The Future of the Index

Perspectives on Crypto Asset Indexation and On-Chain Asset Management

By   Daniel Masters 30th November 2020

CoinShares recently submitted a TokenSets Index Improvement Proposal to add a new index strategy to TokenSets, which is a "lite" version of the CoinShares Gold and Crypto Assets Index (CGCI). Our Chairman, Danny Masters, shares his thoughts on why on-chain indices are critical to ecosystem growth, and how asset management strategies can be implemented in new and novel ways using the innovations introduced by DeFi, or decentralized finance.

A Brief Primer on Indexation

Indexation is a staple of mainstream finance. Charles Dow was the first person to contemplate indexation in 1884, an exercise which, twelve years later, led to the publication of what is now known as the Dow Jones Idustrial Average. Since those early days the galaxy of indices and financial products that reference those indices has grown very large. The Wall Street Journal recently estimated that equity focussed indices make up 14% of the US stock market.

In the commodities space, the Goldman Sach Commodity Index (GSCI) was the gateway for Institutional investors to enter commodity trading in the early 2000’s. Following on from 15 years of organic growth in trading activity starting with the deregulation of the price of oil in the mid ‘80s, it was that induction of institutional investors that drove commodity prices to their cycle highs in 2007.

Crypto Asset Indexation

Crypto assets require an altered approach to that of the GSCI and other commodity indices. Unlike commodities, crypto assets exhibit strong pairwise correlation. This means that in a downturn investors get little protection from the index constituents moving in different directions. This in turn leads to drawdowns in value that are too large for institutional investors to bear.

The CoinShares Gold and Crypto Asset Index seeks to mitigate the market risks as described, while preserving as much as possible the upside return. The technique, as described at length in the documentation, draws on an established risk management technique known as Shannon’s Demon.

The result is an index that rebalances between a basket of crypto assets and a non-volatile asset, gold.

The CGCI is an investable index, meaning that the price performance of the index can be replicated with financial instruments. Typical examples of such instruments could include futures contracts, ETP’s, Total Return Swaps and Collateralized Notes.

What makes replication unique however in this case is that the index can be replicated purely digitally. This means that all index components can be held closely by investors, without the necessity for complex and cumbersome legal structures as is common with other instruments. The experienced investor and crypto enthusiast could hold keys directly, or entrust to one of the new breed of digital depositories and custodians like Komainu.

What CoinShares is discovering is that it is not just crypto assets that are attracting institutional investor interest, but also this new, self sovereign, way of doing business.

Adding Gold in the Index via DGLD

The CGCI is unique in that its largest asset allocation is to gold, not crypto, in the form of DGLD. DGLD is a pioneer digital asset - tokenised ownership rights to gold, allocated to individuals, vaulted in Switzerland and regulated under the FINMA framework. Gold lends itself to tokenisation through its special treatment under law as a quasi-currency. Gold is also a close cousin to crypto, where crypto is the ultimate digital bearer asset and gold the ultimate physical bearer asset. DGLD brings the best of both together.

The Future of Asset Management

According to DeFi Pulse, the total value locked in DeFi protocols is nearly $13B, but today, little of that is in asset management protocols. After building our XBT Provider line of ETPs to over $1B in AUM, our team at CoinShares see a clear path to more trusted, transparent on-chain asset management strategies attracting more investment capital.

Any new asset management environment scales slowly at first, and then fast. Again, our experiences from the early days in commodities investing showed evidence of this. As late as the mid ‘90’s commodities were not even considered an “asset class”. However as the investment thesis propagated and instruments became available this became a reality. We see Crypto Asset investing, still, as very early stage. The typical investor is him/herself young. What is clear is the days of “calling your broker” are over and replaced by execution only platforms and apps. The next wave in our opinion is on-chain asset management. This has already started and, with some popular yield-farming plays has typically been a highly focussed approach. As asset classes mature, and investors think more about exposure to the class rather than picking winners within it, so indexation becomes more prevalent. This is our projected path forward.


The information contained in this document is for general information only.Nothing in this document should be interpreted as constituting an offer of (or any solicitation in connection with) any investment products or services by any member of the CoinShares Group where it may be illegal to do so. Access to any investment products or services of the CoinShares Group is in all cases subject to the applicable laws and regulations relating thereto.

This document is directed at professional and institutional investors. Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. The CGCI was launched on 28 April 2020. Figures prior to this date have been derived by applying the methodology as at that date. Historical performance is not an indication of future performance and investments may go up and down in value.You cannot invest directly in an index. Fees and expenses have not been included.

Although produced with reasonable care and skill, no representation should be taken as having been given that this document is an exhaustive analysis of all of the considerations which its subject-matter may give rise to. This document fairly represents the opinions and sentiments of CoinShares, as at the date of its issuance but it should be noted that such opinions and sentiments may be revised from time to time, for example in light of experience and further developments, and this document may not necessarily be updated to reflect the same.

The information presented in this document has been developed internally and / or obtained from sources believed to be reliable; however, CoinShares does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions and other information contained in this document are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Third party data providers make no warranties or representation of any kind in relation to the use of any of their data in this document. CoinShares does not accept any liability whatsoever for any direct, indirect or consequential loss arising from any use of this document or its contents.

Any forward-looking statements speak only as of the date they are made, and CoinShares assumes no duty to, and does not undertake, to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Nothing within this document constitutes (or should be construed as being) investment, legal, tax or other advice.This document should not be used as the basis for any investment decision(s) which a reader thereof may be considering. Any potential investor in digital assets, even if experienced and affluent, is strongly recommended to seek independent financial advice upon the merits of the same in the context of their own unique circumstances.

CoinShares Capital Markets (UK) Limited is an appointed representative of Strata Global Ltd. which is authorised and regulated by the Financial Conduct Authority (FRN 563834). The address of CoinShares Capital Markets (UK) Limited is Octagon Point, 5 Cheapside, St. Paul’s, London, EC2V 6AA.

The CoinShares Astronaut is a trademark and service mark of CoinShares (Holdings) Limited.

Copyright © 2020 CoinShares


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