CRYPTO20: The First Tokenized Cryptocurrency Index Fund Daniel SCHWARTZKOPFF, Luke SCHWARTZKOPFF, Raymond BOTHA, Matthew FINLAYSON with Frans CRONJE, on behalf of CRYPTO20 October 15, 2017 PLEASE READ THIS SECTION AND THE SECTIONS You are not eligible and you are not to purchase any AT THE END OF THIS WHITE PAPER ENTITLED C20s in the CRYPTO20 token sale (as referred to in this DISCLAIMER OF LIABILITY, NO REPRESENTATIONS White Paper) if you are a citizen, resident (tax or otherwise) AND WARRANTIES, REPRESENTATIONS AND or green card holder of the United States of America, or WARRANTIES BY YOU, CAUTIONARY NOTE ON a citizen or resident of the Republic of South Africa or FORWARD-LOOKING STATEMENTS, MARKET AND Cayman Islands. INDUSTRY INFORMATION AND NO CONSENT OF OTHER PERSONS, NO ADVICE, NO FURTHER No regulatory authority has examined or approved of any INFORMATION OR UPDATE, RESTRICTIONS ON of the information set out in this White Paper. No such DISTRIBUTION AND DISSEMINATION, NO OFFER OF action has been or will be taken under the laws, regulatory SECURITIES OR REGISTRATION AND RISKS AND requirements or rules of any jurisdiction. The publication, UNCERTAINTIES CAREFULLY. distribution or dissemination of this White Paper does not imply that the applicable laws, regulatory requirements or You should consult with your legal, financial, tax and rules have been complied with. other professional advisors(s) before taking any action in connection with this White Paper. There are risks and uncertainties associated with the Company and its business and operations, the C20s, the The tokens described in this White Paper are not intended CRYPTO20 token sale and the underlying assets, as to constitute securities in any jurisdiction. This White Paper described below. does not constitute a prospectus or offer document of any sort and is not intended to constitute an offer of securities or This White Paper, any part thereof and any copy a solicitation for investment in securities in any jurisdiction. thereof must not be taken or transmitted to any country where distribution or dissemination of this White Paper This White Paper does not constitute or form part of is prohibited or restricted. No part of this White Paper any opinion on any advice to sell, or any solicitation of is to be reproduced, distributed or disseminated without any offer by CRYPTO20, an exempted company registered including this section and the following sections entitled under the laws of the Cayman Islands (the Company) to Disclaimer of Liability, No Representations and Warranties, purchase any tokens (C20) nor shall it or any part of it, nor Representations and Warranties By You, Cautionary Note the fact of its presentation, form the basis of, or be relied On Forward-Looking Statements, Market and Industry upon in connection with, any contract or investment decision. Information and No Consent of Other Persons, Terms Used, No Advice, No Further Information or Update, Restrictions The Company will deploy the proceeds of sale of the On Distribution and Dissemination, No Offer of Securities C20s to fund the project, businesses and operations, as Or Registration and Risks and Uncertainties. outlined in this White Paper. Any agreement between the Company and you as a purchaser, and in relation to any sale and purchase, of C20s is to be governed by only a separate document provided by the Company (the T&C). The T&C will set out the terms and conditions of such agreement. In the event of any inconsistencies between the T&Cs and this White Paper, the T&C shall prevail. This White Paper has been prepared in multiple languages. In the event of any inconsistencies between one version and another, the English language version shall prevail. 1
EXECUTIVE SUMMARY The only opportunity for future participants to buy these tokens Cryptocurrencies have grown exponentially since their creation post-ICO will be from ICO participants on exchange – no further in 2009, with the total cryptocurrency market capitalization tokens will be sold or minted. 98% of the ICO funds will go currently standing at over $150 billion. While growth has been towards purchasing the underlying assets. A full breakdown of strong, the market capitilization of cryptocurrencies as a whole is funds utilization and token distribution is available in sections VI still only a fraction of that of the S&P 500 index - which is itself and XIII. only a fraction of the global stock investment market. There is still room for considerable growth. The index hyperparameters for the portfolio and rebalancing methodology were carefully determined via a structured data There are now thousands of cryptocurrencies to choose from, science approach. A trading strategy was put in place to mitigate with more appearing each day. Choice paralyzes - choice adds the risk of front-running and a viability study was conducted cost, complexity and the need for advice. High risk, extreme to confirm that a portfolio at the maximum raise size would be volatility and practical difficulty compound to render buying able to effectively acquire sufficient coins without paying a large and safely storing an effective and diverse portfolio of coins premium. The minimum effective portfolio size is $2m and if this (cryptocurrencies) a complex problem. is not achieved all investor funds will be returned. A maximum component weight of 10% was selected to prevent any single asset CRYPTO20 is the worlds first cryptocurrency-only tokenized from dominating the index. index fund, and aims to provide a solution to this problem. The portfolio will autonomously maintain a diverse portfolio of the top Security is extremely important and the smart contract code 20 cryptocurrencies by market capitalization in the same way that was audited by an independent third party (Hosho Group). Expert funds such as the Vanguard 500 maintain a portfolio based on the advisors were consulted, best practices implemented and strong market capitilization of the top 500 publicly listed US companies identity verification procedures put in place to prevent Sybil attacks (the S&P 500). In order to continue to track the market (index) and bad actors from compromising CRYPTO20. CRYPTO20’s over time, CRYPTO20’S asset portfolio is adjusted regularly in a holdings will be audited and the audit report made public post-ICO. process called rebalancing. A full list of advisors is available on the CRYPTO20 website. CRYPTO20 is not a platform, it is a fully functioning product. A public ICO will be held from the 16th of October to the 30th CRYPTO20 cuts out the middleman and is thus able to offer the of November 2017. CRYPTO20 will use the ICO contributions to lowest fees in the industry. acquire assets and test rebalancing over December and the coin is expected to be listed on exchange in January 2018. Index funds have consistently outperformed actively managed funds since their inception. For the 12-month period ending May All trading data will be stored during CRYPTO20’s operations - 2016, investors poured more than $375 billion into index funds, this valuable data includes order books, pricing, coin volumes and while actively managed funds experienced outflows of roughly more. After approximately six months of trading this deep dataset $308 billion during the same period. One reason why index funds will be utilized by our machine learning