Sorry to come in so late. I have been interested in cryptoETFs for a long time.
My comments specific to the proposal are based on https://gist.github.com/ConfusedObserver/cbc1d248ac81f64533fdf21ab1f251f4 which might be different from what have been posted above.
First the tone and pitch of the proposal might need a shift. For example
While this crypto coin ETF is not exactly "good money", it's a chance for people to participate in the (price) development of crypto currencies without the need to deal with all of them.
There is no need to be appologetic for not being a "good money" because no one else has made one.
If you try to sell "a chance for people to participate in the (price) development of crypto currencies" nobody will be interested. Instead try to tell its a chance for people to diversify investment and participate in the crypto technology revolution by "Just take my money". More below.
Second, why is the ETF denominated in BTC? BTC is highly volatile against fiats and most people in the world earns fiat salary. Why not price the fund in USD and accept BTC as payment for purchase? As I show below the fund could be more stable than BTC.
On component assets, my idea is to diversify customers fund into an fund consisting of cryptocoins and their derived assets in three categories: the top N (marketcap on CMC) POW coins, top N POS coins, and top N strong-anonymous coins that have been issued for more than 1 year, and have multisig feature that enables a decentrialized reserve.
The choice of categories is to reduce miner-user interest misalignment risk in POW and authority clamp down risk. The number N is for diverification within a category. The categories can be adjusted as severe risks are identifies.
I think multisig signers shouldn;t be confused with directors. The signers only need to be reliable and could just have minimal technical knowledge to release the fund. The directors need to have knowledge, experience, and judgement in solving business and tech issues.
I think that dividends from profit paid to shareholders awarded to directors should be appropriate incentive.
I have also though about it for some time. The following is how this should be tackled in a two step approach,
- Create an index
- Make the ETF track the index
My idea is that the fund will track a what I call the Minimal Variance Index. Here after I refer to this index fund as the Fund.
The Minimal Variance Index (MVI)
Suppose there are M assets in the index. The index value (in "point") is calculated by adding component contribution of every asset. The fraction, or weight, of contribution by the i-th asset in the index is Wi.
Wi = 1/Vi / sum_over_i(1/Vi) ,
where Vi is the price volatility of the price of the i-th asset's USD price (Pi) in the last e.g. 6 months, normalized by the average of Pi.
Since Vi is a measure of volatility, the above ensures that more volatile assets get less weight in the index.
Vi is chosen to be a function of Pi (the exact mathematical definition needs to be studied) so that the index itself will have minimal fluctuation relative to its average value. Hence the name Minimal Variance.
The index value = sum_over_i (Pi * Wi * some-factor) , for example.
The performance of the index should be tested with historical data, given the set of component assets.
Making and provding index feeds can be a business by itself. Dow Jones Index makes 130,000 indices.
Make the Fund
The Fund can track the MVI by owning all component assets. Synthetic indexing using futures is not discussed here.
The unit of the Fund token is set such that each fund unit is worth one index point.
Buying and selling are made to balance among the assets so that their relative contribution to Net Asset Value (NAV) of the Fund equal to their respective weights (a process called Rebalance).
The weight of every component asset changes. Updating of the weights of all assets in the fund according to the current index can be half yearly or quarterly if the process (e.g. component picking ) is costly, or can be daily if the process is largely automated.
The timing of rebalancing and weight updating can be periodical or with randomness to discourage index front running.
The Fund NAV is calculated daily, if not in realtime. The value of a fund Unit is calculated by dividing the NAV by Fund unit in circulation.
A customer buys the Fund by buying the crypto Fund token from the Fund organization using bitcoin , for example. The sales proceeds, minus fees, are patitioned according to the current weights and used to purchase respective assets immediately. A customer can also buy the Fund with a basket of assets, and paying a better fee. All assets are put into multisig addresses, and become part of the Fund Reserve, save for some liquidity fund.
The Fund token owner can always redeem and get back a basket of coins according to the current weights, or get btc from selling these coins by the Fund. The Fund is backed by a full decentralized reserve.
On the secondary market, the token can be sold/bought according to supply/demand.
The Fund is managed by managers, and directed and paid by Fund shares owners through consensus and voting. The Fund tokens are generated on blockchain from grant voting.
The reserve signers sign to release funds according to the Fund status calculator, which feeds the Fund website to publish current status of the Fund. The signing can be automated. The signers are just holders of keys.
The Fund front desk is an instance of bots that takes buyers fund, converts to the basket of assets, calculates fees (revenue plus e.g. 2%), calculates Fund tokens from the basket of assets yielded (so the buyer pays the exchange cost), issues Fund tokens to the buyer, and sends the assets to the Reserve. In principle electronic money in any form can be accepted as payment as long as it can be converted to cryptocoins, as the payment funds don't need to be held by the Fund. The bot also takes the Fund tokens from a customer can sells assets according to the currrent weights and pay the customer in bitcoin, or if wanted, in a basket of assets.
The sales fee minus cost of operations is profit. When accumulated profit is more than d% of full Reserve , the excess will be issued to Fund shares holders as dividends. The Fund shares owners have an interest in the health and performance of the Fund.
Value to the customers
- Exposure to the best cryptocoins and assets without buying all of them.
- MVI dynmically assigns greater weights to the more stable coins in time, averages volatility out in many assets.
- Rebalancing sells high and buys low, and is proven to increase customers' value in volatile market.
- Index fund saves cost and is well recognized to perform better than hand-picking assets (even by experts).
Value to the investors
The Fund can start small. Most work can be tried by human initially to gain operational knowledge. Automation costs but can be build gradually. Once the in frastructure is made the long-term operation is almost automated. The cost of managers, directors, signers, server renting, and tech support during operations is limited. The fee collected is unlimited.
More products can be added with little cost to cater different customer need.