Title: Category Winners Index (CWI)
Created: 4 May 2021
We would like to propose that the Index Coop manage a product based upon an index of crypto’s category winners.
The Categories Winners Index (CWI) is an index that seeks long-term capital growth. It seeks to achieve this objective by identifying the key themes within the crypto arena and incorporating the dominant constituent of each category into the index.
Category identification is critical to ensure sufficient exposure to all aspects of crypto given the expanse and variety of applications and uses. CWI gives investors the ability to gain exposure to a wide spectrum of crypto, but with a focus on a subset of each of the category winners. A ‘category’ is identified by using Coingecko’s categorization & selecting the dominant token within it based on Coingecko’s market capitalization.
Using CWI reduces transaction costs for investors and gives diversified but targeted exposure via a single index aiming for long-term capital growth.
The Category Winners Index is designed to track protocols that have proven execution and have become dominant or disruptive in new emerging spaces. Crypto has progressed significantly from the early days of BTC & ETH and has evolved into an arena that now impacts a huge variety of applications. Crypto is now of significant size for us to be able to distinguish clear sub-categories. CWI aims to identify the market leader in each sub-category & provide holders explicit exposure to each category’s dominant token.
A scenario likely familiar to all IndexCoop community members: Friends/family/colleagues ask what to invest in within the crypto space, and how to transact. By the time you have explained that there is a wide variety of use cases within crypto & each token has different purposes/uses it’s highly likely the individual who was initially interested has decided they don’t have enough time to investigate further. CWI provides an easy answer to that common question by providing easy exposure to the top 10 crypto categories & the top asset within each category.
The target market for CWI however covers a broad investor spectrum, CWI can be used by beginners/intermediate investors who would like convenience & exposure to crypto with low fees & automated rebalancing. CWI can also be used by advanced and institutional investors such as UHNW/GFO who have limited time to track & rebalance their portfolios. There is also strong potential for DAO treasury diversification - DAOs who are looking to divest their treasury are looking for broad but targeted divestiture to spread risk across all crypto categories.
Currently, there is no product on the market that combines the convenience of a single index with a horizontal outlook across the crypto economy. This product enables a very straightforward passive hold strategy for ongoing crypto-asset exposure.
Before we explore the CWI for crypto, let’s walk through how this could work in the traditional investing world using the example of equity. Many say crypto is the next Internet; that it will be as disruptive and as value generative as the Internet has been over the last couple of decades. So what would a Category Winners Index look like for the Internet today? Here is our view:
- Mobile - Apple ($2.2T)
- Enterprise - Microsoft ($1.9T)
- eCommerce - Amazon ($1.7T)
- Search - Alphabet/Google ($1.6T)
- Social Media - Facebook ($900B)
- Gaming - Tencent ($800B)
- Payments - Paypal ($300B)
- Streaming - Netflix ($200B)
- Travel - Airbnb ($100B)
- Sharing - Uber ($100B)
Several points to note on this list. First, the names should sound familiar, and you’ve seen the various acronyms like FAANG and MAGA , etc. CWI is somewhat broader and meant to capture a wider spectrum of current activity on the Internet. Second, the list today would very much be different from what it was in 2010 or 2000, categories evolve over time, not constantly, but enough to make it matter.
For example, Sharing, Streaming, and Social are relatively new. In 2000 you might have had Portal (Yahoo), Access (AOL), and Auctions (eBay) instead. Similarly, the winners in each category can change over time, Google was not the first/largest search engine (remember Inktomi, Lycos, Altavista?), and neither was Facebook the first social media site (MySpace, Friendster, etc). And while several competitors exist in each of the categories, our premise is that the winner takes most of the value (network effects!), so we always want to have the current winner represented in the index.
Finally, here’s how we determine the winners. We list all companies worldwide by market cap. We then assign a category for each of the predominantly Internet-focused companies. The top market cap company for each category is then selected as the winner. This is kept up-to-date every month with the current list of Internet category winners. So imagine having this index in the early days of the Internet. All you had to do back then was to decide that the Internet was likely to turn into something big and then just buy and hodl the Internet CWI index for 20 years :-). Likewise, if you think Crypto is that big thing now, the Crypto CWI index is exactly for you!
(Data as of April 30th, 2021)
|1||wBTC||Bitcoin||Cryptocurrency/Store of Value||$1T||10%|
|2||ETH||Ethereum||Smart Contract Platform||$314B||10%|
*Pending sufficient liquidity, can reassess closer to launch and if still insufficient we will choose the next 2 categories/coins.
As above CWI seeks to identify the top 10 categories within crypto, and then select the clear market leaders within them. Here are the steps to this process:
- We start with the top 100 coins by market cap (per Coingecko).
- We then list Coingecko’s category definition for each coin. Some minor cleaning of the data is required to take into account multiple categories (we choose the most specific and dominant one), no category (we add one), inappropriate categories (eg stable coin), and conflicting categories. We also cross-reference with other sites like CoinMarketCap and Messari to ensure consistency and integrity of categorization.
- The next step is to indicate which of these coins meet our overall requirements. The major considerations here are that they exist on the Ethereum blockchain, have sufficient liquidity, and otherwise meet legal and regulatory requirements.
- Finally, the top market cap coin for each category (and which meets our requirements) is selected and added to the index. We continue until we get to 10 unique categories. For clarity, once a coin from a category is included, no other coins from that category will be selected. Also if a category is in the top 10 but it’s winner doesn’t meet requirements (for example not on Ethereum), we then don’t include that category.
CWI uses equal weight for each category so each component is fixed at 10%. The general goal of an equal-weighted index is to represent the performance of its constituents in equal proportion to one another. This way you get broad coverage and diversification across the spectrum of crypto. You also get a good balance between higher returns from relatively riskier/newer categories as well as some protection from relatively stabler/older categories.