partner, DataProphet, to outperform actively managed funds is due to their low annual fees. optimize rebalancing and produce trading strategies for future fund CRYPTO20 has an annual fee of only 0.5% whereas competing types. CRYPTO20 ICO participants will have priority access to crypto offerings have fees of 3% per year. All crypto offerings these very limited cap funds and the C20 token will be convertible. built on one of the many recently launched fund platforms will apply their fees over and above those of the platform. CRYPTO20 In conclusion, CRYPTO20 is a closed-cap, tokenized can offer such low fees because it is independent and automated. cryptocurrency portfolio that autonomously tracks the top Index strategies are a set of rules that an algorithm can act on with 20 cryptocurrencies with weekly rebalancing to a maximum no human intervention required. component weight of 10%. C20 is a utility token that is representative of a portion of the Instantly owning a diverse cryptocurrency portfolio is now as total value of the CRYPTO20 cryptocurrecy index. The initial easy as holding a single token. tokens can only be acquired during the token offering process which is a one off, closed cap offering. The tokens provided will ”Don’t look for the needle in the haystack. Just buy represent a participant’s share of the portfolio. 98% of the total the haystack!” amount contributed during the offering will go directly towards – John C. Bogle, founder of the Vanguard Group and buying the underlying cryptocurrencies. C20 is an ERC20 token inventor of the index fund. based upon the Ethereum blockchain. Operating on the blockchain allows for global accessability, 24/7 trading, transparency, public verification of CRYPTO20’s holdings and no expensive legacy banking fees. The tokens value is linked directly to the 20 underlying cryptocurrency assets held by CRYPTO20 via the innovative price floor mechanism implemented in our smart contract. The smart contract allows participants to cash out for their share of the underlying assets at any time. This means that C20’s value on exchange will be protected - it will be irrational to sell at a price lower than the tokens share of the underlying assets if a higher price is offered via the smart contract. Token holders are free to sell or exchange their tokens at any time and pay no exit fees, broker fees or advice fees. 2
C ONTENTS LEGAL DISCLAIMER: I INTRODUCTION 4 1. Prospective ICO Participants should inform themselves as to the legal requirements and tax consequences within the countries II TYPICAL PORTFOLIO & FUND STRUCTURES 5 of their citizenship, residence, domicile, and place of business with respect to the acquisition, holding or disposal of the Tokens, III RATIONALE BEHIND A CRYPTO INDEX STRATEGY 5 and any foreign exchange restrictions that may be relevant thereto. The distribution of this White Paper and the offer and sale of IV SMART CONTRACT SPECIFICATIONS 6 the Tokens in certain jurisdictions may be restricted by law. This V LIQUIDATION OPTION 7 White Paper does not constitute an offer to sell or the solicitation of an offer to buy to any person for whom it is unlawful to make VI TOKEN DISTRIBUTION AND STRUCTURE 7 such offer or solicitation. VII PORTFOLIO HYPERPARAMETERS 7 2. CRYPTO20 is not providing you legal, business, financial VIII REBALANCING METHODOLOGY 10 or tax advice about any matter. You may not legally be able to participate in this private, unregistered offering. You should consult IX SECURITY & TRANSPARENCY 10 with your own attorney, accountant and other advisors about those matters (including determining whether you may legally participate X TRADING STRATEGY 10 in this ICO). You should contact us with any questions about this XI AUTOMATION 11 ICO or the Tokens. XII MARKETING AND INVESTOR RELATIONS 11 3. It is the responsibility of any persons wishing to acquire the Tokens to inform themselves of and to observe all applicable XIII ICO FUNDS UTILIZATION 12 laws and regulations of any relevant jurisdictions. Prospective ICO Participants should inform themselves as to the legal requirements XIV REPORTING 12 and tax consequences within the countries of their citizenship, XV PROJECT TIMELINE 12 residence, domicile and place of business with respect to the acquisition, holding or disposal of the Tokens, and any restrictions XVI CONCLUSION 13 that may be relevant thereto. References 13 4. This White Paper constitutes an offer of Tokens only in XVI-A RESTRICTIONS ON DISTRIBUTION AND DIS- SEMINATION . . . . . . . . . . . . . . . . . . . . 15 those jurisdictions and to those persons where and to whom they lawfully may be offered for sale. This White Paper does not constitute an offer to subscribe for securities except to the extent permitted by the laws of each applicable jurisdiction. 5. Nothing in this White Paper is intended to create a contract for investment into CRYPTO20, and each potential ICO Participant acknowledges that CRYPTO20 will rely on this assertion of an ICO Participants statements with respect to compliance with the laws of the jurisdiction in which the ICO Participant is legally domiciled. AN IMPORTANT NOTE FROM OUR LAWYERS: Crypto20 is incorporated in the Cayman Islands. Its company registration number is 327608. This document should not be construed as an offer or solicitation of an offer for the sale of tokens. The individuals listed in this document are not and will not be selling tokens and have drafted this document on behalf of the legal entity that will be conducting the relevant token sale. Consider the English language version of all CRYPTO20 communications, media and documentation to be the only official version. 3
ABSTRACT I. INTRODUCTION CRYPTO20 is an autonomous cryptocurrency-only portfolio The benefits are simple and many: convenience, no composed by utilizing an index strategy. The token sale funding broker fees, no exit fees, full transparency, full control and will be used to buy the underlying cryptocurrency assets and CRYPTO20 will hold the top 20 cryptocurrencies by a lower price bound. There is no need to keep your C20 market capitalization. CRYPTO20 cuts out the middleman, tokens on a centralized platform and you are free to sell the platform, and is thus able to offer significantly lower fees. or exchange your tokens without restriction. Automation Index funds have consistently beaten the average managed allows CRYPTO20 to operate with fees of only 0.5% p/a as fund since their inception. opposed to the market average of 3% p/a. CRYPTO20 is not a platform, it is a fully functioning product and its token value is not based on speculation but No trust is required in the ability of human fund rather the product benefits and net asset value of the 20 administrators/traders – an index fund strategy does not underlying cryptocurrencies. There are no broker fees, advice require any discretion or judgment, just adherence to a fees or exit fees. CRYPTO20’s utility token is called C20. It method determined via data science. The number of tokens, can be traded at any time, holdings are fully transparent and there are no legacy banking fees or expensive fund managers. rebalancing frequency and asset weightings were carefully determined and our approach is detailed in this white paper. C20 tokens are directly tied to the underlying assets with a novel liquidation option that can be exercised via the