At Token Factory, we believe in the wisdom and performance of unmanaged portfolios that capture the performance of an asset class in a smart way. Smart beta means using analytics and simulations to algorithmically define a broad-based, diversified investment portfolio. The term “beta” means correlation to the broader market indexes. An example of a true-beta product would be the Vanguard Index Fund, which tracks the performance of the S&P 500. We say this fund has a "beta" of 1.0, since it uses the S&P 500 as a benchmark.

A smart-beta approach would be to recognize that the cap-weighting of the S&P may notprovide the best returns long-term, so you could imagine an index comprised of the last 490 stocks on that list, which probably has a chance of better returns in the long run. By running simulations and backtesting, you can determine what you think is the best version of an index that consistently beats the S&P. Then the next step is to create an investable product that produces those returns.

What is a Cryptographic Token?

In the blockchain world, a token is a tiny fraction of a cryptocurrency (bitcoin, ether, etc) that has a value usually less than 1/1000th of a cent, so the value is essentially nothing, but it can still go onto the blockchain. (For more on blockchain, please visit www.decentralstation.com).

This sliver of currency can carry code that represents value in the real world - the ownership of a diamond, a plot of land, a dollar, a share of stock, another cryptocurrency, etc.

Tokens represent ownership of the underlying asset and can be traded freely. One way to understand it is that you can trade physical gold, which is expensive and difficult to move around, or you can just trade tokens that represent gold. In most cases, it makes more sense to trade the token than the asset. Tokens can always be redeemed for their underlying asset, though that can often be a difficult and expensive process. Though technically they could be redeemed, many tokens are designed never to be redeemed but traded forever. On the other hand, a ticket is a token that is designed to be redeemed and may or may not be tradable.

CryptX Summary

When you purchase the CryptX token, you are purchasing the value of the entire portfolio of all the cryptocurrencies we have ever bought, divided by the number of tokens. For a simple model, imagine that we start with $1,000. We take that money and purchase 50 different cryptocurrencies, and we send those coins to cold storage, so they are secure. That’s our portfolio. Then we issue, say 20 new CryptX tokens and sell them on the Lykke exchange for $50 each. When people buy them, we collect the money and send the cash back to the other exchanges to buy new tokens. Every week, we rebalance the portfolio according to our rules, and we take out 0.0288 percent from the entire portfolio as our fee (adds up to 2 percent per year). Your tokens don’t change, but the NAV does.

The NAV is always the total market value of the portfolio divided by the total number of tokens outstanding. In our example, the NAV starts at $50, but a day later it could be a bit less or a bit more. It’s hard for the NAV to change too much in a day, because each coin has only a small percentage of the portfolio. At the end of the week, we apply our algorithm again. It’s possible that a few coins have slipped off the index and some others are now on. We don’t sell tokens from the portfolio. Instead, we just purchase the new mix each week. So, even though there are 50 coins in the portfolio each week, the actual portfolio could have quite a few more.

The goal of our portfolio is to “represent the overall market” without the big-caps taking too much, giving new promising coins a chance to rise. This, we hope, will provide strong returns without the volatility of a more concentrated portfolio. We’re aiming to capture the returns of the big-cap and mid-cap coins.

How we do it
The hard way. We guarantee that behind every token is the full portfolio of coins that the token represents. This means that every week we purchase about fifty cryptocurrencies on the large exchanges, according to our algorithm, using software rather than doing it by hand.

We send the coins straight to cold storage (this means we have the private keys in our possession, offline, so we can’t move them easily, and neither can anyone else). We then issue the corresponding tokens and price them to match the current NAV of existing tokens. And then we sell our tokens, either on our web site or on an exchange.

Coin-Token diagram
We purchase our algorithmically-determined mix of coins on a few large exchanges, then we put those coins immediately into cold storage. We then issue coins and sell them on an exchange.
Weighting
We use a fourth-root weighting scheme, which takes a cap-weighted ranking and smooths it out to closer to a flat distribution. This gives good exposure to the hard-to-get alt coins, while still maintaining a good percentage of the big-cap currencies. Anyone who wants to add bitcoin or ether to his/her portfolio can do so easily. We cap the largest coins as follows:

  • Under $1b market cap: We use the fourth-root of the market cap to determine the weight when we purchase. No coin can grow to more than 12 percent of the portfolio

  • $1b to $10b market cap: automatically gets 6 percent of the portfolio

  • $10b to $100b market cap:automatically gets 7 percent of the portfolio

  • $100b+ market cap: automatically gets 8 percent of the portfolio
Number of coins
We’ve designed the portfolio to grow over time, as the industry does. It makes no sense to fix the number of coins or set a market-cap hurdle. We’ll determine the number of coins as the market changes, with the goal of broad diversification and reducing volatility.

