The following description describes a baseline index offering that can be built in accordance to the timeline specified in the agreement schedules.
Any significant changes to the baseline may result in extending the timeline and resource requirement.
Consider a client wanting to build an index of stablecoins, blockchain protocol coins, and lending protocol tokens.
A set of coins and tokens that fit this criteria consist of:
USDC, BTC, ETH, AAVE, MAKER, ADA, TRX, COMPOUND, DAI, USDT
The client also wants to ensure that the list of tokens are then filtered by certain conditions. For example the client wants to make sure that The set consists of coins and tokens with over a $3 billion dollar market capitalization.
This means the set above now becomes:
USDC, BTC, ETH, AAVE, ADA, TRX, USDT
Finally the client wants to make sure that the 24hr traded volume for each coin and token in the set is greater than $3 billion.
So finally the set becomes:
BTC,ETH,ADA,TRX,USDT
Filtering is applied in the pre and post calculation of the index Constituent and the Index itself.
Index Eligibility Criteria
Inputted by user to determine which constituents should be added to index
Index Constituent Calculation: Receives input from the ‘Eligibility Criteria’ and combines it with data from the APEX system. Then assigns a ‘1’ or ‘0’ value to each potential constituent depending on whether they meet the ‘Eligibility Criteria’, effectively filtering out those that are unwanted in the ensuing weighting.
Index Constituent Weighting: Receives input from the ‘Constituent Calculation’, effectively filtering out those with a ‘0’ value by multiplying their weightings by 0. This constituent weighting could then be made bespoke to the customer.
For example, a customer wants a weighting based on ‘market cap’. The weighting for constituent x would be:
βx = 1 * M
Where:
βx is the weighting of the constituent
1 is the value assigned to the constituent in the ‘Constituent Calculation’
M is the market cap of that constituent
Index Score Calculation: This is the output of the index. It will be one number. It is calculated by:
Y = β1x1 + β2x2 + β3x3 + …
Where:
Y is the Final Index Price
βn is constituent weighting for x
xn is the constituent
This hypothetical portfolio of cryptocurrencies represents the market as a whole. However, indices can be created for subsections of the market (e.g. emerging markets index, security coins index, Ethereum-based index, Exchange coin index).
This index can act as a potential basis for a myriad of instruments/securities including an index ETF and tradable mutual funds.
This particular index Helps reduce volatility, generated by individual risky cryptocurrencies, by balancing them with others. It leverages the strength of the APEX Infrastructure advanced analytics, research and market knowledge to effectively and efficiently track markets associated with constituent cryptocurrencies
.
Baseline Customisable Eligibility Criteria & Rebalancing Period
An eligibility criteria can be used to determine index constituents. This criteria is applied each time the Index re-balances.
The eligibility criteria can vary over time so it needs to be customisable.
A baseline eligibility criteria requires an index constituent to have :
An average market cap over the last 30 days (e.g. > $1Bn)
A daily trading turnover over last 30 days (e.g. > $5m)
Liquidity
Trading pairs (e.g. must be tradable with USD)
Number of pricing sources that meet due diligence standards (e.g. must be available to trade on trusted exchanges)
Must be free-floating (not tied to any other asset)
Must have met above conditions for three rebalancing periods
Rebalancing periods include altering the weighting of certain components so that they do not violate the floor or cap rules (i.e. do not constitute <1% or >30% of index)
Respectable firm/team
List of baseline criteria for eligibility
Market Cap -(Numerical)
Turnover (spot/deriv) -(Numerical)
Liquidity -(Categorical, Bucketed)
Number of Trading Pairs -(Numerical)
Number of Pricing Sources -(Numerical)
Developer Commits(?) -(Numerical)
Currency/Stablecoin/Smart Contract Platform -(Categorical)
Volatility -(Numerical)
Own blockchain -(Boolean)
Minimising the impact of potential price manipulation on the index
Cryptocurrency price manipulation has been reported by independent sources so it is known to exist. The eligibility criteria can take qualitative factors into account to minimise the impact of potential price manipulation. The criteria may decide to only include Digital Assets that have been:
vetted by 3rd party auditors.
Listed on 3 or more crypto exchanges that have FIAT banking licenses
If an exchange has a FIAT banking license, it implies that it is subject to regulatory scrutiny
Aggregate the Digital Asset markets price across exchanges that have banking licenses
If the index price calculation utilises orderbook analytics, it can use the APEX Digital Asset spoof orders detector as a potential discounting factor.
Baseline Index Price Calculation Methodology
Select a number of constituents required for the index, this number should then remain constant.
Decide weighting of each constituent
This can be done by using free-float market capitalization based on circulating supply.
Weight caps and floors are also applied so as not to overweight or underweight.
If constituent exceeds cap, weight is reduced and excess weight redistributed to across all other constituents in proportion to their weight.
If the constituent is below floor, it will be rounded up with the increase removed from the balance of the constituents below the cap proportional to their weights.
Weights are calculated at each rebalancing.
The volume of a currency that is in actual circulation, could be used rather than just being hodl-ed, as a way of differentiating ourselves? For example, if 15% of a cryptocurrency is being ‘moved around’ [definition pending] then a ‘float factor’ of 0.15 is applied to the market capitalisation before weighting is applied. Note: ‘float-adjusted weighting’)
Decide on an initial index value (e.g. $10,000,000)
Calculated as
IV (0)= Initial value of index on trading day t=0
X (i,0)= Number of units of component i in index after cap and floor rules applied
P (i,0) = Price of component i in the index on trading day t=0
n = Number of components in the index
The index price is then calculated:
where
IP(s)= Current index price at time s
D(t)= Index Divisor
The index divisor (D(t) above) is a number used to set the index price at a base level (e.g. 2,000). If the market cap changes significantly because of an event such as a hard fork, deletion or alteration of a constituent, then a new index divisor will be calculated so that the index price remains constant.