Innovative Crypto structured products – the ShortLyCi case

structured products

Cryptocurrency futures of all sorts and margin trading up to x200 leverage, are being offered through different entities. Bitcoin ETFs have not been allowed and retail can either invest directly or through trackers and ETPs or certificates. In this post, I highlight the innovative cryptocurrency structured products that Lykke introduced this year, with a special focus on ShortLyCi. 

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019.

The new digital asset class continues to mature slowly, gradually, and in a rather conventional way. Futures on Bitcoin were the first derivatives that were launched on the CME and now on Bakkt. Additional offers are being added on regulated and unregulated venues, to address the needs for leverage, risk management, and shorting. Some futures are settled in Bitcoin or Tether, and others in USD.

This past week, all Crypto news highlighted another milestone for the Bakkt monthly Bitcoin futures contract that represents one bitcoin. The daily volume hit $15million, an all-time high since its launch on Sep. 23.

Bitmex, the unregulated venue, continues to dominate globally the cryptocurrency futures market by volume.

PrimeBit offers the highest leverage for Bitcoin, Ether, and Litecoin margin trading.

Another symbolic futures listing was announced this week from a less known Dubai based exchange in Dubai, BTSE, that will list the first futures contract for the privacy crypto, Monero.

We will continue to see more activity in the futures market of cryptocurrencies, without any notable innovation. Market conditions will dictate what becomes the standard in cryptocurrency futures in terms of settlement. For now, some settle with delivery of the underlying crypto, others in dollars or Tether.

The first innovation that merits a closer look in the cryptocurrency structured product asset class, is ShortLyci from Lykke. It is a way to short the market and manage risk available for retail too.

ShortLyci is a way to bet against a market cap weighted basket of the Top 25 cryptocurrencies. The first innovation lies in its dynamic and transparent repricing and rebalancing.

Rebalancing: Every 24 hours the 25 cryptocurrencies are rebalanced in order to make sure that ShortLyci is always betting against the Top 25.

This is in contrast to the conventional world that uses indices and benchmarks that are rebalanced on fixed calendar schedules or other artificially imposed ways and with very low frequency which means that they are out of whack most of the time.

S&P500 rebalances once every quarter. Even though its power has been increasing and is one of the main performance benchmarks for ETFs or mutual funds, few people these days think about how it is built and what it really represents.

FTSE Russell`s recon day appears on the Wall Street Journal headlines, as trillions of dollars are indexed to the Russell indices and rebalancing of the index affects the markets.

In the conventional world of publicly traded stocks, we use heavily indices that do not reflect market capitalization as they rebalance usually on a quarterly basis. #AndTheIronyIs that the market cap indices affect the market when rebalancing.

ShortLyCi reflects the market capitalization with only a 24h delay. It shows one of the advantages of tokenizing existing shares. Indices could be rebalanced frequently which would improve performance tracking and mitigate the market disruptions around the days of rebalancing the big indices.

Repricing: Every 1 minute the 25 cryptocurrencies are repriced in order to make sure that ShortLyci has a minimal tracking error of the Top 25 cryptos included. Prices are sourced from several outside exchanges.

ShortLyCi is one Token that allows you to have the same exposure as shorting a dynamic basket of the Top 25 cryptocurrencies.

You can also buy in one Token, LyCi, which is the long version of the Top 25 cryptocurrencies.

The other innovation of the LyCi family, is that the investor can choose at settlement to receive the value of the Token in USD or to actually receive the 25 constituent cryptocurrencies.

The cost of these structured products is transparent and low. LyCi entails a 1.45% per annum at settlement and ShortLyCi entails 3.45% per annum again at settlement. The cost of ShortLyCi is really low compared to the costs and risks of margin trading on exchanges, which are available for a few of the large cryptocurrencies.

The ShortLyCi token offers a way to short the crypto market with a limited downside compared to shorting through margin trading. A ShortLyCi investor cannot lose more than the amount invested in the case that the market rises fast. In margin trading, investors can lose more than the amount invested.

The other advantage of gaining exposure to these frequently rebalanced market cap-weighted products, is that the cryptocurrency market is volatile and there are sizable changes in both the weighting of the top 5 cryptocurrencies but also the ranking of the rest.

From a glance at the LyCi weightings at launch (Jan 26, 2019) to last week, it is clear that there is value to frequent rebalancing.

Approximate Change in weights since launch

Current weights

Bitcoin              +14%                 72.93%

Ethereum           -2%                     9.39%

XRP                  -6%                       5.52%

XLM                   -1%                      0.72%

TRX                   -1%                      0.59%

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