves. Index perps are traded on margin, offering leverage that amplifies both gains and losses. They track the underlying spot prices of the constituents through the same funding rate mechanism as perpetual contracts on single assets.
WOO X has strategically partnered with GMCI to launch its own suite of crypto index perps. To learn more about the partnerships, please visit https://woox.io/blog/en/introduction-to-index-perps.
For information on constituents and weights of the indices listed on WOO X, please visit ▶ Index PERP weights and indices.
Understanding Index Fundamentals
What is an Index?
An index measures the price performance of a basket of assets using a standardized metric and methodology. It serves multiple purposes:
- Market indicator: indices provide a snapshot of market trends and sentiment, reflecting the collective movements of their constituents.
- Performance benchmark: investors use indices to gauge the performance of portfolios and individual investments relative to the broader market or sector.
- Research and analytics: indices help analyze market sectors, asset classes and overall economic conditions, facilitating informed investment decisions.
How is an Index constructed?
Index construction typically starts with an eligible universe of assets and then screen them based on predefined criteria such as market capitalization, sectors, liquidities, depending on the intended use and exposure of an index. Once the initial screening is done, eligible assets are typically ranked based on one or more selection criteria and only the top qualifiers may be chosen to be included as the index components.
How is Index weights determined?
Weighting in an index determines the impact of each constituent on the index’s overall performance. Common weighting methods include:
- Market capitalization weighting: each constituent’s weight is proportional to its market value
- Price weighting: each constituent’s weight is proportional to its price
- Equal weighting: each constituent has the equal weight regardless of market cap or price
How is Index calculated?
The index value is typically calculated as a weighted average of its constituents.
IndexValue = (price of each consitituents * quantity of each consitituents) / diversor
Where diversor = a normalizing factor that ensures index value is properly scaled and consistent over time.
How is Index maintained?
Index maintenance ensures the index accurately reflects the market or sector it tracks. This involves various types of adjustments and the common ones are regular rebalancing and responding to corporate actions or specific events.
Regular rebalances
Regular rebalances are scheduled adjustments to the index’s compositions and the corresponding weights. During these rebalances, the index provider reviews and adjusts the constituents to reflect changes in the market, such as shifts in market caps, sector dynamics and so on. These occur at predefined intervals, such as monthly, quarterly, or annually based on the index methodology. The rebalances typically involves adjustments to the index divisor to ensure the price continuity.
Here is an example that illustrates how a regular rebalancing is done:
Pre rebalance
Assuming index A has BTC, ETH and DOGE in its constituents prior to the rebalance. Divisor is 1,200 and the index price is 100.
| Constituents | Price | Quantity | Weighted Contribution Quantity * Price / Divisor |
| BTC | 60,000 | 1 | 1 * 60000 / 1200 = 50 |
| ETH | 3,000 | 10 | 10 * 3000 / 1200 = 25 |
| DOGE | 0.2 | 150,000 | 150000 * 0.2 / 1200 = 25 |
Index price = 50 + 25 + 25 = 100
Post rebalance
The rebalance adds WOO to the index. Post rebalance, the index value is still 100 with its divisor adjusted from 1,200 to 2,400 to ensure index price continuity is maintained.
| Constituents | Price | Quantity | Weighted Contribution Quantity * Price / Divisor |
| BTC | 60,000 | 1 | 1 * 60000 / 2400 = 25 |
| ETH | 3,000 | 10 | 10 * 3000 / 2400 = 12.5 |
| DOGE | 0.2 | 150,000 | 150000 * 0.2 / 2400 = 12.5 |
| WOO | 0.5 | 240,000 | 40000 * 0.5 / 2400 = 50 |
Index price = 25 + 12.5 + 12.5 + 50 = 100
Corporate actions adjustments
In traditional financial markets, corporate actions such as stock splits, mergers, and acquisitions require adjustments to the index to ensure its continuity and reflective value. The index's divisor is often modified to keep the overall index value consistent before and after the corporate action.
In the cryptocurrency space, traditional corporate actions like stock spin are uncommon. However, events such as hard forks or airdrops can lead to similar rebalancing actions to ensure the index accurately reflects the index’s target exposure.
Event driven adjustments
Event-driven adjustments occur in response to significant changes affecting the constituents of the index, such as when:
- Assets that undergo significant price declines within a short period of time
- Assets that become illiquid or non-tradable
- Assets that impacted by fraud or major security breaches
These assets are typically removed from the index on a pre-announced removal day. The removal typically resets their weights to zero with the divisor adjusted to ensure the price continuity of the index.