The ICO funds will be used to buy the underlying assets. smart contract. This function ensures a greatest lower bound Tokens can be liquidated through the C20 smart contract (infimum) on the market value of all tokens. for their share of the porfolio’s net asset value (NAV). This CRYPTO20 allows for access to a diverse cryptocurrency is key: it protects the token price as it would not be rational portfolio by holding a single token. The tokens will be tradable to sell at a lower value on exchange when tokens can be on exchange post-ICO and no further tokens will be issued. directly liquidated for a higher value. The top 20 cryptocurrencies by market capitalization change, and so will CRYPTO20’s holdings. This rebalancing process Funds with stellar performance attract substantial amounts allows for tracking of the cryptocurrency market index and is an effective risk mitigation strategy. of new money. A manager will most likely have to use that new money to ”chase” a relatively small group of coins. A cryptocurrency portfolio based on a hybrid index system This buying pressure can drive up coin prices, forcing the consisting of the top 20 coins by market cap, with weekly fund manager to pay higher prices than would otherwise be rebalancing and a component cap of 10% produces a combina- the case – affecting all tokenholders by reducing the fund’s tion that has broad market exposure and acceptable turnover without allowing a single asset, and thus single source of risk, future gains. This is the motivation for issuing no further to dominate. This paper seeks to structure and justify our tokens post-ICO. hypotheses and conclusions. The total market cap of the S&P 500 (June 30th, 2017) was 21.83 trillion USD [1] while the entire combined cryptocurrency market cap is only a fraction (approximately 0.7%) of this [2]. The S&P 500 is only a small part of the global investment market. There is thus still significant potential to introduce retail investors into the crypto market. Exposure to crypto returns with a broad, limited risk profile offers a compelling case to both crypto and fiat investors. CRYPTO20’s value proposition (diversification by holding a single token) will be heavily promoted via marketing and investor outreach. The only opportunity to purchase these tokens post-ICO will be on exchange from ICO participants – highlighting the real demand for reduced risk crypto investments whilst simultaneously creating value for participants. CRYPTO20 will be of benefit to the community as a whole – market transparency and liquidity will increase as a result of our trading activity. We will bring fresh support, funding, and understanding to the community. Conventional Investors who were uncertain about investing in a single technology or system will now have an option to support the emerging cryptocurrency market through CRYPTO20. 4
II. TYPICAL PORTFOLIO & FUND STRUCTURES III. RATIONALE BEHIND A CRYPTO INDEX STRATEGY Index investing has seen exponential growth among investors since the first index mutual fund was launched in 1976. This has proven to be a successful form of investment as the low-cost involved has allowed index funds to outperform the majority of active managers across market and asset styles. Over a 10-year investment horizon more than 80% of large-cap fund managers failed to outperform their benchmark index. The odds of picking a winning fund manager are also low: studies show that regardless of past Fig. 1. Comparison of managed vs. index funds [3] performance, future performance is virtually random [4]. Definitions: Simply, an index fund allows investors to track the index – the underlying trend behind the selection of assets without Open-end mutual fund: being reliant on a particular one. There is no active trading An open-end fund is a mutual fund issuing unlimited apart from the rebalancing of assets at fixed time intervals. shares of investments in stocks and/or bonds. Investing This allows the fund to consistently track the mean market creates more shares, whereas selling shares takes them out performance even if some of the original assets fall out of of circulation. Shares are bought and sold on demand at favor. their net asset value, which is based on the value of the fund’s underlying securities and is calculated at the end of The CRYPTO20 tokenized portfolio would be the first the trading day. When a large number of shares are redeemed, of its kind – it is bought with crypto and holds only the fund may sell some of its investments to pay the investor. cryptocurrencies. It will bring stability and old-economy Shares are bought directly from the fund administrators. money into the ecosystem, which will boost liquidity and Exchange-traded fund (ETF): provide a stable instrument for those who previously thought An exchange-traded fund is like an open-end mutual fund it was too risky to invest in a single technology. but instead trades as a common stock on a stock exchange. It is not purchased directly from fund administrators. An It is hypothesized that one is not able to attribute the ETF may trade at a premium or discount to the NAV but lack of cryptocurrency take-up by retail investors seeking this is often very short-lived due to arbitrage by institutional to allocate ’high-risk’ portfolio funds solely to the difficulty investors. of purchasing cryptocurrencies. The number of exchanges, services and payment methods available to purchase Closed-end fund (CEF): cryptocurrencies is increasing exponentially. In many cases A closed-end fund is seeded once-off via an IPO and it is easier and less burdensome to purchase bitcoin than to then traded on exchange thereafter. No further shares are invest in a USD denominated mutual fund. issued and CEFs may trade above net asset value as buying and selling the shares on exchange has no effect on the The authors believe this lack of investment may be due to underlying assets. the fact that no such product has previously been available, communicated effectively in plain non-technical language The structure of CRYPTO20 is analogous to a new hybrid- and actively marketed to this sector. There is a distinction type; a closed-hybrid fund (CHF): between ’high risk’ and ’unacceptable risk’ in the minds of - A CHF is a closed-end fund that trades with an index many investors – cryptocurrencies have traditionally been strategy whereas traditionally all closed-end funds have seen as the latter [5]. CRYPTO20 aims to bring the risk to an been actively managed. acceptable level for allocation to a retail investor’s portfolio. - Post-ICO, investors will only be able to purchase the Zero Sum Game C20 tokens on exchange. No further tokens will be sold The central concept underlying the case for index- directly. Buying and selling tokens on an exchange does fund investing is that of the zero-sum game. This theory not affect the underlying NAV and CHFs are able to states that, at any given time, the market consists of the trade at a premium depending on market forces. cumulative holdings of all investors, and that the aggregate - A price floor is created via the liquidation option in market return is equal to the asset-weighted return of all the smart contract, effectively ensuring that the token market participants. Since the market return represents is not able to trade at a discount. the average return of all investors, for each position that outperforms the market, there must be a position that 5
