Coinpit uses an open-source index to track bitcoin spot prices on which contracts are settled. The index is designed to have the following properties:
Representative of the spot market¶
To ensure we are undisturbed by the uptime and engine stability issues at spot exchanges, we use a median based index.
Many indexes use variants of volume weighted prices VWAP to compute the index. While VWAP is a reasonable choice for mature markets, it introduces instability in the presently developing crypto-market. It is very common for exchanges to go down for days or be down for maintenance without notice. Often exchanges with the heaviest volumes go down hard and stay down. Exchanges can also have chaotic swings and bad prints that can cause volume weighted indexes to jerk around wildly, causing unnecessary instability
Robust against exchange failure and downtime¶
A median automatically discards extremes by its very definition and any extreme behavior or instability is automatically eliminated. Exchanges can go down, have bad prints, have engine issues, flaky price feeds, change API, get DDOSed or fail to perform smoothly for any number of reasons and there would be minimal impact on the index. A huge variance among prices can be ameliorated by adding more index components as needed.
Transparent and reproducible¶
Proprietary indexes may be non-reproducible easily and complex formulae may not be verifiable at a glance. To keep things simple, we use a standard median of component exchanges.