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Guiding Principles and Investment Approach

Version 1.0.0

The Arbitrx Crypto Funds were developed to provide investors with a clear, rules-based, and transparent way to track the value of individual crypto assets and groups of crypto assets. The funds are designed for benchmarking active strategies, serving as underlying funds for tracking funds or simply measuring the returns of the market over time.

The crypto market is new and presents many challenges to well-established protocols for traditional assets such as stocks and bonds. The Arbitrx Crypto Funds aims to combine the best of traditional asset investment methodologies with appropriate adjustments to adapt those practices to the crypto space.

The guiding principles of the Arbitrx Crypto Funds include:
Pricing decisions must follow a clear, rules-based, and transparent process.
If the judgment of the Arbitrx Crypto Fund Committee is required when applying those rules, decisions will be made public with full documentation of the decision-making process.
Funds are designed in all aspects to be investable and replicable; as such, they will take into account measures surrounding liquidity, capital controls, exchange stability, custody limitations, and other factors in a rules-based manner.

The Arbitrx Crypto Funds will be governed by the Arbitrx Crypto Fund Committee with the support of the Arbitrx Crypto Fund Advisory Board.

Arbitrx Crypto Funds Committee

i. Overview: The Arbitrx Crypto Funds Committee has sole responsibility for developing, maintaining, and adjusting the Arbitrx Crypto Fund Methodologies, and for verifying the data sources used to calculate options.

ii. Responsibilities: The Committee meets monthly on the 25th​ of the month (or the first business day following the 25th ​of the month) with the following goals:

    • Review and verify all data sources—existing and proposed—contributing to the Arbitrx Crypto Funds for uptime, accuracy, and robustness
    • Review and approve new methodologies or changes to existing methodologies to the Arbitrx Crypto Funds
    • Review and approve all methodological decisions that require judgment, and provide detailed public explanations of those decisions
    • Handle other matters on an as-needed basis

iii. Voting: Decisions are made by a simple vote of a majority of the members of the Fund Management Committee present at the meeting. A quorum of two members is required for a meeting to take place.

Arbitrx Crypto Fund Advisory Board

i. Overview: The Arbitrx Crypto Fund Advisory Board (the “Advisory Board”) is composed of leading experts in the fields of traditional asset indexing and crypto-assets. The role of the Board is to provide considered opinions on critical issues facing the Arbitrx Crypto Fund Committee and to make recommendations on potential changes to the methodologies surrounding Arbitrx’s investments.

 

ii. Responsibilities: The Advisory Board meets on a quarterly basis and on an ad hoc basis as requested by the Arbitrx Crypto Fund Committee, and will address specific issues where insight and perspective will be additive to the efforts of the Committee. Advisory Board suggestions are not binding to the Fund Committee.

The Arbitrx Crypto Funds are designed to capture the investable market opportunity for crypto assets around the world. This section outlines the rules governing which assets and exchanges contribute to the indexes.

Exchange Eligibility Requirements

i. Eligibility Requirements

Arbitrx considers an entity to be an Eligible Cryptoasset Exchange if it meets the following criteria:

a. Provides an open platform for exchanging at least one crypto asset for either another crypto asset or for a fiat currency

This requirement exists to identify the set of institutions to consider for further analysis.

 

b. Is not domiciled in a country, region, or locality that implements meaningful capital controls on international investors

This requirement exists to eliminate assets or price inputs from exchanges that are not accessible by international investors. The crypto market has seen unusual premiums and/or discounts emerge in markets where meaningful capital controls exist.

 

c. Is in compliance with local regulations and not subject to extraordinary regulatory or legal action

This requirement exists to limit exchanges to those that are positive actors in the community and to limit the potential for interruptions in service or unusual pricing due to the government or regulatory enforcement actions.

 

d. Charges fees for trading

This provision is designed to exclude exchanges that encourage wash sale trading.

Note that exchanges that engage in “trade mining”—the practice of compensating individuals with an exchange-specific coin for trading other coins on that exchange, as a way of offsetting the cost of executing transactions—are also excluded under this clause.

