Now that’s an allocation breakdown which is starting to look more like an index. Thanks
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The MCAP Community Call is this Thursday 17:00 UTC (12:00 EST). Everyone is welcome. The slides are in the calendar invite.
MCAP Community call
Thursday, January 6 · 5:00 – 6:00pm UTC
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This looks like a great product, and one that I’ve personally been looking for for a long time. Some questions.
In your back tests, what did this approach look like in 95% VaR conditions?
Forgive me for being pedantic / if I missed this, but are the TE numbers daily or weekly?
Have you run this on a longer time horizon than the 2 month time period under section 3.4? When my team looks at fund TE, we look at a minimum of 3yr historical data to give a sense of validation.
You mention the turnover is 20% every couple of months. That results in quite a high annual turnover. Where do trading fees come into play?
Have you thought about licensing this product to companies like S&P / Bloomberg?
Thank you!
Hi Bo, Thanks for the nice feedback.
We have not looked at VaR or longer back-testing periods yet. Typically, back-testing is not done until the next decision gate DG2. The DG1 post serves to gauge community sentiment and get initial feedback.
Daily
We can reduce the turnover at the expense of higher tracking error. We will optimize the turnover in the next version of the methodology. In general, higher turnover results in higher gas costs (which are borne by Index Coop and the Methodologist, not the investor) and higher asset decay due to slippage, albeit small.
We have discussed licensing the methodology but not made any concrete plans yet.
This is my first post, so please forgive me if I’m breaking any protocols here. And sorry for the book I’m about to write, but I feel strongly about this topic especially as I think it is the determining factor into just how successful this DAO will be. You have clearly done a great deal of professional-level work on this methodology and work up. This proposal is exactly what attracts me to the community of Index Co-op in the first place.
I’m an investor with a TradFi background and am astounded to see the weakness in offerings out their for a Direct Indexing product for Crypto/Digital Assets. You guys are super positioned to win this, but even a slight misstep out of the gates and somebody bigger is going to take down the whole buffet.
With that in mind, I would STRONGLY urge you to ditch any allocation to BTC/ETH altogether.
Hear me out. As flawed as the models may be, any retail/HNW investor can logon to any web-app trading platform on their phone and purchase an ETF to get exposure (we know the limitations in detail, they don’t) to BTC/ETH. Most ETF products out there tackle this currently. See GBTC, BITW, ETHE, GDLC, BTF, XBTF the list is ONLY going to grow. This is how Wall Street works, they think they are on to something and CNBC needs something new to blab about. There will be a flood of ETF products and they will largely allocate to BTC/ETH. You launch this product and you will just be a more complicated version.
An investor may be factually mistaken that he is getting “true” exposure to the asset for the “right” reasons, but you have to ask - is Bob the retail investor going to: set up a wallet, vet any of the exchanges, deposit funds, go through KYC, write down his private keys, pay “gas fees”…any and all of the unfamiliar, intimidating and frictious steps he needs to take to buy this kind of product? Or put in a market open order for BITW on Thinkorswim? Promise you it’s the latter.
Where Index Co-op has a shot, a massive one, to truly capture a differentiated index and passive market: continue defining the sectors or industries in the space as you have done, and then compile them into a one-shot portfolio.
The retail and high net worth market does not need any help getting exposure to Mega cap crypto. They need (and really want) to outsource the due diligence involved in breaking down the Broader Crypto market “Ex-Mega Cap” to use traditional finance terms. They hear about Defi or DAOs or NFTs or the Metaverse, but have no clue which coins are legit, or what’s the proper sector allocation to each space. Or just how many sectors there are. They need expert guidance for this. Having gotten somewhat up the ladder myself, nobody anywhere seems to have a shared taxonomy of themes or sectors or groups or industries, let alone what the allocation to any should be in an overall crypto portfolio. THIS is your billion dollar opportunity.
I think you’d be making a significant strategic mistake to re-create existing ETF products and assume retail will pile in given the significant onboarding hurdles involved. There really isn’t any value there to be honest in having a product that is 70% two coins. However - a Total Market Cap Core Portfolio
for all the other coins minus BTC/ETH, now you’re talking.