underperforms the market by the same amount, such that, in - Ethereum smart contracts enable a very transparent way aggregate, the excess return of all invested assets equals zero. of offering a liquidation option. The smart contract complies with the ERC20 token This zero sum around the market weighted mean return standard [8] and can be used from any compatible Ethereum means that for every profitable trade an investor makes, wallet. The contract code facilitates an ICO crowdsale by another investor must make the opposite side of that trade specifying a start and end block number so as to restrict and incur a loss relative to the market. This holds true certain functions during the ICO period. The token to ether regardless of whether the coin or token in question is price ratio is adjusted dynamically throughout the presale mispriced or not, and for the same reason, the zero-sum such that token price tracks $1 (the bonus structure is then game theory must apply regardless of market direction. applied on top of this). The distribution of market returns will thus be centered Participants can send ether to the contract directly or via around a mean - the index CRYPTO20 aims to track. By the buy or buyTo functions. The ether purchase amount is holding a basket of coins we hope to capture this mean return used to calculate the tokens bought which are then added – we expect to see a few coins that underperform and a few to the balance of the participant account. The participant that overperform, the sum of the returns should provide the account (the account that is debited with tokens) is the mean or market/index return. sender account when using the buy and fallback function Low-fee Fund Benefits or the specified address when using the buyTo function and passing an address as an argument. Active traders and fund managers generally have a far higher fund expense ratio than that of an index fund – The smart contract has a two-tier control functionality around 6 times higher than an index fund (3% p/a compared which gives two controlling wallets different levels of to 0.5% p/a). The effect of this is that the aggregate return of authority. This allows future blockchain development and investors is less than zero sum which makes outperformance full on-chain automation without sacrificing the control of compared to an index strategy and to the market much less fund managers. likely. The withdraw function automatically calculates the ether Data from the Financial Research Corporation has been amount to send to the participant account based on a forward used to evaluate the predictive value of different fund pricing policy [9] which uses the asset-backed price of the metrics such as a fund’s past performance, Morningstar tokens less a 1% trading fee. This trading fee is not a fee rating, alpha, and beta [6]. In the study, a funds expense ratio that CRYPTO20 imposes - it is levied by the exchanges was the most reliable predictor of its future performance, necessary to execute the liquidation procedure. The price with low-cost funds delivering above-average performance will be updated regularly to accurately reflect the value of relative to the funds in their peer group in all of the the underlying crypto assets. periods examined. Likewise, Morningstar performed a similar analysis across its universe of funds and found that, // simplified contract withdrawal function for illustrative purposes regardless of fund type, low expense ratios were the best function withdraw(uint withdrawAmount) { predictors of future relative outperformance [7]. address participant = msg.sender; require(block.number > fundingEndBlock); require(balanceOf(participant) >= A position as a large player in the crypto markets will withdrawAmount); afford CRYPTO20 access to lower exchange fees and none uint withdrawValue = withdrawAmount / of the legacy banking costs. Fiat investors looking for crypto currentPrice; returns with a broad exposure and limited risk profile will require(this.balance >= withdrawValue); be drawn to CRYPTO20. balances[participant] = safeSub(balances[participant],withdrawAmount); balances[fundWallet] = IV. SMART CONTRACT SPECIFICATIONS safeAdd(balances[fundWallet],withdrawAmount); participant.transfer(withdrawValue); Reasons for Choosing the Ethereum Blockchain: } - Security and predictability (as opposed to, for example, having to run a separate blockchain), This withdrawal function ensures a greatest lower bound - Use of robust and well-supported clients (Ethereum- (infimum) of the pseudo-continuous time market value of based tokens can be managed with official Ethereum all tokens. Formally: clients), inf imum{Σ(µi Fi )} ≥ H (1) - High liquidity (transferable for ether), - Easier listing on exchanges with infrastructure already Where µi is the speculative market coefficient of any single in place, participant’s total initial contribution (Fi ) and H represents the total asset value of the portfolio. Seeing that Fi per tokens 6
bought is fixed during the ICO and that no further tokens Summary: are minted; participants are assured a maximum minimum - 7.5% C20 Team withdrawal amount that is independent of all market forces - 0.5% Advisory Team µi . The implications of this are explained below. - 2.5% Marketing and Investor Relations V. LIQUIDATION OPTION - 1.0% Legal - 1.0% Security - Systems and Smart Contract High-volume traders may seek to exploit pricing to the - 0.5% Bounty Program detriment of the community by initiating sell-offs that - 87% ICO Participants cascade and result in flash crashes so that they can purchase the cheap tokens. The liquidation option offers a price floor protection – this ensures the price never drops below that The CRYPTO20 team tokens will vest over two years to of the underlying assets because of market manipulation. ensure that team incentives are aligned with ICO participants. Prices are, however, free to increase as speculative value is This is enabled via a public smart contract ’vault’. created by the high demand for a low-cost, diversified and VII. PORTFOLIO HYPERPARAMETERS automated cryptocurrency portfolio that can be held as a Future-proofing: Eventually crypto returns will likely single token. settle and resemble real-world investment returns as the market becomes more efficient, and as altcoins reduce A small, dynamically allocated percentage of bitcoin market cap dominance. Exchange fees will then CRYPTO20’s assets will be held by the smart contract be more relevant as they become larger with respect to (in ether) to facilitate the liquidation option. This amount profits. Predicting the rise and fall of cryptocurrencies is will be controlled automatically as usage demands. The near impossible [10] – and remarkably difficult even in vast majority of other cryptocurrency assets will be held in established markets with decades of data. various cold storage wallets. The rationale behind an index strategy was previously es- During a withdrawal, the C20 tokens are transferred tablished – we will now focus on increasing market exposure back to CRYPTO20’s managers. These tokens are then and decreasing the costs of running such a system. resold on exchange at the current NAV per token or market price, whichever is higher. This ensures that the underlying Test Assumptions and Conditions: