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CombiCoin - A Reliable Crypto ETF Coin

Summary

Bitcoin is the first and largest of the cryptocurrencies, but being the first it suffers from many issues.

Lots of other coins have been invented since, many solving some of the problems, others being scams or copycats without added value.

New coins keep appearing, and choosing is hard.

CombiCoin, a regularly rebalanced coin physically indexing the top 30 coins, solves the choice problem, adding diversity and reducing volatility in the process. CombiCoin has performed very well.

(This was written in December, and has been updated only slightly.February 2019: Combicoins have been replaced by the much more flexible bundles.  Please see here.)

The situation

Recently Bitcoin has soared in popularity - and price. Some people see a bubble, other the beginning of a new currency system. And many want to jump on the bandwagon.Bitcoin was the first cryptocurrency, but it is far from the only one. Being the first, it uncovered a large number of problems, some of which could be repaired along the way, while others needed a hard fork (a split of the currency) or have no easy way to get repaired. And recent history has shown that hard forks have become difficult to pull off from a social point of view. Blockchain ledgers are there to stay, it seems; cryptocurrencies make a good chance of becoming mainstream; but whether Bitcoin itself will make it in the long run is very doubtful. Let's have a very quick look at some of its problems (no need to understand all of it, as long as the existence of problems is clear).

  • Quantum computing makes great strides. IBM has achieved the 50 qubit milestone (and allows the public to play with their quantum computer: https://www.research.ibm.com/ibm-q/). With a decent quantum computer, breaking several of the cryptographic protections of the Bitcoin system becomes trivial - allowing people to empty other people's wallets, among other things.
  • Bitcoin has the concept of "proof of work mining". where people spend enormous amounts of computing power on frivolous activities (finding a string that, when encoded, produces a long string of zeroes). The energy consumption of mining is notoriously hard to estimate, but seems to be in the order of magnitude of the power consumption of Morocco (How much energy does bitcoin mining really use? It's complicated), and it is increasing exponentially.
  • Nowadays Bitcoin mining requires a heavy investment in hardware, and living in a cold area with cheap electricity. Inner Mongolia is where miners concentrate. But this concentration goes against the philosophy of a distributed coin without a central authority: China could put pressure on the miners and control how the blockchain is validated. Bitcoin Gold was meant to correct this, but since the miners (of course) didn't switch to it, its acceptance was low.
  • The Bitcoin ledger has a slow transaction speed, and a strictly limited capacity. As a result, getting ones transactions validated quickly can become very expensive. Also, it is not hard to jam the system with transactions and so create a denial of service (DOS).
  • The blockchain language is not Turing complete - that is: it is not a full-fledged programming language. Lots of interesting things, such as smart contracts, simply aren't possible with it.
  • The system is unforgiving. An error in a bitcoin transfer most likely means that the money is lost forever. Often it can be seen sitting in some account, but nobody can get at it.

Now Bitcoin is a live project, and changes are being made, repairing or alleviating some of these issues. However, the real innovation is seen in altcoins (alternative coins).Altcoins have sprung up by the hundreds. Many are mere scams, or uninteresting copies of Bitcoin, but others implement genuinely new solutions to some of the above and other issues. Some altcoins introduce truly new concepts - e.g. one coin has the ability to move from one blockchain onto another.

The problem

If one wants to invest in cryptocurrencies, which coin or coins should one choose? There are over a thousand of them, and picking tomorrow's winners is hard. What is more - tomorrow's winner may not have been invented yet.

Keeping a diverse portfolio has its own challenges, as different coins often need different wallets, and moving between those wallets may require going through an exchange.

For people willing to invest a large part of their time in research, maintaining a high-quality portfolio might be an option, but for most of us it isn't. We'd like to have an index, and a user-friendly ETF that follows that index.

Enter Triaconta

Triaconta (http://triaconta.com) is a Netherlands-based company that is active in the cryptocurrency world. It has TriaTokens, which are like shares in that 50% of their profit is payed out in the form of a monthly dividend to whoever owns them at the ex-dividend date. The other 50% is used for expenses and for research and development. TriaTokens are traded at Etherdelta (https://etherdelta.com/#TRIA-ETH).

