A First: Cryptoassets and Gold in EU Benchmark Compliant Index

CoinShares Group, the digital asset management firm took another step forward in establishing the presence of digital assets in the institutional investing space. 

CoinShares Launches New Digital Asset Index

The CoinShares Group announced the launch of the Coinshares Gold and Cryptoassets Index (CGCI). This is the first index that has exposure to a digital asset and is also compliant with the EU Benchmark Regulations (EU BMR).

A huge milestone for cryptoassets, as Bitcoin which is often touted as the digital version of gold as an asset class, becomes an integral part of a financial product for institutional investors that seek to have exposure to digital assets.

Moreover, the pairing with gold in this index is done to combine the high volatility of cryptoassets with the low volatility of the precious metal. The risk profile of the index is smoothed out considering that there is no high correlation between gold and Bitcoin, according to CoinShares Group.

The index methodology maintains a basket of 5 equally-weighted cryptoassets weighted against gold. There is no fixed list of cryptoassets eligible for being included, but the criteria is based on 6 month-rolling market capitalization and excludes any ERC-20 tokens and privacy-focused cryptoassets. 

The financial product goes through a re-balancing process, which occurs monthly, with the cryptoasset basket rebalances to include the top 5 eligible market cap weighted cryptocurrencies as of the time of rebalancing. The calculation of the index relies on Kaiko cryptocurrency market data along with Messari’s supply data – two leading data providers in the digital asset space.

Meanwhile, the weights between the cryptoasset basket and gold is determined based on a weighted-risk allocation scheme.

The development of the CGCI resulted from research conducted between CoinShares and Imperial College London, published in 2019, identifying that the pairing of gold and cryptoassets delivers a risk and return profile that is superior to holding either alone.

Cryptoassets Paired with Gold for Better Risk-Reward Profile

The index methodology was created from the research and experimentation conducted with the EU registered benchmark administrator, Compass Financial Technologies to ensure a robust and benchmark compliant index. As the first EU BMR compliant index, the CoinShares Gold and Cryptoassets Index is also live on popular financial data providers like Bloomberg Terminal and Refinitiv.

There are already several options for institutional investors to get exposure to cryptoassets, but with the high volatility of the market, investors may shy away from committing. This new weighted pairing with gold – one of the assets that is known to have a low volatility – allows investors to enter the digital asset space and benefit from higher returns while minimizing their exposure to volatility risk. 

The CoinShares Group already has a great track record in the cryptocurrency space with several financial products which include the first regulated Bitcoin hedge fund and the first exchange-traded Bitcoin product.

Daniel Masters, Executive Chairman of CoinShares believes this is a major step forward for the digital asset space drawing parallels with the institutional adoption of commodities, stating:

“Robustly researched and documented index products were the catalyst for institutional adoption of commodities in the late '90's through the advent of the Goldman Sachs Commodity Index. This crypto and gold index aims to do the same, by using academic research and its benchmark regulated status to pass muster with even the most stringent investment committees.”

The Evolving Space of Digital Assets

The digital asset space has been longing for the attention of institutional investors for some time. In the last couple of years there have been several incursions by big institutions into cryptoassets. Established traditional financial institutions like Fidelity or ICE have launched separate entities for the digital asset industry since then.

However the crown jewel for the crypto space remains to be an approved Bitcoin ETF by the SEC, which would cement the asset’s place in its separate category. Nonetheless this goal seems to be as elusive as two years ago.

Several applications from different asset management firms have been rebuffed by the regulatory authority, and each one of them citing reasons related to the supply side of the cryptocurrency market – the lacklustre custody options, the inaccurate price data and uncertainty over exchange volumes.

Even though the cryptocurrency space developed ever since and more custody solutions appeared for institutional investors, and data providers seem to have built more robust price indices, there is no talk of progress towards approval of  a Bitcoin ETF.

Maybe the key lies in the demand – when there is a sufficiently high institutional demand for digital assets, regulators may quickly change their tune.

CoinShares is part of this cohort of companies working to improve the infrastructure for digital asset financial products. With this new product, the company not only has the potential to generate institutional demand for cryptoassets, but also blazes a trail for further product innovation for others in the space.