A key purpose of the DCI is the diversification of a very
volatile cryptocurrency market. This allows for an investment in
the entire cryptocurrency space without the risk of betting on a
single coin and the hassle of holding coins from different
exchanges or in different wallets. There are many coins available
and some are very valuable investment vehicles. However, others are
highly volatile and, frankly, others are worthless. The goal of DCI
is to manage an index fund of coins that is the weighted average of
the top 30 coins.
While the qualifications of a top performing coin are somewhat
subjective, the overall goal is to minimize risk and maximize
returns. The key to that is creating a weighted average of many
un-correlated or negatively correlated coins with the highest
possible expected return including the possibility of replacing
coins within the index.
Unfortunately, many coins are highly correlated, very volatile,
and some have a non-zero probability of spontaneous failure. There
are competing metrics for which one can optimize a portfolio
towards; specifically maximizing expected return versus minimizing
volatility. The goal of the DCI is to maximize the Sharpe Ratio,
which is a ratio of expected portfolio returns over the portfolio
The selection process involves the simulation of millions of
possible future single-year market prices, based on the historic
volatility and correlation of returns using the last 1 year of
data. A penalty is applied to the newest coins that have less
historical data and a higher chance of spontaneous failure using a
proprietary scoring function based on the Lindy Effect which is
explained in the following paragraphs.
Within this simulation, a report of the maximum expected
draw-dawn, maximum days of loss, expected return, expected 95th
percentile return/loss, and the expected Sharpe Ratio is generated.
More importantly, an optimization process, using a genetic
algorithm, is utilized to develop an optimal portfolio. After each
simulation, the portfolio is rebalanced by up-weighting top
performing assets and down-weighting poor performing assets until
an optimal portfolio of assets is created across all future
scenarios in terms of both minimizing volatility and maximizing
This is neither a coin to day trade nor a coin to buy and hold
(not HODL). The hard work of diversifying the portfolio for maximum
value over the next 1 year holding period has already been
completed. Additionally, the portfolio is periodically reweighted
to move new top performers in and move bottom performers out. If
any asset that is expected to fail, due to a hack, fraud, or any
other specific reason, said asset would be immediately removed from
the portfolio to be replaced with the next best performing
The Lindy Effect states simply that the future life expectancy,
also referred to as the probability of failure, is proportional to
both the health and existing longevity of the entity in question.
This is also part of the Doomsday argument. Put simply, fads fade
quickly and old things tend to remain. For the purposes of DCI,
coins that have been around for a long time and have high market
share have a near zero probability of spontaneous failure, while
newer coins with a lower volume have a higher probability of
spontaneously becoming worthless.
Here, the probability of failing on a single day is defined as a
function of health (market cap), longevity, percent of coins in
circulation, and sentiment.
Attention. There is a risk that unverified members are not actually members of the team
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