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Navigating Digital Asset Risk

How to Find Light in the Dark

by Wilfred Daye, CEO of Securitize Capital and Sharon Liebowitz, Senior Director, Innovation & Strategy at S&P DJI
Apr 4, 2022

Accredited and institutional investors seeking digital asset exposure have felt blind for too long. Investors hear about the incredible potential of digital assets, but their inability to evaluate fundamentals leaves them unable to estimate risk. Are investors really flying blind, or has the digital asset investing ecosystem simply been poorly lit? Let’s turn on the lights and find out.

Power On

In December 2021, a new tokenized digital asset fund tracking the S&P Cryptocurrency LargeCap Ex-MegaCap Index1 launched, which has the potential to shed light on digital asset performance. The index seeks to track over 35 cryptocurrencies with minimum liquidity and market-capitalization criteria, excluding bitcoin (BTC) and ether (ETH). By indexing digital assets, investors can explore new broad-based exposure opportunities with more transparency.

The S&P Cryptocurrency LargeCap Ex-MegaCap Index is a member of the S&P Cryptocurrency Broad Digital Market (BDM) Index that provides transparency with a wide snapshot of the cryptocurrency market and reflects a view of market performance overall. The S&P Cryptocurrency BDM Indices are weighted by market capitalization (MC). Because the market is especially dynamic, the use of fixed ratios or fixed values to determine MC – often done in equity markets – is quickly outdated. Instead, the indices use a clustering algorithm to select the appropriate cohort of constituents. The clustering algorithm is based on only one dimension, the natural logarithm of MC, and the S&P Cryptocurrency LargeCap Index utilizes the large-cap cluster to identify constituents. For additional details on the algorithm, please see the methodology.2

In the S&P Cryptocurrency LargeCap Ex-MegaCap Index, the exclusion of the two largest coins, which make up approximately 60% of the total market capitalization, serve to highlight the performance of relatively smaller coins that are overshadowed by the dominance of bitcoin and ether.

The ability to track these newer digital assets using the largest and most recognized index provider throws light on an under-exposed investment area, and helps investors evaluate fundamentals.

Institutional Custody

Shedding light on asset performance is just one of several areas in which using an index published by an established index provider can help when navigating unfamiliar territory. For both institutional and non-institutional investors, trust is a must. But one of the biggest barriers to participation in digital asset investments for institutions has been securing custodial arrangements that meet regulatory requirements.

Over the past several years, a number of custodial solutions have sought to provide institutions with the control needed to offer digital asset products. Anchorage Digital and Copper are two leading custodians and prime brokerages for digital assets that meet such standards. Working with Securitize to secure digital assets for trading and investing, Anchorage and Copper provide a solid foundation to build trusted solutions on top of, including potential yield.

By segregating digital assets across custodians such as Anchorage Digital and Copper, Securitize reduces commingling risks. Moreover, the arrangement enables institutions to invest in emerging digital asset products with ease.

Minimizing Counterparty Risk

Part of the solution that Securitize built helps settle trades with minimal friction and next to no counterparty risk. This is possible because blockchains use distributed consensus mechanisms to order transactions. The blockchain that Securitze uses to operate the tokenized cryptocurrency fund is called Algorand, and it provides instant settlement which exceeds the industry standard of T+2 by many orders of magnitude and reduces counterparty exposure for settlement risk. Investors can benefit from this efficiency as the fund actively manages positions and requires quarterly rebalancing.

Instead of needing to rely exclusively on order books to match trades against traditional counterparties or transfer agents, Securitize offers multiple blockchain solutions to settle trades and reduce counterparty risk. These include Algorand, as well as Avalanche, Ethereum, and Quorum, which can provide fast settlement without a counterparty like the Depository Trust & Clearance Company (DTCC). When it comes to issuing funds, having this optionality on the backend helps businesses considering tokenization choose a transfer agent best suited for their needs and not just settle for the same, inefficient transfer agents that haven’t changed much in decades.

Optionality

As BTC and ETH increase in popularity, they may be becoming more correlated with public capital markets. Removing the two largest cryptocurrencies by market capitalization enables investors to take advantage of a new type of low-correlation fund. Furthermore, it provides new opportunities for diversification.

When it comes to alternative investments, allocating a percentage of your portfolio to indexed cryptocurrency funds like the Securitize S&P Cryptocurrency Tokenized Fund can help you gain exposure to an emerging asset class. By lighting the way for accredited and institutional investors, others may eventually feel more comfortable exploring the new territory as well. This is why Securitize entered into a licensing relationship with S&P Dow Jones Indices to launch a tokenized digital asset fund tracking the S&P Cryptocurrency LargeCap Ex-MegaCap Index.

Fundamentally Better

For those who still want BTC and ETH exposure, cryptocurrency yield funds can provide more concentrated investment opportunities that may compound interest over time. Having the opportunity to allocate to both types of financial instruments may balance out the risk of investing in just one. When approaching a new asset class, having this optionality can make all the difference. With Securitize and S&P at your back, you can navigate digital asset risk with the lights turned on.3

© 2022 Securitize, LLC
All rights reserved
info@securitizemarkets.io
1:

The S&P Cryptocurrency Large Cap Ex-MegaCap Index is a product of S&P Dow Jones Indices LLC (S&P DJI), and has been licensed for use by Securitize Capital. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by S&P DJI and sublicensed for certain purposes by Securitize. The Securitize S&P Cryptocurrency Large Cap Ex Mega Tokenized Fund based on the S&P Cryptocurrency Large Cap Ex-MegaCap Index is not sponsored, endorsed, sold or promoted by S&P DJI, Dow Jones, S&P, or their respective affiliates, and none of such parties makes any representation regarding the advisability of investing in such products.

2:

Source: Lukka Prime, as of March 2022.

3:

Securitize Markets is an affiliate of Securitize Capital, LLC, (Securitize Capital) both of which are wholly owned by Securitize, Inc., their parent company.

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