Vinter K33 Crypto Indexes
Index Methodology
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Introduction
The Vinter K33 Crypto Indexes are a family of benchmarks. The indexes are developed to provide a rule-based and transparent way to track the value of a portfolio. Each index measures the value of an investment strategy.
This methodology clearly determines what constitutes an active market for the purposes of each index, and establishes the priority given to different types of input data. The methodology considers factors like the size and liquidity of the market, the transparency of trading, the positions of market participants, market concentration, and the adequacy of any sample to represent the market or economic reality that the benchmark is intended to measure.
K33 is a research-led digital assets brokerage with investment services, helping clients across EMEA make informed decisions backed by industry-leading digital assets research, enter the market guided by a multi-exchange brokerage service, and invest safely for the long term in tailored managed funds. K33 provides a unified platform where customers get access to research, digital assets brokerages, funds, and structured products. Read more at k33.com.
Invierno AB ("Vinter") is a pioneering index provider specialized in crypto assets, playing a key role in the emerging crypto ETF industry. The firm collects digital asset data from hundreds of sources, transforming proprietary strategies into investable products. Learn more at vinter.co
Indexes
KVQ
The K33 Vinter Quality Index (“KVQ”) is an equal-weighted index of the crypto assets that pass the Quality Filter. This index aims to reduce the downside risk of investing in crypto by selecting high-quality assets and avoiding low-quality assets. The index is rebalanced quarterly. During a rebalancing, we rank all top 30 assets on quality and select the ones that pass the Quality Filter. Equal weighting, as opposed to weighting by size, distinguishes this index from a plain vanilla top 10 crypto index. In addition, equal weighting provides a healthy antidote to the market’s overconfidence.
Construction
Universe: Eligible assets in the top 30 by market capitalization.
Selection: All assets that pass the Quality Filter.
Weighting: Equal weighted.
Rebalancing: Quarterly on the last business day of the month, starting at the end of January.
Rationale: Invest in the high-quality assets identified by K33's industry-leading research team. High-quality assets have the highest chances to survive in the long run and the greatest potential for capital appreciation. By investing in an equally-weighted index, investors can circumvent the market’s overconfidence in the largest crypto assets.
Dissemination
Currency: USD
Type: Price return
Base date: 2021-01-01
Base value: 1000.00
Publish: Daily after 4 pm London time.
Identifiers
Full name: The K33 Vinter Quality Index
Ticker: KVQ
Bloomberg: KVQ
Refinitiv: .K33VQ
Vinter API: vnk3-qualeq-30-d
Quality Filter
The purpose of the Quality Filter is to evaluate the quality of crypto assets from an investor’s standpoint. A high-quality asset is defined as an asset having a small probability of permanent financial loss. Since crypto asset prices almost never go to zero, we define permanent financial as an asset’s price decreasing by 90% or more from its current value and never going above this level again. To mitigate this downside risk of permanent financial loss, the Quality Filter acts as a safety net where only high-quality assets are retained. We perform the following four steps.
Categorize: Each asset is assigned to a category, which allows for relative comparison.
Exclude: Assets with faulty tokenomics, missing information, or presenting a lack of transparency, are taken out.
Evaluate: Five pillars enable the evaluation of an asset's quality for each category.
Pick: The Quality Filter picks the highest-ranked assets with scores above the cut-off Quality Score.
1. Categorize
Categories regroup and enable the comparison of assets having similar purposes. Each asset in the top 30 by market capitalization belongs to one of those categories:
Smart Contract
Payment
DeFi
Inter-Blockchain Communication
Centralized Exchange
Money Infrastructure
Specialized Utility
Community
Gimmick
2. Exclude
In the second step, we exclude assets with faulty tokenomics, since they have a large probability of a permanent financial loss. Besides removing assets with clear red flags, we also exclude assets with missing information or lack of transparency since we cannot compare them with other assets.
3. Evaluate
Each crypto asset that passed the first two steps, can be evaluated on five pillars. These pillars are adjusted for each category to allow for relative and appropriate evaluation, as some categories are not comparable.
Pillar A: Persistent network effects
This pillar assesses the strength of the current network effects. A high score indicates that the token is unlikely to be made irrelevant with the emergence of new, similar tokens and that continued usage of the token is likely. A low score on persistent network effects entails that the token is more likely to be made irrelevant, either by competing tokens or the outlook for the use case being weak.
Pillar B: Use
This pillar assesses the volume of meaningful economic use of the asset. Meaningful economic use of an asset refers to payments for transactions where value changes hands. The payee ought to be willing to pay for this use in another currency than the one paid.