 

e. Has a functioning, secure, and reliable application programming interface (API) allowing for the timely ingestion of trade and volume data

A functioning, secure, and reliable API is required to onboard data from exchanges. In addition, it is a test of the reliability, transparency, and robustness of the exchange itself.

 

f. Has no significant downtime, withdrawal, or known security issues

This requirement exists to protect the fund methodology from pricing or asset inclusion distortions that arise at exchanges with significant downtime, withdrawal, or known security issues.

 

g. Accounts for more than 1% of the combined trailing 30-day dollar trading volume of all crypto assets on entities that meet rules III.A.i.a through III.A.i.f

This requirement exists to ensure that the fund captures only robust exchanges where sufficient volume exists to support accurate price discovery. In addition, excluding the long tail of small exchanges eliminates significant engineering and maintenance burdens that would have little to no impact on the resulting price data. The Arbitrx Crypto Fund Committee reserves the right to add additional exchanges that fall outside of the 1% requirement as contributors if it deems those exchanges systemically important. Such designations will be made public in the meeting minutes of the BArbitrx Crypto Fund Committee.

 

h. In the opinion of the BArbitrx Crypto Fund Committee, relying on all available data does not inflate or exaggerate the volume of trading on the exchange.

The Arbitrx Crypto Fund Committee conducts a careful analysis of reported trade volume, size, frequency, patterns, spread size, and other factors to evaluate the validity of an exchange’s reported volume. It may also rely on third-party evaluations and other factors. The goal is to exclude exchanges from the consideration that may exaggerate volume or report noneconomic trading activity.

ii. Review of Eligibility and Emergency Removal

a. Normal Review: The Arbitrx Crypto Fund Committee will review the list of Eligible Cryptoasset Exchanges on a monthly basis.

Failure to meet any of the Eligibility Requirements speaks to emergent risks to the quality of data coming from a crypto-asset exchange.

 

b. Emergency Loss of Eligibility: Under extraordinary circumstances, exchanges may lose eligibility immediately by a unanimous vote of the quorum of members of the Arbitrx Crypto Fund Committee. The Committee will post meeting minutes of that removal online.

This rule exists to allow the Arbitrx Crypto Fund Committee to stop Eligible Cryptoasset Exchanges from contributing prices to its indexes in extraordinary situations where Arbitrx has reason to believe the pricing from those indexes is not reflective of true price discovery in a given asset.

iii. Use of Eligible Cryptoasset Exchange Subsets for Calculating New Indexes or Index Variants

The Arbitrx Crypto Fund  Committee may elect to create new funds, or variations on existing funds, using defined subsets of the complete list of all Eligible Cryptoasset Exchanges. For example, a fund could be constructed that restricts its pricing inputs from Eligible Cryptoasset Exchanges selected on the basis of legal domicile of the exchange, or specific regulatory status of the exchange, or alternative trading volume minimums, or any other factor that the Committee may elect to use. Any funds using subsets of the Eligible Cryptoasset Exchange will be clearly labeled as such.

Cryptoasset Eligibility Requirements

The Arbitrx Crypto Funds draw core constituents from their list of eligible crypto assets, which comprise those items that meet each of the following Eligibility Requirements:

i. Eligibility Requirements

a. Is a cryptographically secured digital bearer instrument

The Arbitrx Crypto Funds use a broad definition of crypto assets to capture all coins and tokens associated with public blockchains, including those using a variety of different consensus mechanisms.

 

b.Has a price that is not pegged to another crypto asset, fiat currency, group of those currencies, or hard asset

The Arbitrx Crypto Funds exclude stablecoins and other pegged assets from consideration, as the funds are built for investors searching for returns as opposed to stable values. Note: An exception to this rule can be made for funds deliberately designed to include these assets, but that exception will be clarified in the individual fund methodology.

