One of the developers of CIV-20 index Oleg Naumovich shared why the cryptocurrency market is in need for a new milestone, who and how makes up the index and how it can be used in practice.
Q: Oleg, you are a professional broker with extensive experience of active stock market management. Tell the truth, do you need the crypto market index just to have a common “lighthouse” in the uncommon crypto sea?
A: You can put it this way. But the lighthouse is not only for me; it is for all members of the market, and their number is rapidly growing. Indeed, the basic function of any index of this kind is benchmarking, indicating the situation of the market or a certain industry. Everyone is used to S&P-500, NASDAQ or MICEX Index. These indexes are clear to both professionals and regulating bodies, as well as the public. Looking at the index, the investor or the manager can understand the market situation, see whether it is growing or descending. As a rule, these indexes anticipate the situation. The index is the first to drop; then we see other symptoms of worsening, inflation, GDP drop etc.
This benchmark is also used by investors to solve the practical problem: what happens if I just employ the buy-and-hold strategy? It means that I buy the whole index and don’t do anything for a year. It is a great test for fiduciaries. Imagine that the index falls by 20%, and the portfolio fiduciary managed to keep the drawdown at the level of 10%. An inexperienced investor would get upset for having lost the 10%. But if he had bought the index, he would have lost 20%. In fact, the fiduciary saved your 10%. This is considered to be a good job.
And on the opposite, let’s imagine the situation when the index grows by 20%, but the fiduciary makes you only 15%. You happen to have paid commission for not such a professional job. That is why we need the benchmark: to see how efficient active management is in comparison with the passive one. This mechanism exists almost everywhere in the financial world.
Q: (follow up on the previous questions) Except for the cryptocurrency market.
A: Indeed. The basic indicators to look up to are either general market capitalization or the exchange rate of Bitcoin as the most popular currency. This is a remote and smooth indicator. While the index is something aggregate. At the moment, the crypto market has no fully functioning indicator of this kind. This is what we created.
Q: Do you think it is necessary on the market with not so many professional traders with good command of your trading language?
A: We understand that the market is young, it is just taking shape. But there are some professional investors and traders about to enter it. If only a year ago those were only geeks and IT people who had any interest for cryptocurrencies, now more and more professional traders begin to look at the crypto market.
And, moreover; it’s ok if you say that there are lots of non-professional members. What would they look up to, if there’s no index? Here’s a safe haven for a beginner: buy-and-hold strategy. Buying the index, we buy the whole market, a little bit of every currency. A diversified portfolio with well-balanced risks.
Q: This is the right time to reveal the index structure. Does CIV-20 mean twenty currencies of some kind? If yes, what currencies are these?
A: The top, the most available and the most useful ones for the present moment. The index structure is dynamic, it is constantly rebalancing itself. Even S&P-500 is reviewed on a quarterly basis; in our case, it happens approximately once a week. It is a typical situation for a young market when a popular currency becomes an outsider tomorrow. Stars rise and fall in an instant. Since the cycles are short, the index needs to rebalance more frequently. It makes it convenient for an investor: there’s no more need to watch the market, to get involved. Having bought the index, he can be sure of having the top currencies. I will not reveal the CIV-20 formula and its rebalancing algorithm, it is our know-how for now.
Q: Ok. But I’m still interested in its dynamics. How adequately can it reflect the current situation of the cryptocurrency market?
A: It is pretty accurate. But there is another thing that matters: what kind of profitability it shows. For there is no other milestone, let’s compare it to Bitcoin rate. From April 2016 to September 2017, Bitcoin has grown by 1060%. Profitability of our index for the same period reached 1653%. See? Bitcoin kicked off nice profit, but at some moment there are other altcoins that make better hits. You need to catch the wave that is out of the mainstream. This is what our index and our algorithm are capable of. Now we are sure of that.
Q: I believe there is some pragmatic sense in your project besides just introducing a benchmark.