assets can be rebought in the event that an investor uses Back-tests for portfolio value as well as expenses were the liquidation option – which would be unlikely due to the carried out for 105 175-day rolling windows, each separated market price floor explained above. by 4 days, over the period 1 January 2016 - 16 August 2017. The rolling windows are implemented to ensure the VI. TOKEN DISTRIBUTION AND STRUCTURE results are relatively time-invariant. The value and expense graphs are for disjoint windows, line graphs are used for There will be no token creation, minting or mining after clarity. the ICO period. Tokens will be transferable and tradable once the ICO is successfully completed and the underlying Expenses are calculated as 0.2% of every trade required assets have been acquired. Investment can be made in ETH, to rebalance the portfolio and are accumulated within each BTC or LTC. The USD equivalent amount of any ETH, window. This includes both the selling off and purchasing of BTC or LTC invested will be locked in at the time of entire coin holdings that enter or exit the top N number of investment according to market rates and considered the coins, as well as trades required to maintain the appropriate participant’s contribution. cap-ceiling. Token Type: ERC20 – Ethereum Blockchain Blockchain forks were treated as anomalies and any new Maximum Supply (Hard Cap): 86 206 896 coins created were seen as disparate from any other coin Available for Purchase: 75 000 000 holdings for the purpose of these tests. This was done to Minimum ICO Contribution: 0.04 ETH ensure that test results do not incorrectly value a smaller Minimum Raise: $2 000 000 number of coins or a higher cap-ceiling due to this particular Price per token: anomaly being present in the data set. Pre-sale (1 Week, up to 7 500 000 tokens): $0.95 Pre-sale & first 48 hours of ICO: $1.00 Discrete values were chosen for analysis to prevent 48 hrs to Week 4 of ICO: $1.05 overfitting to the limited data. Tests of the various Week 4-6 of ICO: $1.10 hyperparameters were performed simultaneously but are 7
1 presented in ordered sections for clarity. Section A: Rebalancing Frequency Rebalancing is the act of periodically adjusting a portfolio such that its asset composition reflects the index it aims to track. Rebalancing an index fund not only reduces risk but also increases the median return. Daily, weekly and monthly rebalancing periods were investigated as well as no rebalancing. Fig. 3. Portfolio Performance for Different Rebalancing Frequencies Hypotheses: A1: It is hypothesized that a rebalanced portfolio is likely to provide a greater median return. This means that a rebalanced portfolio is likely to outperform a non-rebalanced porfolio over multiple periods. The test conducted will therefore be over multiple windows with each point on the line graph representing the portfolio value at the end of the window. A2: The rebalancing frequency needs to achieve a balance Fig. 4. Expenses for Different Rebalancing Frequencies between accurately tracking the index and keeping turnover, and thus expenses, low. It is hypothesized that a weekly rebalancing frequency will achieve this goal. Analysis and Conclusion: Tests: A1: In Figure 2 it can be noted that rebalancing outperforms no-rebalancing across the majority of A back-test of portfolio value for varying rebalancing observations in terms of value. A rebalancing strategy frequencies for tracking an index of the top 20 coins by is thus selected. market cap was performed. A2: As can be seen in Figure 4 above the expense ratio increases dramatically with daily rebalancing. As crypto returns in the long-term begin to normalize the much greater expenses incurred by daily rebalancing will have a more significant effect on the total value of CRYPTO20’s holdings. A Weekly rebalancing frequency tracks the index more accurately than monthly and has a more acceptable cost ratio than daily. Fig. 2. Portfolio Performance for Market-weighted Portfolios with Different Section B: Number of Tracked Coins Rebalancing Frequencies Hypotheses: As can be seen in Figure 2 above, a portfolio without B1: Is it hypothesized that portfolio expenses and returns rebalancing does not track the index effectively. In Figure are correlated with the number of coins held in the portfolio. 3 below, weekly rebalancing seems to achieve the greatest Tests: portfolio value most often out of the four rebalancing fre- quencies. A back-test of portfolio value with number of coins E As the rebalancing frequency increases from weekly to ∈ {10, 20, 30, 40} with a weekly rebalancing frequency and daily there is a dramatic increase in expenses. This is unde- a 10% cap-ceiling was performed. sirable. Figure 4 provides an illustration of this difference. Figure 6 below illustrates the frequency at which each coin selection has the greatest value at the end of each testing 1 Note that the test results shown for each of the hypotheses presented window. below do not constitute the entirety of the data analyzed to reach their Figure 7 illustrates how expenses as percentage of portfo- respective conclusions. A large test space was simultaneously analyzed and only the most relevant graphs are presented here. lio value varies by the number of coins the portfolio tracks. Each point represents total expenses per rolling window period. 8
C2: It is hypothesized that decreasing the cap correlates to an increased total expense ratio as coins with lower market- cap (and thus lower index ranking) will have a higher than normal weighting and thus incur greater expenses when they churn in and out of the index. Tests: A back-test of portfolio value for top 20 coins at market cap ceiling ∈ {10%, 20%, 30%, 40%} with weekly rebalanc- Fig. 5. Portfolio Performance for Different Number of Coins ing was performed. A pure market-share weighted (no cap) portfolio was also back-tested for comparison. Fig. 6. Direct Return Comparison for Different Number of Coins Fig. 8. Portfolio Performance for Different Market Caps Fig. 7. Expenses for Different Number of Coins Fig. 9. Expenses for Different Market Caps Analysis and Conclusions: B1: The number of coins in the tracked index does seem Analysis and Conclusions: to be correlated to the portfilo’s return and expense ratio. The number of outperforming windows is substantially higher C1: Figure 8 confirms that a capped portfolio performs for 20 coins when compared to the alternatives in Figure substantially better over the most recent 30 windows 6 above. The portfolio value incorporates turnover and thus (spanning the past 275 days). expenses. 20 coins are therefore selected to represent the CRYPTO20 index. It is also seen that a 10% cap ceiling performs most consistently over all observed windows. A 10% cap is more Section C: Cap-Ceiling profitable more often and it offers a decreased risk profile A hybrid-market cap index strategy protects against a when compared to a portfolio without a cap where a single single coin dominating portfolio composition whether it coin may entirely dominate. be bitcoin now or another coin in future. The higher the market cap ceiling the closer the hybrid model emulates a C2: A decreasing cap does correlate with an increasing pure market-share model, with a 50% cap being roughly expense ratio as hypothesized (Figure 9). This is due to functionally identical to the market-share model. the increased churn caused by a more evenly spread asset distribution and is a consequence of the greater weighting Hypotheses of the lower market-cap coins. A lower cap does, however, C1: It is hypothesized that a hybrid-market capped allow the portfolio to achieve greater and more consistent portfolio will increase returns and give broader market returns. exposure in comparison to a pure market-cap weighted portfolio due to the greater weighting altcoins will receive. 9