 

c. Is freely traded and can be freely held for the foreseeable future

This requirement exists to ensure that assets may be traded and stored in a manner that is acceptable to an institutional investor. It also allows for the removal of assets with known terminations or pending illiquidity, such as those that arise from the announced freezing of a placeholder token at the end of a registration process, among other potential situations.

 

d. Trades on two or more eligible crypto-asset exchanges, without withdrawal, issues specific to that crypto asset

This requirement exists to ensure robustness in the exchange ecosystem supporting any given crypto asset. It guarantees that at least two exchanges support a given asset and that the second (third, fourth, etc.) exchange(s) is (are) sufficiently robust to maintain smooth trading in the event of a failure at any single exchange. Note: This rule takes into account withdrawal issues on an asset-by-asset basis at each exchange.

 

e. Is custodied by a third-party custodian regulated as a trust company in the EU states regulated within other regulatory frameworks deemed comparable by the Arbitrx Crypto Fund Committee.

This requirement exists to ensure that assets in the fund can be safely held by a custodian with a regulatory status acceptable to an institutional investor.

The list of custodians meeting the criteria above is reviewed annually. The list of coins available to custody at these custodians are reviewed quarterly. As of December 20, 2019, the list of custodians were:

      • Anchorage
      • Bakkt Warehouse
      • BitGo
      • Coinbase Custody
      • Fidelity Digital Assets
      • Gemini Custody
      • itBit
      • Kingdom Trust
      • New York Digital Investment Group

 

f. Has no known security vulnerabilities, including critical bugs, undue exposure to 51% attacks, or other factors, as determined by the Arbitrx Crypto Fund Committee

This requirement exists to ensure the asset is not knowingly exposed to a critical security risk that could lead to a significant loss in value.

 

g. Has traded more than 10% of its free-float and inflation-adjusted market capitalization on eligible cryptoasset exchanges over the past 30 days.

This requirement exists to ensure the cryptoassets included in the index are sufficiently liquid to facilitate easy investment and withdrawals.

 

ii. Loss of Eligibility and Exceptions

a. Normal Loss of Eligibility: Assets will lose eligibility and be removed from all indexes at the next regular reconstitution event if they violate any of the listed Eligibility Requirements for 30-consecutive days.

Failure to meet any of the Eligibility Requirements for individual cryptoassets speaks to emergent risks surrounding that asset. The 30-consecutive-day provision avoids unnecessary churn caused by individual-day point failures.

 

b. Emergency Loss of Eligibility: Under extraordinary circumstances, assets may lose eligibility and be removed on a same-day basis by a unanimous vote of the quorum of members of the Bitwise Crypto Index Committee. Such emergency removals will take place at 4:00 p.m. ET following the conclusion of the meeting and public posting of that notice on our website.

This rule exists to allow the Bitwise Crypto Index Committee to act quickly in the event of truly extraordinary circumstances, including major security breaches, regulatory action, or identified fraud that imperils the value of an eligible cryptoasset.

 

c. Hard Forks Exemption: Hard Forks are granted a 45-day exemption to rule III.B.i.d.

Hard forks are new cryptoassets that are granted to holders of existing cryptoassets when portions of the consensus nodes adopt different policies. In the event of a hard fork, holders of an existing cryptoasset end up with ownership of both the original cryptoasset and the new, hard-forked cryptoasset. These hard-fork assets can be significant in size and importance in the marketplace.

To reduce unnecessary turnover in the indexes, hard forks are given a 45-day exemption to the volume-related portions of the Core Eligibility Requirements, so that they are not reflexively removed from indexes due to their “newness.”

 

iii. Use of Restricted Or Alternative Weightings of Eligible Cryptoasset Subsets for Calculating ​Indexes

The Bitwise Crypto Index Committee may elect to create new indexes, or variations on existing indexes, using defined subsets of the complete list of all the eligible cryptoassets and/or alternative weighting schemes. For example, an index could be constructed that restricts the maximum percentage of eligible cryptoassets, or that makes use of alternative trading volume or market-capitalization minimums, or any other factor that the Committee may elect to use. Any indexes using subsets of all eligible cryptoassets will be clearly labeled as such.