CF DACS, ICYMI
As a reminder, here’s how CF Digital Asset Classification Structure (CF DACS) meets the critical need for a cogent framework that defines protocols of the digital asset universe:
Investors can now conduct reliable attribution analyses of cryptoasset portfolios; a process that was all but impossible to undertake before CF DACS existed, and a critical prerequisite for the evolution of institutional digital asset management.
As we showed in our recent outline returns attribution of Nasdaq Crypto Index (NCI), CF DACS provides information and insights into the economic reality engendered by digital asset holdings at a higher-resolution than is possible from an examination of assets and weights alone.
How Diversified is CF Diversified Large Cap Index?
For another example, we’ve applied the structure to CF Benchmarks’ CF Diversified Large Cap Index - the regulated liquid benchmark representing 95% of the total market capitalisation of the investible digital asset universe.
And whilst this is not the place to go too deeply into a comparison of the portfolios, it’s worth noting – at a high level – differences between CF Diversified Large Cap and NCI category and subcategory weights.
Doing this helps illustrate their differing methodologies and how well they meet implied investment objectives – together with CF DACS, the exercise is an attribution-lite that spotlights the key strengths of the structure.
The Diversified goal
First, let’s outline CF Diversified Large Cap’s implied objectives.
Its diversification objective is self-evident. But that goal is quantified by CF Benchmarks’ Diversified Market Capitalisation Method.
For the full methodology go here:
CF Diversified Series Methodology Guide
And here:
CF Digital Asset Index Family - Multi Asset Series Ground Rules - Section 4
For an egregiously simplified version, see below:
This methodology is designed to ‘penalize’ free float market caps of heavier constituent weights more than lighter weights, thereby reducing the index weight dominance of the former.
NCI – more ‘measured’
By contrast, Nasdaq Crypto Index does not have ‘diversification’ as a manifest objective. Instead, eligible assets are selected “according to their relative free float market capitalizations.”
As NCI’s Methodology states, it is designed "to measure the performance of a material portion of the overall digital asset market”.
Weight shift
Comparing resultant CF DACS subcategory weights for CF Diversified Large Cap with those of NCI, we find moderate-to-sharp differences.
As shown in Figure 1. below, the Non-Programmable subcategory of the Diversified Large Cap Index equated to 44.82% as of June 1st, 2022. The Programmable subcategory comprised 51.45%.
That compared with 68.49% in Non-Programmable and 29.89% in Programmable for NCI, as of March 1st, 2022.
Subcategory weights for both portfolios are summarised below.
Top-level points:
Conclusion
CF Diversified Large Cap Index and NCI aren’t properly comparable, but the utility of the structure is clear even from the above surface level examination.
Whilst both portfolios purport to be broadly representative of the crypto market, CF DACS reveals and quantifies the precise exposure of their constituents to standardized classification categories and subcategories.
In this way, the structure is an impartial gauge of the extent to which any digital asset portfolio ‘does what it says on the tin’ – i.e., meets its investment objectives.
This functionality paves the way for the granular fine tuning—including rebalancing and reconstitution—required to ensure that a digital asset portfolio remains aligned with its objectives.
Watch below to understand CF Digital Asset Classification Structure in 3 mins
The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell any of the underlying instruments cited including but not limited to cryptoassets, financial instruments or any instruments that reference any index provided by CF Benchmarks Ltd. This communication is not intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. Please contact your financial adviser or professional before making an investment decision.
Note: Some of the underlying instruments cited within this material may be restricted to certain customer categories in certain jurisdictions.
CF Benchmarks
Gabriel Selby
Ken Odeluga