Hyperparameter Summary CRYPTO20 will at any stage hold varying amounts of A portfolio utilising a hybrid-market cap weighted index the 20 coins that form the index it tracks. The majority strategy that tracks 20 coins with a 10% cap weighting of each of these cryptocurrencies will be stored in cold provides broad market exposure with acceptable turnover wallets with a small percentage of each currency stored and mitigates risk by more evenly weighting the tracked in a wallet on our servers so as to facilitate automatic assets. The cap also assists in future-proofing the porfolio rebalancing. If rebalancing necessitates moving more because a single asset, and thus single source of risk, is of the cryptocurrency to these hot wallets this will be not allowed to dominate. A weekly rebalancing frequency done manually via interfacing with various cold wallets – offers an acceptable balance between portfolio turnover and CRYPTO20’s portfolio managers will be notified ahead of the ability to accurately track the underlying index. time so as to accommodate this. The weekly rebalancing period affords more than sufficient time for this purpose. VIII. REBALANCING METHODOLOGY Trades will be executed over multiple exchanges at CRYPTO20’s portfolio will be rebalanced in accordance varying times within our weekly rebalancing window to with FTSE Russel’s capping methodology [11]. The Con- mitigate the risk of front-running. The following section, stituent Capping Factor ci is given by: TRADING STRATEGY, contains a quantitative analysis on X liquidity and front-running. Z ci = (pj × sj ) (2) I × (pi × si ) Ledger Nano Ss [12] will be used for the storage of all j∈J cryptocurrencies it supports. For all cryptocurrencies not Where, supported, encrypted USB drives will be utilized. These • i denotes the crypto to be • sk is the circulating sup- storage devices will be held in secure safe deposit boxes with capped ply of the k th crypto back-up paper-wallets stored at separate secure locations. • j denotes an uncapped • I is the percentage of the Locations are undisclosed for security consideration. A crypto index represented by all public audit post-ICO will confirm the presence and • J is the subset of cryptos uncapped constituents safe storage of the USB drives and paper-wallets to ICO that are uncapped • Z is the percentage cap- participants. • pk is the official closing ping level (i.e. 10%) price of the k th crypto Wallet interactions with CRYPTO20 will be facilitated The constituent capping factor is calculated and applied through light clients running within their own containerized to all constituents whose uncapped weighting is above services. See the AUTOMATION section for additional 10%. The weights of the uncapped constituents are then detail. calculated and if any previously uncapped crypto now has a weighting greater than 10%, the constituent capping factor is X. TRADING STRATEGY recalculated including this crypto in the subset that requires The S&P 500 is rebalanced quarterly and additions or capping. This process is repeated until all cryptocurrencies deletions are announced several days prior to the actual are capped correctly. change [13]. In most years 25 to 30 stocks in the S&P 500 are replaced [14]. Any funds tracking this index need to IX. SECURITY & TRANSPARENCY rebalance their portfolios in accordance with these changes. Some index funds trade the added or removed stocks in the CRYPTO20 has implemented security industry best days in the run-up to the change and some trade on the day practices for defense against Sybil attacks and bad actors of the change. in co-operation with our team of expert advisors. Strong identity verification and authentication procedures are in As of 07/31/2017, the bottom 10 stocks of the Vanguard place to ensure secure operations. S&P 500 ETF are only approximately 0.063% of the index value [15]. The market cap of the Vanguard fund is The smart contract code has been thoroughly audited $338.3 billion [16] and the bottom 10 stocks are $213.8m by the Hosho Group (https://hosho.io/) for vulnerabilities, by market cap of the total fund. These stocks have a confirmation of operation as described in this White Paper, combined average daily trading volume of $40.25m [17] static and manual analysis of the smart contract, gas analysis [18]. Front-running and purchasing of stocks is seemingly and verification of the deployment procedure. Transparency in CRYPTO20’s trading activities and a much greater problem for fiat index funds – of which current holdings will be ensured through the use of view- Vanguard is only one – and these funds only lose 20-28 only exchange APIs as well as through proof of reserve basis points p/a (0.2 – 0.28 % per year) to front-runners [19]. for non-exchange wallets (this includes both hot and cold wallets). The CRYPTO20 portfolio’s lowest weighted constituents would be approximately 1% of AUM on average [20]. This 10
Coins Amount in USD, per slippage XI. AUTOMATION name pos. avg 24hr 1% 2% 3% % of vol. AUM CRYPTO20 will be automated via API integration with Waves 18 $7.4m $128,033 $458,886 $812,491 1.08 multiple exchanges, possibly including but not limited to: NEM 8 $8.2m $45,546 $176,543 $575,736 0.77 Bitstamp, Bitfinex, BTer, Bittrex and Poloniex. The full list TenX 20 $9.4m $140,405 $844,399 $1,628,245 2.17 of exchanges utilized will be available on our website when EOS 19 $17.9m $147,053 $417,523 $625,430 0.83 trading begins. Additional exchanges will be added when TABLE I vetted and APIs with the minimum sufficient functionality Amount immediately purchasable for four low-volume coins in the are made available. CRYPTO20 index as of 28 August 2017 The liquidation price of the C20 tokens will be determined through the use of an exchange service developed by equates to $750,000 with $75m-worth of AUM. The lowest CRYPTO20. Automation of liquidation price updates are market-cap coins in the index have average daily trading an essential part of smooth business operation, however, volumes of approximately $5-20m, as evident in Table automation can also expose security risks due to the 1. The amount immediately purchasable was calculated necessity of online private key storage. We circumvent this automatically by the CRYPTO20 exchange service via the risk by implementing a two-tier permissions system, with ingestion of order book data from the utilized exchanges. multiple addresses allocated only the necessary permissions Adding a coin thus generally necessitates the purchase of to fulfill a particular task, such as updating the liquidation only 3% to 15% of average daily trading volume, while price. This strategy enables risk-mitigating automation the Vanguard S&P500 index fund has to contend with the without having to store crucial private keys online. purchase of 200-500% of the average daily trading volume. The CRYPTO20 backend