Rebalancing is done on a monthly basis in three steps and over two phases. The three steps are as follows:
- Swapping winners. For a given category, if a new token becomes consistently larger than an incumbent, then the incumbent would be replaced by the new challenger. The average market cap of the challenger for the last 30 days, would have to be greater than 10% for this change to take effect. This is implemented to ensure that a new winner can definitely be crowned and to prevent excessive back and forth trading.
- Swapping categories. This would only happen if a new category became bigger and more important than the existing ones (per criteria above). In this case, the new category (and its winner) would replace the least important one. Similar to above, the new category winner must have a greater than 10% average market cap over the last 30 days, to replace the incumbent.
- Balancing to 10%. This would happen every month and is to keep the equal-weighted index intact and fixed to 10%.
Similar to other Indexes at Index Coop, we propose to implement a two-step process for rebalancing. The first phase is the determination phase and happens in the 3rd week of the month. This is when the changes for the next reconstitution are determined and communicated. The second phase is the reconstitution phase and happens in the first week of the month. This is when the changes are actually implemented, including the rebalancing to 10% and any category or winner swaps.
- Long term exposure to the best-in-class investments
- Set and forget, 1 click exposure to market leaders
- Low cost to hold with targeted diversification
- First and only index with a horizontal cross-thematic approach
- Broad investor spectrum; appeals to beginners, advanced and institutional investors + strong potential for DAOtreasury diversification
- Very Large Total Addressable Market (TAM)
Size of opportunity
The current global crypto market consists of ~7,000 listed crypto assets with a total market cap of $~2.3T.
~60% of this total value is captured across just 10 of the assets under consideration for CWI. This percentage becomes higher still once stablecoins and “wrapped” coins are deducted from the initial total. With this skew of capital accruing to just these assets, a proxy such as CWI could become a huge magnet for users looking for convenient exposure.
The real value add from CWI however is in the construction. It is optimized for upside reward by singling out only the most successful market themes and subsequent dominant investments. Filters out the laggards, all whilst maintaining balanced diversification.
In short, CWI is diversified yet targeted. This approach is beneficial to a wide range of investors as mentioned above.
One comparison we can draw from traditional finance would be the FAANG+ (Facebook, Apple, Amazon, Netflix & Google) ETF’s. Just these 5 stocks worth ~$6T makeup around 15-20% of the entire SP500 index and have significantly outperformed it over the last 5 years. Over certain time periods, they have been responsible for almost 40% of the index’s gains.
According to Investopedia’s “Best FANG ETFs for Q2 2021,” just the top 3 FAANG+ focused ETF’s have combined AUM’s of $290b. Not all of this AUM is attributed just to these 5, however, they are heavily concentrated in them. $290b equals 4.8% of the $6T combined market caps of the FAANG stocks under the management of just these 3 ETFs.
CWI capturing just 0.01% of the value of the constituents would equal an AUM of $~130-150M
Or $1.3-1.5B at 0.1%
A streaming fee of 95bps would net $1.2-1.4M or $12.4-14.3M pa respectively.
CWI is different from any other product within the crypto ecosystem. CWI is both broad i.e. covers everything from blue chips (BTC, ETH) to DEFI (UNI, AAVE), and NFT platforms (CHZ, ENJ) to infrastructure (LINK, FIL), whilst also being targeted to the dominant tokens. CWI is not simply a ‘top 10’ of crypto assets index, it covers all major market segments. It is different from existing IndexCoop products, and IndexCoop competitor products such as CC10, BCP, TCAP, etc. It is also different from any of ETF contructions in the traditional finance space too.
Next, we consider the overlap between existing Index Coop products. In perspective, we believe they are not significant.
DPI constituents: 14 + CWI constituents: 10 = Total 24. Overlap: 3 UNI, SNX + AAVE = 13%
MVI constituents: 15 + CWI constituents: 10 = Total 25. Overlap: 1 ENJ = 4%
BED constituents: 16 + CWI constituents: 10 = Total 26. Overlap: 5 BTC, ETH, UNI, SNX & AAVE = 19%
FLI constituents: 1 + CWI constituents: 10 = Total 11. Overlap: 1 ETH = 9%
** does not factor in weightings
On-chain liquidity analysis
CWI by definition contains the category winners i.e. large cap assets, all of which have deep liquidity on major DEX’s. The components are highly likely to be in the top 100, if not the top 50 list of largest coins by market cap. However, we may face liquidity issues with wrapped or synthetic versions of tokens so will have to consider that carefully. (see notes under proposed composition above)
We propose a 0.95% Streaming fee with an 80/20 split to Index Coop (0.76bps to Index Coop, 0.19bps to meths).
There are currently no predetermined plans for intrinsic productivity. We are aware of the potential for instance to LP the WBTC: ETH part of the portfolio and/or stake ETH, AAVE, etc in order to generate returns and re-invest them back across the portfolio.
We would like to invite the community to provide feedback and expert guidance around this topic.
Author Background and commitment
Index Coop contributors:
@MrMadila Is a “Gold Owl”. He is an active member within IndexCoop leading the Org working call, is involved with the work of the TWG & contributing across the community more generally with Twitter accounts such as Documenting DPI, FLI, MVI, etc. He has 10 years of previous experience in traditional asset management operations.
@Lanks has been involved in crypto for 2 years & has 15 years of experience in traditional finance covering investment banking, wealth management, and more recently is leading new business activities at a fintech startup. He has recently been contributing to Index Coop’s BD team with input on custodial solutions and institutional sales.
@cacho has been a full-time investor since 2012 mostly in crypto, with 20 years past experience in tech and startups both in development and product management roles.