Pillar C: Regulatory Risk
Regulatory risk is the potential for government regulation changes to impact a crypto asset's value and adoption significantly. Crypto assets with a high regulatory risk will get a low score as they are more likely to become subject to regulations, which can significantly decrease demand and value.
Pillar D: Ecosystem size and liveness
A vibrant community of developers, users, and businesses that are actively working to build and use a crypto asset can be a determining factor for success. Where data is available, we assess the economic strength of this community’s demand. A high score indicates that many developers actively work in the asset’s ecosystem and a large community of dedicated users.
Pillar E: Inflation schedule and ownership concentration
Inflation and ownership concentration should be viewed in combination as they pose similar risk dynamics regarding token pricing.
The inflation of a token is evaluated on the percentage of supply already issued. We give a high score to assets with a high percentage of the supply already issued. Most crypto assets have an issuance schedule with diminishing inflation, based on the simple principle that a scarce supply is positive for the value of a token.
Ownership concentration measures the wealth distribution of the asset. A high ownership concentration leads to a bad score. When just a few token owners control most of the supply, this creates a risk of price drops if these owners were to sell their tokens.
4. Pick
Each pillar is scored from 0 to 5, where 5 is the best score. If an asset scores 0 on a pillar, it is excluded. The Quality Score is given as a weighted average of the five pillars, where the first pillar has a weight of 2/6 and the remaining pillars a weight of 1/6 each. The first pillar, Persistent Network Effects, has twice the weight of the other pillars, because it is the most important one. The Quality Filter picks the highest-ranked assets with scores above the cut-off Quality Score.
If the lack of data on a certain pillar poses a significant risk, then the grade for this pillar will be set to 0. But if other relevant data sources can be used to evaluate the asset for this pillar, then the grade for this pillar will be set conservatively based on these data.
Illustration
The scoring process is illustrated in the table below. Assets a to d are in the Payment category, while assets e to i are in the Smart contract category. In this simplified example, we have only two categories. The Quality Score is given by the weighted average of the five pillars: Asset a, for example, has a Quality Score of 2/6 * 4 + 1/6 * (4 + 4 + 4 + 3) = 3.83 rounded to two decimals. The cut-off point for the high/low quality in this table is 3.00, which means that assets e, a, f, and b are of high quality whereas assets c, d, h, i, and g are of low quality.
Category
Asset
Pillar A
Pillar B
Pillar C
Pillar D
Pillar E
Quality Score
Quality
Payment
a
4
4
4
4
3
3.83
High
Payment
b
4
3
3
3
3
3.33
High
Payment
c
1
2
3
3
3
2.17
Low
Payment
d
1
2
3
4
1
2.00
Low
Smart contract
e
5
4
4
4
4
4.33
High
Smart contract
f
4
4
3
3
3
3.50
High
Smart contract
g
1
3
3
3
0
-
Low
Smart contract
h
1
2
3
4
1
2.00
Low
Smart contract
i
0
2
3
4
1
1.67
Low
General Construction Parameters
This section defines the general construction parameters used in designing the index such as the asset universe, the asset selection and the rebalancing weights. This section contains the details needed to calculate each index.
Universe
The asset universe is a list of all possible index constituents. The default asset universe consists of all eligible constituents. It is possible to restrict the universe to assets that only contain a certain label e.g. Metaverse or Web3 as defined in the Vinter Taxonomy.
Selection
The index constituents are selected from the asset universe. One example is to select the ten largest assets based on the current market capitalization. In general, the selection process can be based on a number of factors such as market capitalization, trading volume, returns, volatility, or a combination thereof.
Assets are selected on the review date, which is five business days prior to the rebalancing date. Note that Review Date is not the same as the Yearly Review.
If it is not possible to reach the intended number of constituents, the Index Committee can decide to either include non-eligible constituents or allow the index to have fewer constituents than intended. The decision shall be made publicly available.
Weighting
Rebalance weights are calculated on the review date.
The current weights per asset display the current asset allocation, and is relevant for an ETF creation/redemption. The current weights change every day, based on price movements, whereas the rebalance weights are unchanged between rebalances. The rebalance weights are updated only when the index is rebalanced.
The weight for each asset is always between 0 and 1. The sum of all constituent weights is equal to 100%.
Rebalancing
All indexes are rebalanced periodically, following the rebalancing calendar.
Rebalancing involves selection of constituents and calculation of their rebalancing weights. Calculations are done using the closing prices on the rebalancing date. The new weights per asset are used on the opening of the day after rebalancing.
