Fund Description: Blue-Chip Index Fund

https://genesis.vision/manager/funds/jl-indexfive

Top Crypto Volume Weighted Index Fund.

For investors who identify with a Moderately Conservative risk appetite in the cryptocurrency context (where Conservative = 100% BTC).

Exposure is in the biggest cryptos weighted by global $USD-denominated 90d exchange volume + 1% GVT to support the platform.

Excludes stablecoins.
This is constructed as a basic 'vanilla' crypto fund, founded on the principle of the index fund which was famously pioneered and applied by John Bogle beginning in 1975. This index fund uses trading volume as the metric for determining asset weightings. See [1] below for the rationale for index funds. See [2] below for the rationale for trading volume as the key metric.

[1]

The perceived value of an index fund strategy stems from a certain hypothesis within portfolio theory known as the Efficient Market Hypothesis. This hypothesis argues that if market participants are all competing with a common goal of out-performing the average market rate of return, that competition is effective to the point that the exercise becomes a zero-sum game i.e., no one can consistently beat the market over a long enough period of time. Therefore, rather than expend significant time and resources into market research and trading desks, better simply to construct a portfolio that passively tracks the general market and pass the cost savings onto the investor.

The concept of the index fund is perhaps most familiar to retail investors in the equities context, although equivalents also exist in other markets, e.g. currency ETFs in forex markets, and now in crypto.

Index funds were among the very first funds established on GV that had a rationale behind them that was not purely speculative in nature. They represent what is perceived to be a more conservative and disciplined approach to cryptocurrency investing, compared to what can often be perceived as highly speculative and undisciplined trading between BTC and illiquid altcoins.

Index funds in the equities context usually represent taking a long position on the performance of the market generally, with the intent of reaping market returns. This same philosophy can also apply in the crypto space, and has been applied for this fund.

USDT is excluded because taking a position in USDT (or any other fiat-denominated stablecoin) theoretically represents a short position in the crypto market, which is inconsistent with the philosophy of the fund. USDT multicurrency option within GV is what investors should use to take an effective short position in the market, or otherwise transition into capital preservation mode.

At the time of writing, the trading volume represented by the assets in this fund comprises approximately 60% of total crypto trading volume [adjustments to the indexation model now mean that this fund should be consistently covering somewhere between 70-80% of total trading volume /edit]. Thus this index fund serves effectively as a proxy for the activity of the market as a whole, whilst avoiding the liquidity risk inherent in coins with lower volumes.

[2]

Amongst GV and other crypto index fund offerings, there is variance with regard to the methods used to select assets and assign weightings, though most use market cap as the key metric. Some funds simply identify top ranked assets by market cap and apply weightings that have more to do with the fund manager's discretion. Others apply weightings based on relative market cap. Either way, market cap more often than not is used to determine the ranking of cryptos, which is perhaps largely driven by the highly speculative nature of the market which is greatly focussed upon price.

But there is at least one major concern with this methodology. Since market cap is a function of [circulating supply x spot price], this can lead to the market cap valuation of a given crypto being potentially deceptive with regard to its real world usage, utility, and implied trading volume in the mind of the investor. So for example, a single purchase of a coin for $1 which has a 1 trillion coin supply will imply a market capitalization of $1 trillion with a volume of $1. While an extreme example, this demonstrates one pitfall of the market cap metric when determining asset allocations for an index fund - the potential for significant price slippage occurring on illiquid assets i.e. not being able to get in and out of the fund at the prices you want because trading volumes are so low.

Cryptos are unique in that they bear characteristics of both equities and currencies and yet are a genuinely new and unique asset class; they are popularly valued and ranked based on market capitalization like an equity, and yet can also be measured in terms of trading volume since they act as mediums of exchange like a currency.

Therefore, volume is an alternative viable metric for weighting cryptos within an index fund, and volume is the metric used for this index fund. Volume is acknowledged to be a flawed metric in this context also, given that many exchanges have been reported to boost their trading volumes by way of market making and wash trading. However for the sake of minimising price slippage on entries and exits from the fund, far better that the volume is at least available, even if the volume itself does not originate from entirely organic sources. Thus volume is a better metric than market cap as far as setting weightings are concerned.

JL

This blog is not financial advice. This is an independent blog. Please do your own research. You are responsible for your own investment decisions. The views and opinions expressed in this article are those of the author(s), and do not necessarily reflect the views and opinions of Genesis Vision or its affiliates.