We will initially start with fewer than 50 coins, but we’ll expand the number of coins as we see the overall market rising. We could end up with more than 100 coins in the portfolio a few years from now. We could also reduce the number if the market shrinks

Rebalancing
We rebalance weekly. We don’t ever sell coins, so we adjust the weekly purchase of new coins to add to the portfolio. You can think of this as cumulative addition, not replacement. We will adjust the period according to demand, but we will start with weekly.
Fee
In return for creating and managing the token, Token Factory will charge a 2 percent annual fee, taken out weekly. This comes to a reduction of 0.03883624 per week and will be reflected in the published NAV. We take the fee out of the weekly purchase. In the case that we have a large outstanding market cap and low sales, we will sell coins from the portfolio to take out the fee. By rebalancing and removing the fee weekly, we make all tokens essentially fungible.

A newly-issued token will have exactly the same NAV as any existing coins. Because of the fee, our NAV will always drift behind the idealized (no-fee) portfolio value. Over time, there will be a discrepancy between the coins that should have stayed in our portfolio and the current portfolio. This is how an ETF works.

Redemption
We don’t intend for anyone to ever redeem. However, to give our customers a sense of security, we will make it possible. When you put in a request to redeem your token, we have the option of simply buying it from you for cash at the bid price. Should we decide not to do that, you will need to provide us with the public addresses where we should send the coins. Many of these coins may no longer be in the current portfolio but were purchased at least once in the past. Once you have submitted all the addresses, we have ten working days to put all the coins in your account. Further details can be found on our detailed redemption form.
Divisibility
Our tokens are not divisible. There’s really no need to divide an index token - then you would get some portion of the NAV, which would be too confusing for people.
Token Factory
Product Plans

Our goal is to sell $500 million to $1 billion of the CryptX token. By early 2018, we hope to be selling $1 million per day of our product.

We are looking for exchanges to list on. We are currently in negotiation with the people at Lykke to list our token on their exchange. We are looking for other exchanges that would be interested in listing our token - can you help us with that? If so, please contact us. We are also looking at unregulated options.

We plan to release many products. All of them will have the following characteristics:

  • The portfolio will be unambiguously algorithmically defined, based on research.

  • We will reserve the right to make adjustments "by hand," but we expect them to be very rare ( i.e. when we suspect a scam or price manipulation of a coin that would otherwise fit our requirements).

  • We will always purchase the underlying coins or securities.

  • We will create a token that represents the value of that portfolio.

  • We will create a legal agreement that binds the token to the portfolio.

  • We will issue and sell our tokens on various exchanges and on our own site.

  • We will publish the NAV of each portfolio daily: the NAV is the value of the portfolio divided by the number of tokens issued.

  • When we sell out each issue, we repurchase at the time of our weekly rebalancing. We then offer a new batch of tokens for sale.

  • Token batches make no difference. Tokens for a given product have no identity. After you buy a token from us at the issue price, you can sell it to anyone else, any time, for any price that person will pay. They are completely fungible.

  • We plan to offer to redeem tokens, but it will be very difficult. We offer it mostly as a formality, as we never intend to sell coins and we hope never to redeem any tokens.

  • Eventually, we hope to be market makers.

  • Eventually, we hope to have a liquidity fund that buys back tokens.

  • We will have guidelines on who can legally buy our various tokens.

  • We will include a prospectus that outlines the risks of each product.

  • We will charge a weekly management fee automatically. This will be built into the tokens themselves - they will automatically decrease in value every week. The fee will be in the range of 2 percent per year. By definition, then, the NAV will always be less than the total value of the assets in the portfolio. This reflects the effort required to build and maintain the portfolio.

  • The algorithm will automatically rebalance the portfolio. We are building the software system now.
For more details, please see our white paper.
We are building
the CryptX
token system
now
We plan a special offering when we launch our token, and we have much more coming. We want people to learn how to apply good portfolio design to blockchain-based tokens. Sign up for our mailing list. We’ll notify you of our progress, products, and thoughts on cryptoinvesting.
logo-footer

Token Factory is a division of 20|30, building a broad portfolio of blockchain-based products.
We’re a community of blockchain innovators. Come join us!
Learn more at 2030.io.