Why Hedge and Buchman Indices excluded BitConnect from all indexation procedures and the implications thereof
Tags: Hedge, Excluded, Index, Bitconnect, Bitcoin

Why Hedge and Buchman Indices excluded BitConnect from all indexation procedures and the implications thereof HEDGE Follow Jan 26, 2018 · 3 min read

On Dec 22 2017 Hedge and Buchman Indices called for an extracurricular index committee meeting, where the decision has been made to exclude BitConnect (BCC) and Tether (USDT) from all current and future indexing procedures for violating the rulebook chapter 10: Currency Corruption and Security. In this blog post we would like to focus on BitConnect elaborate on why we decided as we did and explain our way of thinking.

We have designed our indices with 3 principles in mind:

1. Indices have to be arbitragable from the USD investor standpoint.

2. Indices have to be replicable and thus investible.

3. Indices have to be reflective of the market, regardless how irrational the market may be. If it’s not an outright scam, it stays in. We do not subjectively decide on the constituents. If the market assigns them value and they meet the definition of a cryptocurrency, they have to be indexed.

A quick comment on the first two points:

Arbitragable position means that an investor that holds USD can either transfer USD to a particular exchange or easily exchange USD for other fiat currencies in the FX spot market and trade crypto with these fiat currencies further, where the FX exchange is done at a reasonable speed and low fees, and there are no capital controls in the market. This obviously excludes exchanges from mainland China and Korea, as Korean Won and Chinese Renminbi are not freely exchangeable for USD which makes fiat-to-crypto arbitrage challenging.

Monthly weighting scheme is designed to keep indices replicable. These frequencies have to reasonably spaced out (balanced by very high volatility of the asset class — equity indices are usually rebalanced once a quarter), otherwise whoever is doing the replication, has to take onto itself frequent trading fees, blockchain transfer fees and price slippage in a thin market. Fixing the constituents at rebalancing is also necessary; otherwise there would be too many transfers in and out of the index due to aforementioned high volatility.

Third point is perhaps the most important. We designed the indices to be reflective of the market, regardless how irrational the market is. It carries 2 important consequences:

· We do not arbitrarily modify the pricing data. If there is a flash crash or a short squeeze on one of the exchanges, it will be reflected in the indices, though this effect is limited by including 3 pricing sources in most cases, weighted by the aggregate volume for each cryptocurrency.

· We therefore take exclusions very seriously because it sends a strong message to market participants. A cryptocurrency is excluded if and only if it seriously violates respective rulebook.

Which brings us to BitConnect…

About BitConnect: BitConnect was presenting itself as crypto lending platform, where investors are able to lend cryptocurrencies to BitConnect’s proprietary trading bot in exchange for the promise of returns that are above the market norm and usual market rates. There were strong indications that BitConnect is operating a Ponzi scheme, fulfilling sufficient requirements including, but not limited to, promises of above market usual returns that are positively correlated with the lending period, lock-up periods of lent funds and pyramid structure of referral bonification. As evident, BCC was in fact a Ponzi scheme, which was able to continue as long as new people were coming in and BTC price continued to rise. Following the market correction in Jan 2018, BCC disappeared.

On top of that, it is still unknown who is running or owning BitConnect. The UK Registrar of Companies shut down their British mailboxes. The US state of Texas also issues a cease and desist order for all BCC activities in its territory.

Having established that BCC is a scam waiting to burst, keeping it in the indexation procedures at the time of its collapse would cause

1. a lack of trust in the competence of the team,

2. a significant loss of money for investors, underwriters and market-makers.

We take our responsibility very seriously and will continue to monitor the market for more such cases.