runs as a cluster of containerized The coin with the lowest trading volume, Waves, is able services using a thoroughly scalable and redundant to comfortably support the purchase of more than 5% of architecture running on Kubernetes. Security and reliability AUM in the rebalancing period at a slippage of only 3% is central to our system design – we rely on public-key from the best price. Only 1.38% would need to be acquired cryptography, multiple factor authentication and system for the 28th of August 2017 example. This effectively isolation of private keys. The vast majority of CRYPTO20’s justifies the decision for a maximum portfolio value of holdings will be stored offline in cold wallets. $75,000,000. Backend calls to exchange API services will be used Any front runners would need to anticipate coins entering to find optimum routes for different trading pairs so as the top 20 and have enough liquid capital on exchange to to obtain best possible prices on trades. This method will move market rates. CRYPTO20’s index strategy trading rules ensure underlying assets are always bought at the most will be known – however, several strategies will be employed competitive rates and exchange fees. to mitigate this risk: 1) Cryptocurrencies will be sent to the exchange 1-48hrs CRYPTO20’s system architecture makes use of a in advance of the trade so that traders cannot follow microservice design pattern, incorporating messaging and the hot-wallet to know exactly when a purchase or sale task queues with full event logging. Isolating services that will be made. A weekly rebalancing window affords can act as potential attack vectors from the rest of our sufficient time to do this. systems will enable us to enforce tight security preventing 2) Trades will be executed over multiple exchanges. the kind of breaches some other Ethereum-based ventures 3) Trades will be executed at varying times within the have seen. rebalancing window to prevent predictability. XII. MARKETING AND INVESTOR RELATIONS Anomalies and Responses The CRYPTO20 team will invest significant time and Forking: If a cryptocurrency were to fork, the forked effort into post-ICO marketing targeted towards investors currency would be added as a regular portfolio asset. in the traditional financial sector via the production Rebalancing would be performed as per usual at the next of information sheets, explainer videos and planning interval. documents that are easily understandable. Token holders will be able to view detailed information on their holdings Crypto base BTC-ETH swap: A BTC-ETH swap does not and portfolio composition on the CRYPTO20 website. affect CRYPTO20’s trading strategy. During rebalancing, CRYPTO20 will focus marketing efforts solely on non- the most supported single-base exchange pairs are used regulated markets. No promotion or solicitation will be agnostic to the specific crypto. performed where participation is forbidden or likely to be forbidden in the near future in order to remain compliant 11
with local legislation. XV. PROJECT TIMELINE Initial Research and Development XIII. ICO FUNDS UTILIZATION - January - April 2017 – Developed the team and concept; The CRYPTO20 team has completed the development conducted thorough backtests to determine portfolio of the trading system. The ICO funds (98%) will go hyperparameters; set wheels in motion to create a com- towards purchasing the underlying assets. A small allocation pliant legal structure. (0.5%) is made for legal fees to ensure that CRYPTO20 Develop Smart Contract and Autonomous Trading System is compliant with regulation upon commencement of - April - June 2017 – Developed innovative CRYPTO20 exchange trading and a complete audit of received funds by smart contract to best practice specifications; developed a major auditing firm. CRYPTO20 and its cryptocurrency back-end for multi-exchange trading. diversification value proposition will be heavily promoted to retail investors and a 1.5% allocation is made to facilitate Finalize Smart Contract and Trading Protocol this. Any unused funds from the 2% operating expense - June - July 2017 – Complete smart contract to audit- allocation will be utilized in a discretionary capacity once ready state. Optimized autonomous index trading algo- CRYPTO20 has commenced on-going trading. rithm to mitigate front-running and slippage. Consulta- tion with industry expert advisors. - 1.5% Continued Marketing Pre-Exchange Listing - 0.5% Legal Fees and Post-ICO Audit Test Trading System; Security Audit - 98% Underlying assets - July - September 2017 – Security audit and code review process. Trading system tested and completed. XIV. REPORTING C20 Token Pre-Sale Accounting standards for cryptocurrencies remain unclear. - 7th October - 14th October 2017 – Token pre-sale. The International Accounting Standards Board (IASB) will C20 Token ICO either create a new standard or change existing standards to address accounting for investments in intangible assets, - 16th October - 30th November 2017 – Token ICO. including digital currencies. They are known to set standards Public Audit of ICO Funds based on successful businesses leading the way in how to account for their investments, for example in the case - December 2017 – Public auditing firm to audit of commodity broker-traders. The IASB might take years CRYPTO20 ICO and release statement verifying hold- to develop and implement a new standard – considering ings. all possibilities early might enable CRYPTO20 to pioneer Initial Top 20 Coin Acquisition; On-going Marketing and a standard and give tokens credibility as an alternative Investor Relations; First Rebalancing Procedure investment vehicle. - December 2017 - January 2018 – Initial coin hold- ings acquired; final information sheets and reporting CRYPTO20 has conducted an analysis into the audit and structures released to retail investors. First portfolio accounts requirements in order to provide best effort in com- rebalance is performed and monitored. plying with existing legislation. CRYPTO20 will operate on a quarterly reporting basis with annual accounts. The quarterly Public Launch on Exchange reports will include information on governmental risk and - January 2018 – C20 Token is listed for trade on ex- legislation, risk/return analysis, portfolio performance and change. end of year predictive market analysis. Data Collection; Regular Operation Financial reports will include the following: - January 2018 - Future – The data pulled from mul- - A balance sheet and a statement of the portfolio’s total tiple exchanges - order books, volumes etc. will be investment value stored. After approximately 6 months of operation, this - An income statement for the period covered valuable deep dataset will be used to inform future - A list of the porfolio’s amounts and values on the date development; incl. development of AI fund products the balance sheet was issued by partner DataProphet. CRYPTO20 ICO participants - A statement of salaries or any other monies paid to the will have priority acceptance into these very limited cap directors, advisory board and officers funds and C20 tokens will be transferable into these - Total amounts of crypto purchases and sales funds. The information will be made available on the investor portal of the CRYPTO20 website and CRYPTO20’s assets will be viewable at any time with a blockchain explorer. 12
