YIP: yamHOUSE purchase of Coinshares Gold and Cryptoassets Index CGI
Title: yamHOUSE purchase of Coinshares Gold and Cryptoassets Index CGI
Links to additional documentation for CGI:
yamHOUSE purchase of Coinshares Gold and Cryptoassets Index CGI
yamHOUSE has been funded with yUSD and Krugman is running analysis on potentially the initial purchases of assets for yamHOUSE. This proposal allows Krugman to purchase CGI. CGI index while it seems simple and boring, it is a very big deal. Structured products like CGI with an emphasis on Growth with reduced volatility in traditional finance receives investments in the Billions. This will be an arrow in our quiver of tools to market DAO House to other communities.
The CoinShares Gold and Cryptoassets Index Lite Version (CGCI-LV) is an adaptation of the original EU Benchmark Regulated index launched by the CoinShares Group in 2020 (see here: https://coinshares.com/products-services/index-strategies 30) that only includes ERC-20 tokens in order to be compatible in a tokenized index smart contract.
Since the original CGCI is constructed using physical gold and 5 individual cryptoassets some re-engineering of the initial structure was required, whilst ensuring that the core theory and value proposition was preserved. The CGCI-LV therefore deploys the same theory but instead limits the index to 3 ERC-20 token constituents; a gold stablecoin and 2 cryptoassets.
For the gold basket, wrapped-DGLD (wDGLD) was chosen as the ERC-20 gold stablecoin. For the cryptoasset basket wrapped-bitcoin (wBTC) and wrapped-Ether (wETH) were selected based on being the largest and most established cryptoassets.
Academic research conducted in partnership with Imperial College London found that a pairing of gold and cryptoassets in a way that accounts for their risk contribution delivers a risk-adjusted return profile that is superior to holding gold or cryptoassets alone. The CGCI-LV is designed with the aim of providing diversified exposure to the alternative asset space in a way that yields a superior risk-return profile when compared to holding such assets in isolation while being orthogonal to traditional financial markets. Accordingly, the Index must:
- Be comprised of a small number of liquid, investable constituent assets
- Exhibit a relatively stable composition of asset weights that do not vary dramatically between rebalancing periods, leading to low turnover
- Utilise some means of principled risk control leading to lower volatility
- Be specified in a clear and unambiguous manner to facilitate validation and reproducibility
- Hold constituent assets on a long basis only
- Not make use of leverage.
Two noteworthy characteristics of the returns of non-stablecoin cryptoassets are their high volatility, which brings with it a high level of risk, and their high intraclass correlation, which limits the benefits that can be had by diversifying across multiple cryptoassets. Yet cryptoassets exhibit no correlation with gold, a highly-liquid yet scarce asset which has proved to function as a safe haven during crises affecting traditional financial systems.
Although volatility poses challenges in terms of increased uncertainty, there are also benefits to be had from its proper management through diversification and regular rebalancing (Bouchey et al., 2012, The Journal of Wealth Management. Volatility harvesting: Why does diversifying and rebalancing create portfolio growth?). This is exemplified by the so-called Shannon’s Demon approach in which two, ideally uncorrelated, assets – at least one of which is highly volatile – are periodically rebalanced to maintain an ideal target allocation. The resulting expected growth rate is greater than the arithmetic mean of the individual expected growth rates, while the variance of the returns is less than the mean of the individual variances (Poundstone, 2005. Fortune’s Formula.).
The CGCI-LV is intended to be a low-volatility index that utilises the concept of volatility harvesting through (a) forming a basket of cryptoassets and (b) combining it with gold using weighted-risk contribution as a rebalancing mechanism. By decreasing volatility levels, it seeks to yield superior risk-adjusted returns when compared to a number of alternative strategies, including holding cryptoassets or gold alone. Further, it presents a moderate turnover, which should translate into moderate operating costs.
Size of opportunity
The CGCI has already gained a lot of demand and CoinShares is currently investigating opportunities to deploy the index as an investable benchmark in its passive products business. Additionally, it is anticipated that the CGCI-LV would likely be well received by the native crypto community and is expected to be picked up by CEXs to offer it to their users.