Frankly, this is what I’m looking for with my personal crypto allocation, and it’s not out there. There are many other HNW investors like me. There are some RIAs or Family Offices that want broad exposure to the space as well, but they can get BTC/ETH products just about anywhere.
I personally have just enough patience to go through the hurdles of setting up a wallet, now that I’m here I am fine to buy BTC/ETH on my own. What I want is DPI+DATA+MVI+PAY+GMI in their proper allocations. You come up with the allocation. THAT is the value. There is no uniform GICS (Global Industry Classification Standard) similar to what S&P or MSCI or Russell use. You guys can own that outright and claim it.
There is a nascent precedent for this and it mirrors S&P’s approach of the “BDM” or “Broad Digital Market” they have a number of sub indices and they are ‘ex-Mega Cap’ or ‘ex-Large Cap’. I’ll let you investigate further their criterion, it seems pretty opaque and fuzzy to me.
The market opportunity you have is to define what asset allocation means in the crypto space. That’s totally up for grabs right now. Any. Provider. Can make a market cap weighted portfolio. The index coop can make their name well known for being the experts in the ‘Broader Digital Market’ outside of Bitcoin and Ethereum.
If you have to - use the 2FLI products for your exposure to BTC/ETH and “free up some space”. You can investigate the Institutional investing concept of “Portable Alpha”. The PIMCO funds use this concept well in their PLUS products. Worth a look.
But give me a “Crypto Core ex-Mega Cap” portfolio and I have an order for you tomorrow. Not a piece of my allocation. The whole thing.
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Hi Jack,
Thanks for your very thoughtful reply. You read my mind. I have a draft ready for an index product called XMEGA that would be the total market cap excluding the top-half (ie, BTC, ETH and BNB) which I think is very close to what you’re describing. You could then replicate that for bottom quarter by market cap and so on. The market segment would be tradfi investors that have GBTC or BITW in their 401ks or SIPPs and are looking for mid/small-cap exposure.
It’s actually very difficult technically to make a decentralized total market cap index. All of the current products on the market are synthetic. I don’t suggest that the difficulty alone justifies the product but rather that it does create a significant technical moat.
I fully agree with you the onboarding hurdles are still far too high to lure substantial numbers of investors from tradfi. I don’t think that will be resolved until the field moves to Layer 2. The primary target for this product are defi-native users looking for total market exposure (ie, Jo in the user examples) as opposed to retail investors making their first foray into defi (ie, Susans). They will still for the most part require custodianship.
Your broader point about the merits of passive vs active investing in crypto is a fascinating one. I strongly agree that active, curated indices play an important role and we have and are developing many products with that philosophy. For example, we have products released or pending for Metaverse, Small Cap DeFi, Data, NFTs, Social et al. You expressed your interest in a rational allocation across the IC products. We’re considering launching target risk meta-index products that I think would address that interest. See a previous post on the Target Retirement Index series.
I think the view that passive investing in crypto maximizes risk-adjusted returns just as in traditional equity investing is unproven. There are many reasons to suspect that there is sustainable alpha in crypto, for example due to the large information and technical asymmetries, but I have equipoise until I see the results. The beauty is we’re exploring these questions together at the dawn of an entire new asset class.
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A fund of funds would be pretty awesome to get exposure to everything.
Indexed sorta had the idea with their Future of Finance token. Shame they got hacked or arbitraged though.
Piedao also has their own version I believe.
Would be cool to see a BED + MVI + JPG + DATA + GMI + PINT + PAY + whatever other index will come out in the future in a single token. Can’t say I can predict the gas fees to execute that transaction, but a one transaction solution will simplify the taxes for sure.
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Agreed with Jack here. I’ve actually build a fund that’s doing exactly that - breaking the market into sectors and layers in order to recreate index exposure but taking tactical tilts towards preferred segments of the market using a combination of fundamental analysis and machine learning. Happy to compare notes as well if you guys are going to continue down the route of breaking out the market by sector. Our goal as well is to create factor analysis for the market, similar to how traditional markets have things such as Momentum, Value, Growth, etc. Being able to do that for crypto markets would be very, very cool. Is this something that you guys are planning to research? If so, again, happy to compare notes and share knowledge.
