With so many cryptocurrencies trading on so many different exchanges nowadays, it can be difficult to determine the true price of any particular coin. Or figure out its utility or peer group. Sui Chung founded CF Benchmarks to try to fix that problem. He’s looking to create some order and organization within the crypto space and joins the ETF Think Tank to discuss how his firm can benefit the entire industry and its participants.
Chung explains that the goal of CF Benchmarks is quite simple – to do for crypto what MSCI has done for equities. His real journey began back around 2017 when he realized that crypto and digital currencies were going to become an asset class, but also noticed that the plumbing and infrastructure in the industry was creaking at the seams. What it needed more than anything was a framework. Because there are 200 different venues where Bitcoin is traded and hundreds of prices, there was also a need to create a benchmark price for Bitcoin. He started with that as the initial goal and then looked to branch out into crypto indices from there.
Today, they are known as the guys who created the Bitcoin reference rate. This was important because at the time the CME was looking for a more robust provider since it was considering creating the first Bitcoin futures contracts. Chung’s company is now used to help price those Bitcoin futures.
Chung sees the crypto industry getting a lot of negative press today, especially considering the FTX collapse, but he emphasizes an important point. This is a market structure problem, not an asset class problem. In every industry, there are good and bad actors. Even large institutions can fail with the wrong people making decisions. Many of these companies fail because there are poor risk managers along with the financial risk involved. Those, however, are failures of the institution, not the failure of digital assets. When Lehman went under, people didn’t suddenly stop buying stocks and bonds. The same should be the case here.
As an index provider, Chung believes it’s his job to observe what is there, not dictate to it. You can look at Dogecoin and Shiba Inu and conclude that they’re just meme coins and shouldn’t be taken seriously but doing that runs the risk of throwing the baby out with the bathwater. The reality is that people are trading these coins regularly and they’re part of the ecosystem. Shiba Inu, for example, has spawned games and other protocols. You don’t necessarily want to discount these things. Enterprises can start as something silly but change and develop over time.
CF Benchmarks has also developed a crypto classification process. He notes that if the company is going to be the MSCI of crypto, we need a similar GICS-type system as a means of classifying coins, so they make sense to investors. Every token is associated with a software protocol, but it’s important to understand the functionality that’s associated with each. CF Benchmarks groups every token into one of three categories – settlement (e.g., Bitcoin and ethereum), services (e.g., Oracle/BtB style coins) and sectors (e.g., NFTs and the metaverse).
Other key takeaways:
- The Bitcoin reference rate is based on prices at 4PM London time, which is the most liquid point during the trading day.
- Over the past 12 years when the digital asset market kicked off, investors voted with their wallets, but there were few participants in the market. Today, every new investor makes the odds of the market being wrong that much smaller.
- CF Benchmarks has a framework in place that takes data from 6 exchanges because they meet the company’s criteria. They apply it without exception.
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