What is the CGCI?
Alternative Asset Index
Low Correlation + Volatility Harvesting
Why Gold + Crypto?
Volatility Weighting + Monthly Rebalancing
The CoinShares Gold and Cryptoassets Index
Diversified Exposure to Alternative Assets
The index methodology maintains a basket of 5 equally-weighted cryptoassets weighted against gold. During each rebalancing date, which occurs monthly, the cryptoasset basket rebalances to include the top 5 eligible market cap weighted cryptocurrencies as of the time of rebalancing.
Meanwhile, the weights between the cryptoasset basket and gold is determined based on a weighted-risk allocation scheme.
We opt for a risk ratio that results to 80% of the total risk emanating from the crypto-basket component (α = 4) and ensures a good level of diversification. This accounts for a proper risk contribution and delivers a risk and return profile that is superior to holding gold or cryptoassets alone.
The index methodology was created from the research and experimentation conducted with Imperial College of London and with the EU registered benchmark administrator, Compass Financial Technologies to ensure a robust and benchmark compliant index.
CGCI vs Bitcoin vs Gold
The CGCI introduces an adapted version of the Shannon’s Demon theory to control and benefit from the high volatility produced by cryptoassets.
The Shannon’s Demon theory is a strategy where two uncorrelated assets -at least one of which is highly volatile (e.g. cryptoassets)- are periodically rebalanced to maintain an ideal weight allocation. Additionally, the theory of Equal Risk Contribution is generalized to allow for weighting according to a desired level of contribution to volatility. We find a crypto–gold weighting based on Weighted Risk Contribution to be historically more effective in terms of Sharpe Ratio than several alternative asset allocation strategies.
The resulting expected growth rate of the CGCI is greater than the individual expected growth rates, while the variance of the returns is less than the individual variances. This strategy is well suited for cryptoassets due to its volatile nature and being an uncorrelated asset class. Gold was chosen on the other hand as an ideal candidate due to being much less volatile and having displayed very low correlation with cryptoassets.
Due to the persistent levels of correlation between cryptoassets, an equally weighted allocation model is employed within the cryptoasset basket. A group of 5 cryptoasset constituents allows for a certain degree of diversification in the cryptoasset market and ensures a strong enough liquidity pool to source the assets from. Furthermore, the monthly rebalancing of the cryptoasset constituents ensures proper tracking of the overall market and allows for replicability.
Gold was chosen due to its low volatility and correlation, high liquidity, and its ability to act as a hedge to traditional financial markets. It is also represented as the diversifying asset to balance cryptoassets and will overall have a higher allocation in the index weighting.
Together, the two baskets are weighted together using a volatility-weighting scheme which ensures that the higher risk asset will have less of an allocation in order to create a diversified exposure and limit the risks.