XVI. CONCLUSION R EFERENCES A hybrid market-cap weighted (10%) index strategy [1] Siblis Research, ”S&P 500 Total Market Capitalization,” 2017. portfolio consisting of the top 20 coins by market cap, with http://siblisresearch.com/data/total-market-cap-sp-500/ [2] Coin Market Cap, ”Total Market Capitalization,” 2017. rebalancing weekly produces a combination that has broad https://coinmarketcap.com/charts/ market exposure and acceptable turnover without allowing a [3] G. L. Harbron, ”The case for low-cost index-fund investing,” 2017. single asset (and thus a single source of risk) to dominate. https://personal.vanguard.com/pdf/ISGIDX.pdf [4] A. M. Soe, ”SPIVA US Scorecard,” 2015. http://mkwinc.com/wp-content/uploads/2016/03/SPIVA2015.pdf CRYPTO20 is poised to set a new standard for cryp- [5] K. Close. ”Why You Shouldn’t Invest in Bitcoin,” 2017. tocurrency investments. As a transparent, secure and directly http://time.com/money/4623650/bitcoin-invest/ [6] D. D. Guercio, J. Reuter, ”Mutual Fund Performance and the Incentive asset linked ’token-as-a-portfolio’, CRYPTO20 aims to bring to Generate Alpha,” 2012. low-fee, broad market exposure crypto investment to the https://www2.bc.edu/jonathan-reuter/research/active 201208.pdf mainstream with its innovative single token offering. [7] R. Kinnel, ”How Expense Ratios and Star Ratings Predict Success,” 2010. http://news.morningstar.com/articlenet/article.aspx?id=347327 [email protected] [8] ”ERC20 Token Standard”. https://www.crypto20.com https://theethereum.wiki/w/index.php/ERC20 Token Standard [9] Investing Answers, ”Forward Pricing.” http://www.investinganswers.com/financial-dictionary/mutual- fundsetfs/forward-pricing-3597 [10] S. Chan, et al, ”Statistical Analysis of Cryptocurrencies,” 2017. http://www.mdpi.com/1911-8074/10/2/12/pdf [11] FTSE Russel, ”Ground Rules: FTSE UK Capped Index Series,” 2017. http://www.ftse.com/products/downloads/FTSE UK Capped Index Series.pdf?39 [12] Ledger Nano S. https://www.ledgerwallet.com/products/ledger-nano-s [13] S&P Dow Jones, ”S&P U.S. Indices Methodology”, 2017. http://ca.spindices.com/documents/methodologies/methodology-sp-us- indices.pdf [14] David Blitzer, ”Inside the S&P 500,” 2013. http://www.indexologyblog.com/2013/07/09/inside-the-sp-500- selecting-stocks/ [15] Vanguard, ”Vanguard S&P 500 Fund Holdings,” 2017. https://personal.vanguard.com/us/FundsAllHoldings?FundId=0968&FundIntExt= INT&tableName=Equity&tableIndex=10 [16] Vanguard, ”Vanguard S&P 500 ETF,” 2017. https://personal.vanguard.com/us/funds/snapshot?FundIntExt=INT&FundId=0968 [17] Investing, ”S&P 500 Components,” 2017. https://www.investing.com/indices/us-spx-500-components [18] Yahoo, ”Yahoo Finance,” 2017. https://finance.yahoo.com/quote/ua, https://finance.yahoo.com/quote/PDCO/, https://finance.yahoo.com/quote/an/, https://finance.yahoo.com/quote/MNK/, https://finance.yahoo.com/quote/bbby/, https://finance.yahoo.com/quote/mur/, https://finance.yahoo.com/quote/RIG/, https://finance.yahoo.com/quote/jbgs/, https://finance.yahoo.com/quote/cndt/ [19] Bloomberg, ”Can You Really Game Index Funds?”, 2015. https://web.archive.org/web/20170502140906/https://www.bloomberg.com/ view/articles/2015-07-07/can-you-really-game-index-funds- [20] Coin Market Cap, ”CryptoCurrency Market Capitalizations”. https://coinmarketcap.com/historical/20170820/ [21] Bloomberg, ”The Hugely Profitable, Wholly Legal Way to Game the Stock Market”, 2015. https://www.bloomberg.com/news/articles/2015-07-07/the-hugely- profitable-wholly-legal-way-to-game-the-stock-market 13
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RESTRICTIONS ON DISTRIBUTION AND DIS- SEMINATION MARKET AND INDUSTRY INFORMATION AND NO The distribution or dissemination of this White Paper or any part CONSENT OF OTHER PERSONS: This White Paper thereof may be prohibited or restricted by the laws, regulatory includes market and industry information and forecasts that have requirements and rules of any jurisdiction. In the case where any been obtained from internal surveys, reports and studies, where restriction applies, you are to inform yourself about, and to observe, appropriate, as well as market research, publicly available information any restrictions which are applicable to your possession of this White and industry publications. Such surveys, reports, studies, market Paper or such part thereof (as the case may be) at your own expense research, publicly available information and publications generally and without liability to the Company or any member of the Crypto20 state that the information that they contain has been obtained from Team. sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of such included information. Persons to whom a copy of this White Paper has been distributed or disseminated, provided access to or who otherwise have the White Save for the Company and its respective directors, executive officers Paper in their possession shall not circulate it to any other persons, and employees, no person has provided his or her consent to the reproduce or otherwise distribute this White Paper or any information inclusion of his or her name and/or other information attributed or contained herein for any purpose whatsoever nor permit or cause the perceived to be attributed to such person in connection therewith in same to occur. this White Paper and no representation, warranty or undertaking is or purported to be provided as to the accuracy or completeness of such NO OFFER OF SECURITIES OR REGISTRATION information by such person and such persons shall not be obliged to This White Paper does not constitute a prospectus or offer document provide any updates on the same. of any sort and is not intended to constitute an offer of securities or a solicitation for investment in securities in any jurisdiction. No person Neither the Company nor any of the Crypto20 Team has conducted is bound to enter into any contract or binding legal commitment and 15
no cryptocurrency or other form of payment is to be accepted on the basis of this White Paper. Any agreement in relation to any sale and purchase of C20 tokens (as referred to in this White Paper) is to be governed by only the T&Cs of such agreement and no other document. In the event of any inconsistencies between the T&Cs and this White Paper, the former shall prevail. No regulatory authority has examined or approved of any of the information set out in this White Paper. No such action has been or will be taken under the laws, regulatory requirements or rules of any jurisdiction. The publication, distribution or dissemination of this White Paper does not imply that the applicable laws, regulatory requirements or rules have been complied with. RISKS AND UNCERTAINTIES Prospective purchasers of C20 tokens (as referred to in this White Paper) should carefully consider and evaluate all risks and uncertainties associated with the Company and its business and operations, the C20 tokens, the C20 token sale and the underlying assets (each as referred to in the White Paper), all information set out in this White Paper and the T&Cs prior to any purchase of C20 tokens. If any of such risks and uncertainties develops into actual events, the business, financial condition, results of operations and prospects of the Company could be materially and adversely affected. In such cases, you may lose all or part of the value of the C20 tokens. 16