A: Of course. We are creating an investment fund based on our index. It is an ETF-kind of fund. It has become classic on the stock market where there is one or even several stock funds for each index, with the portfolio almost duplicating the index structure. But there is none on the crypto market. And if we have found an efficient cryptocurrency rebalancing algorithm, why not make a fund to employ the buy-and-hold strategy?
We are in the unique moment to do so. Something similar was happening in Russia from 2003 to 2008, in the five years of stock market development. At that time, Russian index was growing by 30-50%. It did not even require any super management skill: buy it and wait for it to grow by 30-50% in a year. That was when all current financial companies appeared and when they gained their process. Now the cryptocurrency market is going through a similar cycle. During such periods, buy-and-hold is quite efficient.
At the same time, today is unique from the point of view of scale. Now, in the early autumn 2017, the general crypto market capitalization counts up to 160 billion dollars. It may look like a fortune for someone, but for stock market tycoons, large investment holdings and banks it is a children’s game. I forecast the stakeholders’ interest for cryptocurrencies to ripe at the capitalization of one trillion dollars. Before it happens, we have the time to occupy the niche with the potential that is more than obvious to us and other residents of the crypto world. All of us need to take our positions until the large capital arrives and introduces its own rules.
Q: Creation of your own investment fund by itself may be taken by the crypto environment as the arrival of the capital that brings its own rules.
A: Not really so. We do not embody or represent any large capital. We are going to create this project in cooperation with the today’s global crypto community, following the rules acting in the crypto environment. Which means, first of all, crowdfunding and ICO.
Q: ICO? What is that, a tribute to fashion?
A: This is really the most efficient of the tools available today, opening amazing opportunities. But it is a topic for a separate conversation. If you are interested, I suggest that we dedicate another meeting to it.
The next meeting with Oleg, joined by Egor Marchenko who is also a developer in the project. In this session, they speak on the opportunities of ICO development, explain why they do not accept Americans, why they plan to collect not more than 3 million dollars and why it is not a scam.
Q: Hello! You are the crypto index project authors, but we understand that inventing a smart formula is one thing, but bringing it to a legal form on the global scale is another. In your ICO, who is the formal issuer?
Oleg, project CEO: First of all, let me remind you that our product is more than CIV-20 benchmark; it is an exchange-traded fund based on the index. As creating a fund is quite a challenging and expensive task, we decided to establish GuideCTF management company first to manage the fund. It will possess the index which, as we hope, will serve as a support for the whole market. So, there will be two legal entities: the management company and the fund issuer. It means, that the client money will be divided into the money managed by GuideCTF, while the fund is a fund where the clients who trust our strategy deposit their assets into.
Q: But still, why did you choose ICO as an asset attracting tool?
Oleg: Of course, there are some simpler and clearer ones. I’ve been on the stock market for quite a while, and it would not be hard for me to get several key investors into the new cryptocurrency fund. But we should make it clear that ICO helps us, first of all, to expand to the global level. If we dare to develop our index on the global scale, then, of course, we need to appeal to international audience.
Secondly, this is a way for us to ask the market whether it is interested at all. It is one situation when I make a presentation to ten people, and two or three of them believe the idea and follow me. Seeing support from multiple investors is a different thing. Even if they contribute one dollar or ten each, it still matters. It means a vote for us, it means that we are going the right way and the market needs us.
And, finally, why is it ICO? We treat ourselves as a venture project and we warn our investors that venture investment is a risky thing to do. This is a way to spread the possible risk on a larger number of clients. If a client gives us half a million dollars and then there is a drawback, it is one thing; it takes long to get over. When 500 thousand people give you one dollar each, it is a completely different thing. It is an absolutely different level of risk.
Q: What would you say of the risk connected to the legal status of ICO, or, to be more precise, to the absence of such a status? Which jurisdiction does the fund belong to, and what currency do you expect to attract into your assets?