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I agree that factor products have enormous potential. See the recent proposal from Token Terminal for example. One technical challenge is making a robust factor index when you’re limited to ~15 tokens in the index and <20% monthly turnover. They may become more feasible on Layer 2 where the rebalancing costs should be a lot lower.
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Ok, so Susan is a HNW investor who leaves the legwork to her family office. From a marketing perspective, successful execution is going to fall on IBD @Metfanmike @ajay55 @fallow8 to have a plan to bring to existing offices / new offices. Thanks!
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ok,
Thanks for joining the call.
Video is here: $MCAP Community call (2022-01-06 at 09:04 GMT-8) - Google Drive
Slides are here MCAP Community Call - Google Slides
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In the MCAP community call there was a question from @overanalyser on whether we can build MCAP natively on Polygon. I checked and many – but not all – of the tokens are available on Polygon. So I would say we could build it but it would be a different product eg MCAP-P.
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This is a great idea and I have spoken enthusiastically with @MrMadila about it. The opportunity looks good and it is great to see this proposal done well.
I had planned to fully back it but now, after the EF AMA, I have a question, a question that will hopefully just boil down to an inclusion criteria or a misunderstanding on my part.
The full reason is this post about the fundamental security limits of L1 bridges - https://www.reddit.com/r/ethereum/comments/rwojtk/comment/hrngyk8/?utm_source=share&utm_medium=web2x&context=3
In short - bridged L1 tokens lack the guarantees of their native chain such that a transaction to bridge a token could be reverted on the sending chain once confirmed on the receiving chain. To do so, requires a 51% attack, which are famously expensive but, if for a short time, not as much as I had imagined. The problem becomes more acute with greater use because the bridges become a juicier targets. L2 are not vulnerable to this.
Possibly, an attack-cost threshold could be found or a TVL-in-bridge limit set to manage the risk.
I appreciate I may be way off here but I thought it better to ask than not.
Thanks for your enthusiastic support. I’m excited about applying the approach to other market segment products as well, eg, ex-megacap, growth, etc, pending market research.
I have not looked in-depth at the security of the bridged tokens. Who’s best-placed within the Coop to address that?
Yes, there are certainly a lot of possibilities!
To look into the security of bridged tokens will likely need some analytics and opinions from engineering, product, and maybe council. Almost feels like a white hat task! Personally, I’d like to hear the views of Dylan, Dev, and David Silverman, plus, really, everyone here who makes this forum so valuable.
For PoS networks there may be less concern because they have node setup costs, exit queues, and other requirements. Still, analysis seems prudent and probably quite interesting.
OK. Let’s please go ahead with the DG1 vote and then we’ll get the engineering-security assessment prior to DG2, which I believe is the correct process. The relevant protocols are Wrapped, Wormhole, pTokens, and Ren. I have an alt Layer 1 index which I’m planning to submit next week which will have the same question. Perhaps we’ll also get some feedback on the Forum.
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Hi @JosephKnecht this product has not gone through a WTA, which is required for DG1. A DG1 snapshot should be requested by the primary pod representative. Let me a assign someone from the pod and get this through our standard onboarding process.
Adding notes from Work Team Analysis for MCAP!
Work team: @DocHabanero , @abacas, and myself
Score: 2.01
BENEFITS:
Market Opportunity: 3.33
- This was a very controversial section within the work team. All reviewers noted that the product was not differentiated given the competitive products outlined in the post above. Some felt that it was a must-have and a large market given the success of analogous products (like the S&P 500) in tradfi. Others felt that it did not fit those criteria given the 80% dominance of BTC and ETH in this product, and a belief that current on-chain buyers are a very different audience than the traditional S&P 500 buyers. We all noted the thematic and token overlap with this product and BED, which has not generated substantial AUM or revenue.
Revenue Potential: 4
- This product has a proposed 1.9% streaming fee, no mint and redeem fees. Split TBD.
Methodologist Impact: 3
- The methodologist has raised the standard for IC in terms of product competency and methodology; however, they do not have a substantial brand or marketing presence that other methodologists (eg Bankless) bring.
COSTS
Financial: 3
- This product will likely require seeding a liquidity pool
Operational: 1.3
- This product aims to minimize rebalances, has no extrinsic blow-up risk, and does not require incentives.
Technical: 1
- This is a fairly straightforward composite index that will not require net-new engineering work.
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