this is an idea I’ve been playing with for a while now, and I think that now is as good a time as any to share it.
Index Crypto Portfolio (ICP) - A Fund Suggestion
Proposed: 25th January 2021
The proposed index is a fairly simple product line extension from $DPI and is intended as a diversified investment for those who are not heavily involved in DeFi.
The structure would be:
- 50% ETH
- 15% wBTC
- 15% DPI
- 15% cDAI
- 5% Link
- Rebalanced monthly
Core value proposition - customer
- “The only crypto exposure I need”
- Buy and forget, with tax efficient rebalancing
- Very low cost to hold
Core value proposition - INDEXcoop
- Obvious extension of DPI
- Built on v2 Set Protocol contracts as a long term passive product
- We farm he underlying tokens for additional coop income
- $ETH is really the core of crypto and the future of DeFi, so being focused on ETH makes sense for any initial position.
- $BTC is the largest cap with room to expand into CeFi. Some exposure is essential, but a straight market cap match of 60% seems pointless. Having a good chunk in BTC with monthly rebalances captures some of the benefit of the volatility vs ETH.
- $DPI DeFi is growing and a carefully curated set of projects has massive potential, and use of monthly reblances captures the volatility.
- cDAI gives the portfolio a way to capture crypto pumps and buy the dips from the other crypto assets. Use of cDAI provides some income compared to a stable coin.
- $Link is part of the crypto and DeFi infrastructure and a key sector going forward. Its price movements are not highly correlated to ETH / BTC so the monthly rebalance exploits this.
Back test charts
There is not a lot of DeFi data to back test, so I’ve looked at a back test using ETH as a proxy for DPI:
|% Components for back test||ICP||Back test|
|cDAI (2% pa)||15||15|
For the backtest calcs, I’ve assumed that cDAI would capture 2% interests pa on an ongoing basis. These are the individual token values when starting qith $10,000 of each on the 1st Janauary 2018:
Starting from 1st Jan 2018, I’ve calculated the value of a $10,000 portfolio with and without monthly reblances. Then repeated the calculations at 3 monthly intervals (I can do monthly, but the charts would look a mess)
65:15:15:5 backtest 2018 to 2021
The key observation for me is that the rebalance (red or green) is better than the corresponding hold (Blue or yellow) over the longer time periods.
I think the key observation is that monthly rebalancing, with Link in the mix, is rocket fuel under the conditions seen over the last 3 years. The following shows the improvement due to the rebalancing.
Obviously this is cherry picking a portfolio based on past performance. No one could have predicted that Link would do what it has done. The question is will it be correlated to the other components going forward.
If we look at the last 4 months, it doesn’t look so good (because we would be selling BTC and ETH as they pump).
If we include DPI at the 15% weight and reduce ETH to 50%, then the rebalance becomes loss making as we sell more ETH for DPI. (1st Feb data coming soon)
Looking at the correlations for monthly episodes over different time periods shows:
Using sDEFi, as it has a longer history, as an approximate proxy for $DPI (Note, 5 data points is likely too short for a robust correlation calculation):
My instinct would be to launch with, and maintain, very low fees and basically destroy any scope for others to undercut us. I would also include issue and redemption fees. I understand that this would decrease the utility for market participants and make the market more inefficient (and most users will likely purchase for a secondary market). However, I think issue and redemption fees will encourage long tern buy and hold.
- 0.12 % Streaming fee
- [underlying DPI streaming fee 0.95% x 15% DPI = 0.1425%]
- 0.2 % Issue fee
- 0.2 % Redemption fee
The coop would capture and retain any and all income from farming the underlying tokens (and this could include the COMP issued for cDAI holders). As the fund is likely to be held by long term holders, the coop can make a judgement call and farm some of the underlying tokens (with or without staking / lock up).
Notes on construction
- This is pretty close to my current portfolio so I’m obviously biased (I have less stable coins in crypto and I don’t rebalance every month)
- I’ve looked at a few other mixes, but this one seems to hit a sweet spot. (and I like the symmetry)
- There is not much back test data for DeFi, so it’s basically an assumption that DeFi will grow and not be a perfect correlation for ETH.
- Link appears to add some uncorrelated return (and we recruit some Link Marines)
- We could use DAI as the stable coin, but I think there is enough liquidity in cDAI / others to allow easy issuance / redemption, and it makes it more attractive to holders.
- We could replace the cDAI with others (aDAI, yDAI…), but I’m not sure there is an easy way to identify the best candidate. CDAI certainly has the liquidity and brand awareness.
- I considered going 5% cDAI, 5% aDAI and 5% yDAI (purely to keep it within DPI protocols). It would diversify the interest rate a little, but adds more transactions to issue and redemption.
- The ETH:ICP AMM pair are unlikely to diverge in the short term, so it should be a low risk pool to LP (and so cheep to incentivise)
- Compared to DPI, I would think there would be less of a drive to integrate into DeFi, but CEX integration would be fantastic.
Potential methodology changes we could make in the future
- Change stable coin (yUSD, Rari….)
- Replace (part of the) ETH with an income generating ETH (based on staking / yETH etc)
- Replace (part of the) BTC with an income generating BTC.
- Swap wBTC for a different ERC20 BTC.
- Reduce BTC (if ETH flips BTC)
- Remove Link and replace with DPI (Say if Link market cap < 1% of ETH market cap)
Size of opportunity: Given the composition, this fund is unlikely to attract DeFi natives who likelty to have exposure to $ETH and $BTC. However, there is a market to large institutions / DAOs who want a crypto treasury that they can buy and hold long term. The main market for this fund would be people new to crypto investing but who understand the benefits of holding some uncorrelated assets including stable coins. I would expect slow growth, but that it would exceed $50 M in a couple of years.
I note that after 5 months a significant proportion of the $DPI AUV is actually held in smaller wallets, so even with high gas prices some users are accumulating small positions to gain passive exposure to DeFi.
As we may expect a slow uptake, we could delay the launch until the market matures. However, we would
loose the first mover advantage.
Liquidity commitment: I can provide liquidity, however this would be limited to ~$100,000 USD. In proposing this fund I would rely on the coop to provide liquidity mining to help establish the product and liquidity.
Differentiation: There is obviously some overlap with existing DPI holders, however, it is expected the most DPI holders would also hold ETH and or BTC, and so this product is expected to grow $DPI AUV.
There is also a significant overlay with the planned CGCI-LV fund as both contain significant amounts of $ETH and $wBTC. However, the fixed weights and replacing $wDGLD with $DPI, $LINK and $cDAI makes this a different proposition.
On-chain liquidity analysis: All assets are available in DEX’s in large liquidity.
Methodology: The methodology is fairly rigid. There is scope for substitution or changing the weights but this is expected to be infrequent.
Author background and commitment: I have been investing in crypto since 2013, and heavily involved in INDEXcoop since it was founded. As an Individual proposing the index fund, I would need significant resources from the coop to launch and maintain the product.
Fee split: I would expect that the coop would retain the majority of the streaming fees and all the issue, redemption and intrinsic productivity income. Obviously the underlying $DPI would also generate fees for both DeFi Pulse and INDEXcoop.