Egor, technical expert of the project: The subject matter is cryptocurrencies only. We do not accept any fiat currencies, considering the governments’ opinion of cryptocurrencies. At the present stage, all our activity is concentrated in the crypto world. Consequently, we accept only three main currencies: Bitcoin, Litecoin and Ethereum. These are the ones we are sure to remain liquid by the end of the project.
As for the governments’ position, then, doubtlessly, we have to take them into account. For example, the USA, Canada, and Singapore have equaled joint-stock tokens to shares, and have strongly suggested that their citizens do not participate in ICO that have not been registered with a supervising body. Therefore, we warn everyone that we deny participation in our capital for citizens of the said countries. Of course, Singapore and the US are very important markets for us and we do not refuse them. We will gladly cover all the markets as soon as we have done the official registration with the American SEC and Singaporean MAS.
Q: What kind of registration is that?
Oleg: It means, legalization of the fund tokens. Now we run ICO for the management company itself. The management company will make profit by receiving commission from its management activities. Generally speaking, it is the bearer of the product we will use to earn our money. However, the business begins only when we have made the fund tokens and have attracted assets for management. This is the starting point for business. Project delivery time is within 2018. We have planned to issue tokens at the stock exchange in January 2019.
Q: How much assets do you plan to attract?
Oleg: We have two levels. At pre-ICO we want to attract 200 thousand dollars for a proper ICO. We’ve raised the ante very high, the specialists we need are expensive, for it is one of the most popular patterns used nowadays. So, we run our pre-ICO for clear and fixed capital attraction; to get it, we do not need more than 200 thousand. Of course, we speak of the equivalent. The minimum amount for ICO is the cryptocurrency equivalent of 1.5 million dollars.
We plan to stop the pre-ICO as soon as 200 thousand dollars is collected. At the main ICO, we will form the price with an open subscription. It means, that the larger funds we raise, the higher is the final price for everyone, because we satisfy all the inquiries proportionally to the assets we procure. There are some restrictions of our remuneration. I believe that over three million dollars would trigger restriction mechanisms. For this reason, we need at least 1.5, but not more than 3; that would be adequate. The attracted assets will be used, first of all, for the sophisticated and expensive official registration procedure I have mentioned: Singapore and the US. Secondly, for promotion, which is essential for our project. Thirdly, there is security.
Q: Security of what? Or who?
Egor: We mean, security of all project delivery stages. It is critical for us. In fact, a third of the whole project budget will be used to strengthen guarantees for us and for our investors. ICO is a popular tool nowadays, which is also used by swindlers. They have hacked multiple websites on the ICO days, changing wallet addresses for theirs. At the beta testing stage, we are thinking of announcing a hacking contest to find faults in our system, and award the winners. I would like to emphasize how important it is for us.
Q: By the way, speaking of security guarantees for investors, ICO does attract lots of swindlers. Not hackers, but swindlers who organize ICO themselves. Your crypto index idea is brilliant, but how can you guarantee that the project does not turn into a scam?
Oleg: Honestly, it is a hard and a fair question. I have analyzed many ICO, where the organizers claimed that their tokens were unique for international transactions and transfers, but most frequently, it is trash. Take ten ICO, and six of them would claim to be a payment system. Just a coin with no idea. This is the first feature of a scam. However, we have an idea, which has not been employed by anyone else.
Secondly, we have a clear understanding of how to implement it. I am absolutely sure that it works and that the market needs it. Even if the scale is smaller than I imagine, this system is viable even without us. The index can survive on its own.
One of the guarantees is my good name. I am a financial specialist with over 10 years’ experience, and I know what people’s trust means. Once you get involved in a story, you screw up the whole career. I am a young man, and I have no plans of risking my personal reputation and future. I want to dedicate my life to finance, so I cannot let anyone down. Our task is to introduce our product, CIV-20 index, and fix it on the market. If it stands in the same line with S&P-500, NASDAQ, MICEX index, if it ever turns into a global benchmark, we can say that our purpose has been achieved, that the project will be monetized, and this is, indeed, the objective we look up to. First of all, we create a profitable business, and we invite you to participate together with us.