CombiCoin

Triaconta maintains and trades in CombiCoin, which is an open-ended physical tracker of the index of the 30 cryptocoins with the largest market cap. (The underlying values can be found here.)  Whenever someone wants to buy a CombiCoin at a price above the intrinsic value, their market making software creates a coin, sells it, and uses the proceeds to buy the underlying coins. Whenever someone wants to sell a CombiCoin at a price below the intrinsic value, their software buys it, destroys the coin, sells the underlying coins, and uses the proceeds to pay the seller. In either case a profit is made, half of which will eventually be paid out to TriaToken holders. The software will automatically find the best exchange for its trades in the underlying coins (the cheapest when buying, the most expensive when selling).This process ensures that the market price of CombiCoins will always stay close to the intrinsic value, even in the case of e.g. a panic sell-off. It also means that CombiCoin is immune to manipulation by rumour - it is impossible to talk the price up or down. As we shall see further on, it is also practically impossible to influence the price by going long or short in it.

Rebalancing

CombiCoin is in principle an equally-weighted index, in which each of the underlying coins has a share of 3.33%. This insures that in the case of a sudden value loss of one coin, the loss for CombiCoin never exceeds the 3.33%, whereas in the case of a sudden explosion in value, CombiCoin can go up indefinitely. As rebalancing happens every other month, in the meantime coins may end up having a larger share, though. If ever a single coin is to exceed 20% of the value of CombiCoin, an interim rebalancing will be done. Likewise, if ever more than 4% of any underlying coin would be held by CombiCoin, exposure to this coin will be reduced. This makes it virtually impossible to influence the price of CombiCoin by longing or shorting it.

As the rebalancing process is allowed to take up to two weeks, and can be integrated in the buying and selling that make up the market making, rebalancing is expected to happen at virtually no cost.At each rebalancing, the target percentages are not the theoretical 3.33%, but the arithmetic mean of the current percentage and this 3.33%. This allows CombiCoin to take advantage of momentum, as an underlying coin that is racing ahead will be somewhat over-represented, whereas a coin that is lagging will be somewhat under-represented.At each rebalancing, the overall coinscape is checked to see whether new coins should replace some of the ones in the index. To avoid flip-flopping, a coin can only enter the index if it has a market cap at least 20% higher than the smallest coin in the index (which it will then replace).

Currently, CombiCoins (like TriaTokens) are simply non-smart ERC-20 tokens in the Ethereum ledger. Their value comes from the underlying coins that are being held in escrow, and the promise that the Triaconta market making software will always buy them for a price that almost equals the value of the underlying coins. If it is ever necessary to move to another ledger (say, because the Ethereum blockchain is threatened by the advent of quantum computing), it will be trivial to do so.

Performance

After a successful ICO in September 2017, CombiCoin went live on October 21, 2017 at a price of $ 8.60. In the just over three two months since then it has risen to five times that amount, or almost $ 45, with less volatility than most of the underlying coins. Its behaviour and current composition can be seen at http://combicoin.co.

Supervision

Triaconta has opted for voluntary supervision by the AFM, the "Dutch SEC". Because of this supervision, CombiCoin will not be offered on the common exchanges, as this would make it hard to trace the origin of the money put into the coins. Instead, CombiCoins can be bought and sold at https://triaconta.com, against US dollars, Euros, bitcoins or ethers. If and as supervised exchanges come into existence, CombiCoin may become tradable there.

More information:

Disclosure: I am/we are long CombiCoin, TriaToken.

Additional disclosure: If you buy CombiCoins using the link given (http://tinyurl.com/CombiCoin), I shall receive some compensation. If you don't want that, go to the Triaconta website not using my link. You will pay the same price, but the profit made by the trading software will be distributed equally over every TriaToken. As I own some TriaTokens, I'll still receive a bit, but far less than if you use my link.