After the rebalance, the portfolio is updated so that its current weights per asset equal the rebalancing weights per asset. The bigger the difference between the current weight and the rebalancing weight, the larger the portfolio turnover.
Eligible Assets
Assets are eligible as index constituents if they meet the eligibility criteria listed in Vinter’s benchmark statement.
This index methodology expands the asset universe by removing from the eligibility criteria by including crypto assets that are designed to be private.
Calculation
The index value is given by the weighted sum over all constituents of quantity times price divided by a divisor.
The price per asset is calculated by Vinter, as detailed in the constituent pricing section.
The quantity per asset is set to the Rebalancing Weight per asset after rebalancing. In a price return index, the quantity per asset is unchanged between rebalances.
The divisor enforces index continuity on rebalancing. The divisor is defined so that the index starts at a certain start value, which ensures each index tracks the value of a certain amount of capital invested on the start date.
Constituent Pricing
The Vinter reference rates are used to price assets and can vary from one index to another. The algorithms are described in Vinter's single asset reference rates. The Benchmark Statement defines the eligibility criteria for input data.
Market Capitalization
The market capitalization is given by price times circulating supply. Using circulating supply is similar to using public float for an equity index. The market capitalization is calculated at midnight UTC.
Index Provider
Invierno AB, Reg. No. 559207-4172, Box 5193, 10244 Stockholm, Sweden (“Vinter”)
Benchmark Administrator
Vinter is the benchmark administrator and the central recipient of input data with the ability to evaluate the integrity and accuracy of input data on a consistent basis. Vinter is responsible for the development of the index and controls all aspects of the provision of the benchmark. Vinter has established a permanent and effective oversight function, governance processes subject to periodic reviews and audits, policies regarding complaints, ethics, conflicts of interest, and contingency, and has established a clear internal organizational structure with consistent roles and responsibilities to identify, prevent, disclose, mitigate, and manage conflicts of interest.
Calculation Agent
Vinter is the calculation agent and is responsible for determining the value of the index described in the index methodology. Vinter calculates the index values in accordance with the index methodology. Upon the request of the benchmark administrator, the calculation agent shall provide all information available on the composition and details of the calculation of the requested index.
Document Versions
Version
Date of update
Change
1.0.
2023-02-02
Initial version published.
Disclaimer
Any product(s) offered with the indexes described in this methodology as underlying is not in any way sponsored, endorsed, sold, or promoted by Invierno, reg. no. 559207-4172 (“Vinter”). Vinter does not make any warranty or representation whatsoever, expressly or impliedly either as to the results to be obtained from the use of the index(es) “Index” described, licenses, used, or referenced under any Programme or Prospectus and/or the figure at which the Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated solely by Vinter. However, Vinter shall not be liable (whether in negligence or otherwise) to any person for any error in the Index and Vinter shall not be under any obligation to advise any person of any error therein. Vinter is a registered trademark owned by Invierno AB. Invierno AB and its indexes are protected by various intellectual property rights. All third-party use of Vinter and its indexes require by law a licensing agreement with Invierno AB. The Index is a product of Invierno AB. Any Programme referencing the Index is not sponsored, endorsed, sold, or promoted by Vinter and/or its affiliates, and none of such parties makes any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index. The Programme is in no way sponsored, endorsed, sold, or promoted by Vinter and its Licensors and neither of the Licensors shall have any liability with respect thereto. Vinter is not a registered investment advisor, tax advisor or broker/dealer. The content of the index methodology or its related documents underlying is intended only to provide general and preliminary information and shall not be construed as investment, tax, legal or financial advice. The reader shall ensure that all of his or her investment decisions are not made based on the content of this document and shall be solely responsible for all financial losses made in connection with investment decisions. Nothing contained in the index methodology or its related documents constitutes a solicitation, recommendation, endorsement, or offer by Vinter or any third party associated with Vinter to buy or sell any financial instruments in this or any other jurisdiction. Although best efforts are made to ensure that all information on the methodology documents is accurate and up to date, occasionally unintended errors and misprints may occur. The index owner grants the benchmark administrator an exclusive, royalty-free, non-transferable, non-sublicensable license to use the index owner's intellectual property rights to fulfill the benchmark administrator's obligations under the index agreement and the Benchmarks Regulation, including registration of identifiers for indexes. Vinter is a registered Benchmark Administrator by Finansinspektionen (FI) and the European Securities and Markets Authority (ESMA) under Article 34 of the European Benchmarks Regulation (2016/1011).
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