Cryptocurrency investing is an attractive prospect for investors, seasoned and novice alike, due to the potential for massive gains. However, the process of investing in cryptocurrency is generally complex. Many investors are drawn in by the potential for massive returns – such as Ethereum’s 84,000% gains post-ICO – but must wade through an unfamiliar and often unfriendly market.
Even for those with a background in investing, the cryptosphere presents significant barriers to entry. There are thousands of cryptocurrencies to choose from, with ICOs creating dozens more each month. Blockchain technology & its subsequent assets are not generally intuitive, nor easily understood by the general public. In addition, it can be hard to know how to separate a real product from the hype. Several ICOs are clearly cash grabs, bolstered by hype and promises of massive returns, without a useable product, real world utility or function, nor any intent to deliver.
It is possible for an investor to overcome the paralysis of choice and find blockchain assets that they believe are solid investments, but the process of doing so is its own type of investment: investors take the risk of spending a lot of time researching and observing the market, with the possibility of diminutive gains – or loss – for their efforts.
Enter Crypto20, a blending of traditional investing approaches applied to the realm of cryptocurrency.
Crypto20 Brings Index Funds To The Cryptosphere
Crypto20 is an index fund, wherein token holders are purchasing shares in a pooled portfolio, funded by crowdsale and ICO investors, that contains a constantly shifting position of the top twenty cryptocurrencies by market cap. This allows investors to both overcome the paralysis of choice, as well as other barriers to entry that can cause investors of all stripes to shy away from blockchain asset investing.
The portfolio holds a constantly changing selection of the top twenty cryptocurrencies by market cap, then utilizes a set of algorithms perfected by data science to rebalance the portfolio to maximize gains. By creating an index fund fueled by refined & verified algorithms, Crypto20 has created a portfolio model that aims to offer investors peace of mind.
Why an index fund?
John C. Bogle, creator of the index fund, is quoted as saying, “Don’t look for the needle in the haystack. Just buy the haystack.” This is a simple summation of using an index strategy in a managed fund, known colloquially as an index fund. The most well known index is the Standard & Poor 500, a collection of the top 500 largest US stocks. Within the S&P500, there are a glut of index funds, such as the Vanguard 500, as well as a the Schawb 1000.
Investor’s faith in index funds speaks for itself. In the twelve month period from May 2015 to May 2016, investors put more than $365 Billion USD into index funds, whereas similar managed funds (i.e., mutual funds, hedge funds, and DAAs) had outflows of roughly $308 Billion.
The reasoning behind this is simple: due to the nature of buying a swath of the top performing assets, index funds outperform 92% of managed funds. For the same reason, index funds are more resistant to the volatility of any individual asset, while the inherent diversification follows overall market trends. Also, the ratio of returns to fees is generally superior to comparable managed funds.
Investors are already signaling their excitement for the project. Crypto20’s crowdsale, which ended on October 15th, generated $5 million in funds from over 2000 investors.
Why Crypto20’s model works so well
In addition to the index fund inherently being resistant to market volatility, Crypto20’s portfolio hyperparameters are backed by solid data science. Crypto20 identified three main parameters for designing its portfolio:
- Number of coins: the amount of coins within the portfolio.
- Component cap weighting: how much of the portfolio is taken up by any particular blockchain asset.
- Rebalancing time period: how frequently to adjust the above weighting, i.e., how often the portfolio should schedule changes in positions in any particular currency.
Crypto20 then ran simulations of every combination of these variables using historical market data. After extensive research and machine learning led data analysis, Crypto20 came up with the following model:
- Twenty was decided as the magic number to both maximize returns and prevent overfitting – wherein a particular number may technically work better in simulations on limited data, but won’t generalize as well as the model goes forward on a wider data set.
- Component cap weighting will constantly fluctuate, but will never be higher than 10% of the entire portfolio. A sample weighting can be seen below.
- Weekly rebalancing had the best result in simulations, due to having the best minimal fees to lowest risk ratio.
Here is a sample portfolio based upon historical data:
This portfolio is just a proof of concept utilizing historical data, and is intended to offer an example of what the Crypto20 portfolio may look like.
Their model works exceptionally well, as you can see by the data collected from their simulations. Their whitepaper lays out a detailed analysis of the results from their simulations.
C20, The Crypto20 Token
Crypto20’s portfolio is based upon an Ethereum blockchain smart contract, outlined in their whitepaper, which provides several features:
Optimized rebalancing: The Crypto20 portfolio will adjust the portfolio’s positions on a weekly basis, rebalancing their asset positions – including disposal and acquisition of new assets.
Inherent price floor: The smart contract has an inherent price floor mechanism built in, so that any given asset within the portfolio will not be acquired below a certain exchange value.
Complete transparency: Because the fund is built upon the Ethereum blockchain, investors are granted full transparency of every transaction the portfolio makes. Users can monitor the rebalancing of the portfolio in real time.
Instant liquidization without fees: the smart contract allows any token holder to cash out any portion of their token holdings to ETH, instantly. In so doing, it also skirts the requirements for the types of fees that come with managed funds: no need for exit fees, broker fees, or advice fees. As such, the only fee involved is a low .5% fee annually.
Investors buying into Crypto20’s ERC20 token during their ICO will receive an amount of the Crypto20 token, C20, proportional to the amount of ETH invested. All coins will be generated in proportion to the amount of ETH received, with none being created once the ICO is over.
The ICO runs from October 16th to November 30th, and like most ICOs, is closed to US investors. Visitors to the Crypto20 homepage will be able to monitor investments in the ICO in real time.
Crypto20’s competitive edge
Crypto20 isn’t the only blockchain startup that’s attempting to apply traditional investing approaches to cryptocurrency. There are several competitors that may attract seasoned investors – these include the crypto hedge fund platform, HedgeToken, as well as the Digital Asset Array model offered by ICONOMI. However, there’s a major difference between Crypto20 and its competitors: Crypto20’s model is backed by rigorously tested data science, with each change to the portfolio rendered understandable by the transparency of their algorithms, as outlined in their whitepaper.
Applicable investors can register for the ICO until November 30th, via their registration page.
ICOAlert Interview with founder Daniel Schwartzkopff
CryptoTraders Interview with founder Daniel Schwartzkopff
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
In the interest of full transparency, Cryptocurrency Investing is happy to disclose that some or all members of the team were compensated for the creation of this content. However, we ensure our readers that we only endorse projects and technologies that we fully support and stand behind.