GWEI. ETH-20. Ape. Chad YOLO. To those who have invested in crypto’s in the past year, this is common terminology. To all those interested in investing in crypto, things only get more complicated from there.
Regardless of your level of past exposure to cryptocurrencies, you know how these coins can fluctuate. From 2017’s BTC rally from $900 to $20,000, to BTCs following 65% crash from January 6th to February 6th the following year – volatility, massive returns, and massive corrections are all what investors expect, but not what all investors want. In 2020, the largest single day drawdown in the S&P500 was -5.7%. For Ethereum, it was -43.1%. The largest single day gain in the S&P500 was 5.5%, while it was 18.9% for Ethereum. That’s a range of 11.2% for the S&P500, and 62.0% for Ethereum. A difficult range to stomach for those just trying to accustomed to the cryptocurrency space.
This is the fundamental reason that an Index should be created that simultaneously exposes investors to the upside of cryptocurrencies, while maintaining a more manageable level of volatility. In particular, I’m proposing the design, development of, and release of a blended index that does just that: BOND Index.
The BOND Index would target a wide range of investors, though their common features would be a desire for cryptocurrency exposure with reduced volatility. This could be beginning investors, who want to get into cryptocurrencies as soon as possible without diving in completely headfirst, to potential investors with high net-worth that would want to have a cryptocurrency index with a defined risk (that isn’t 100%).
BOND would be an Index with a pre-determined allocation of stablecoins (USDC and DAI) that are then vaulted from the inception date for a period of one year. At the time of writing, the USDC and DAI yEARN vault collect 16% and 17% APY, respectively. The remaining portion of the fund would be allocated among other “blue-chip” cryptocurrencies, such as Ethereum, Uni, and AAVE. The BOND Index token would be tradeable on the open market for the duration that was pre-determined. Once that pre-determined lockup date arrives, the stablecoins will be unvaulted, the cryptocurrencies sold, and the total value of the BOND Index at that date would then be re-allocated to all token holders, and the BOND Index would then be replaced by another BOND Index that could have the same, or slightly altered, allocations and cryptocurrencies, but with a new future date.
Through the duration of the BOND Index, gains from the cryptocurrency portion of the ETF could be reallocated to the stablecoin vault to “lock-in” profits for investors. In turn, this would prevent the BOND Index from becoming heavily weighted towards cryptocurrencies and, thus, prevent BOND from becoming more volatile. This reallocation can be determined by the cryptocurrency portion becoming more than X% of the total Index, or done each quarter, whichever occurs first.
For the sake of hypothetical performance, let’s assume that, at the start of 2020, 50% of BOND was invested in yEARN’s DAI vault, while the other 50% was invested in a mix of cryptocurrencies that tracked Ethereum’s performance. In 2020, the BOND ETF, assuming there was no reallocation and based on a DAI APY of 16% and the average daily performance of Ethereum in 2020, would end up 246%. Ethereum’s performance in the same amount of time was 477%, with the S&P ending the year at ~15%. The maximum drawdown of the BOND Index in the same time would be -21%; a high number, without a doubt, but significantly easier to stomach than watching nearly half your investment get wiped out.
Of course, assuming there were no reallocations, the cryptocurrency portion of the BOND Index would end up representing ~83% of the entire BOND Index. This would, of course, essentially defeat the purpose of BOND. Based on the average rate of growth of Ethereum in 2020 and an APY of DAI of 16%, BOND would end 1H’2020 with ~70% weighted towards cryptocurrencies. Let’s say this portion was reallocated back into the DAI vault (to earn 16%) in a manner that would then rebalance the portfolio to 50% vaulted stable coins and 50% cryptocurrencies. The result? BOND would end the year up 155%, outperforming the yDAI Vault and S&P500 by a factor of nearly 10x in 2020.
One of the most enticing features of BOND to the targeted investment profile would be a defined risk from the time of investment. Assuming 50% of the BOND Index was vaulted at a 16% APY then, mathematically, the maximum loss would be 42% after one year. Of course, this would require the entire cryptocurrency portion to go to zero, which is incredibly unlikely on its own, though a maximum loss of 42% is all but guaranteed to attract investors that aren’t willing to risk a maximum loss of 100%.
Additional BOND Indexes
Bond would be built in a way that would allow multiple BOND’s to be on the market at any one time, all with their own respective lock-up dates. For example, the first BOND Index could be BOND April 2022 Index. It would be released on April 1st, 2020 and the vaulted stablecoins would be locked up until April, 2022, at which point the entire value of the BOND April 2022 Index would be converted to DAI and reallocated to BOND April 2022 holders. While BOND April 2022 is trading, a new BOND Index, let’s say July 2022, could be released at this time. This would allow investors to provide capital at the inception of these funds, which would be set at 50% in July, 2021, as opposed to purchasing the token of BOND April 2022, which would, presumably, be heavier weighted towards crypto by July, 2021.
BOND Index has the potential to be the only Index in the cryptocurrency market today that has a defined risk, one that is less than 50%. It would entice cautious / skeptical investors, those new to the cryptocurrency world, and, potentially, high-worth clients to begin allocating their own capital into the space. Once they become comfortable with BOND, and the rest of the cryptocurrency space, those same investors would likely begin to start purchasing tokens of other NDX Indices, such as CC10 or DeFi5. They would be shielded from the massive swings of the cryptocurrency market, while still being able to appreciate the gains to come from cryptocurrency. Lastly, if an investor decides that they’re ready to take on more risk than BOND has to offer, they can simply swap their BOND token for either their own mix of cryptocurrencies or, ideally, new Indexed Finance ETFs.