Title: Sentiment Optimized Decentralized Assets Index (SODA) -
(ERC 20 flavor)
Author: Jeff Brewer
Created: 23rd May 2021
Summary:
As the Wall Street adage goes, you must be greedy when everyone else is fearful, and you must be fearful when everyone else is greedy. The language used in news cycles can activate different emotional regions of the brain and bias investor decisions away from their mathematically optimal (rational) decision.
At its core, the SODA index seeks to be a low-risk, low-hassle way to have a disciplined approach to investing in crypto while staying sane.
Motivation
The crypto market is largely dominated by retail investors, or individual investors, who are lacking in financial training and general trading experience. This, in part, is why the crypto asset market is extremely volatile and sentiment-driven.
This volatility represents a valuable opportunity that we can unlock for investors @IndexCoop.
Properly managing a diversified portfolio in defi is complex and expensive in both time and money. In the case of Crypto Investing, small accounts are more worried about gas costs, added complexity, and the time needed to manage such products. As a result, most small accounts place concentrated bets and hope nothing goes wrong, which can leave investors feeling like an emotional wreck when volatility increases.
SODA allows all investors to benefit from a systematic and disciplined approach to investing without having to try and time the market, regardless of the size of their account. Diversified target allocations are selected each month, then enhanced by tactical rebalancing weekly.
Assessing Liquidity Risk & Selection Criteria:
Crypto Selection - Using data on and off-chain, I have screeners already built that rank all ERC-20’s for On-Chain Liquidity, as well as our minimum selection criteria each MONTH. I will post the Monthly Top 20 Ranking Results on my blog.
May 2021 - ERC20 Top 20 Ranking
Stable Coin Component: The SODA index will maintain a stable coin position that also fluctuates Counter to prevailing Sentiment. Stable coins we prefer are over collateralized, audited USD-themed products until the market matures and other products meet the inclusion criteria.
The value drivers for Monthly Crypto Asset Selection include but are not limited to :
DEX Liquidity: Over 1 million in Liquidity on Uniswap for each crypto project we consider.
Market Cap: We rank all ERC-20s and award a point for being in the top half of all ERC20s in terms of market cap.
Real 10 exchange- 24 Hr Volume: - it is suspected that a large percentage of reported global trade volume is due to wash-trading or other practices that are not representative of well-functioning markets. The ‘Real 10 Volume’ metric omits volume from exchanges that don’t show consistent patterns of well-functioning markets. We award a point for being in the top half in terms of Real 24 hr Vol.
Sharpe Ratio: We rank all ERC-20s by 1 yr realized Sharpe Ratio, and award a point for being in the top half.
Narrative, Business Model, and Utility: We are not trying to beat the market by picking the best narrative or business model. But we will reject a ranking based on it being considered a Copy Paste Project, an Unethical Project, a Centralized Project, or a pure meme without utility. I would also remove any projects if their inclusion would create significant overlap with other Index Coop structured Products.
Historical Volatility: We rank all ERC-20s by Historical Volatility, and award a point for being in the bottom half.
Sentiment Based - Asset Allocation
Augmento.AI
How much should we put in Crypto this week?
This is first determined by subtracting the Sentiment reading from 100. If Sentiment is at 50% (stable) we would 50% invested in crypto 50% in stable coins. If Sentiment comes in @ 25, a more fearful sentiment, we would scale into a position of 75% crypto, 25% Stable Coin.
Sample Overall Crypto Allocation, if Fear and greed came in at 44
Inverse Volatility Rebalance Methodology (monthly/weekly):
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Monthly Screen and Rank our ERC 20 Universe to find our constituent list. I will post the Monthly Top 20 Ranking Results on my blog.
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The Asset Allocation decision is next. As determined by 1-( Avg Sentiment%)
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Find each project’s 30-day Historical Volatility Inverse and sum them up to find INV_HV and TOTAL_INV_HV.
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Find unweighted %(INV_HV / TOTAL_INV_HV)
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Multiply that by the recommended Overall Crypto Allocation% to find each project’s Weighted Target Allocation.
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Rebalance
Weekly Sentiment based Rebalance Methodology:
If weekly Absolute (±) Change in Sentiment is < 5 % no rebalance this week.
IFF If weekly Absolute (±) Change in Sentiment is > 5 % … as mentioned above is the next step is to determine overall Crypto Allocation: 1-( Sentiment%).
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Find each project’s 30-day Historical Volatility Inverse and sum them up to find INV_HV and TOTAL_INV_HV.
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Find unweighted %(INV_HV / TOTAL_INV_HV)
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Multiply that by the recommended Overall Crypto Allocation% to find each project’s Weighted Target Allocation.
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Rebalance
*Inverse Volatility-Weighted Target Allocations are shown in the Navy Blue Column on the right.
Size of Opportunity
Despite the rapid expansion of the markets, crypto assets are still in their infancy, The total market value of cryptocurrencies pushed past $2 trillion for the first time, doubling in about two months amid surging institutional demand. Bitcoin, the largest of the more than 6,600 coins tracked by CoinGecko, is worth more than $1 trillion alone after its price more than doubled in 2021 to $58,858. The five next biggest coins – Ether, Binance Coin, Polkadot, Tether, and Cardano – have a combined value of about $422 billion.
When compared to other asset classes, Crypto Assets represent only a fraction of the world’s money, but when taking growth into account, the future looks very bright.
Author Background
Jeff Brewer
Jeff_Brewski#3125 on discord
brewer.jeff14@gmail.com
- Previously licensed Series 7, 63, 66, 3, 34 securities professional (Finra CRD# 5152809) who believes index investing is another way to bring about financial inclusion in the long run.
- Fee split: Up to Index Coop
REFERENCES
www.augmento.ai
Overway, Curt. “Rebalancing Multi-Asset Portfolios.” Natixis Advisors, L.P. Whitepaper, 2015. 2 DALBAR, Inc. “Quantitative Analysis of Investor Behavior 2008.” 3 Masters, Seth J. “Rebalancing.” Journal of Portfolio Management, Spring 2003.
