Risks and Disclosures
Index Token Risk Factors Disclosure
Alongside Finance, Inc. (“Alongside”) is a technology provider for the Alongside Crypto Market index (“AMKT index”) and products that are based on that index, including the Alongside Crypto Market index token (“AMKT”).
A purchase of AMKT is subject to a variety of risks, which could cause AMKT to lose value over short or long periods of time or be subject to operational disruptions. You should expect AMKT’s price and total return to fluctuate within a wide range. Index tokens are subject to the following risks, which could impact index token’s price and performance.
The AMKT index token uses an indexing approach that may be subject to errors in data, methodology and/or assumptions, which could negatively impact the value of the index token.
AMKT is designed to track the top 15 cryptoassets by market cap (“AMKT Underlying Assets”) and enable broad-based exposure to the entire cryptoasset category with a single ERC-20 token. A complete look at AMKT asset exclusion and inclusion criteria can be found here. By receiving exposure to AMKT, you receive exposure to the underlying 15 assets that are tracked by the AMKT index. The index token exclusion and inclusion criteria is based on various inputs which may include price data from various third-party exchanges and markets as well as supply data. These inputs may be subject to technological error, manipulative activity, or fraudulent reporting from their initial source. The index is based on a flexible set of rules, and includes certain assumptions that may be flawed and/or may adversely impact the index’s ability to accurately establish or maintain an index of top cryptocurrencies. The failure of one or more of the assumptions built into the index methodology could have an adverse effect on the index token and its corresponding value.
Market Price vs. Net Asset Value (NAV) Risk
The Net Asset Value of the cryptoassets held by the index token may deviate from the price of the index token, and so there are times when the index token may trade at a premium or a discount to the underlying assets.
Net Asset Value (NAV) is the market value of all the cryptoassets tracked by the AMKT index and held by AMKT. Due to changes in the supply or demand for AMKT at any single point in time, the price of one AMKT may deviate from the NAV of the AMKT index. Although it is expected that the market price of an index token will approximate its NAV, there may be times when the market price of AMKT and the NAV differ significantly on secondary markets. Thus, you may pay more or less than NAV when you buy AMKT on the secondary market, and you may receive more or less than NAV when you sell AMKT. AMKT is fully redeemable by eligible AMKT holders for the AMKT underlying assets. This means a holder of AMKT is able to redeem the underlying in-kind cryptoassets in the event the AMKT price deviates at a discount to NAV, enabling those holders to arbitrage the price back from its NAV deviation.
Crypto Market Risk
AMKT reflects the market activity of those cryptoassets that it tracks, including price fluctuations and illiquidity.
The cryptoasset category is known for both price volatility and events of reduced liquidity. These market conditions may result from a variety of factors, including supply and demand, change in interest rates or currency exchange rates, governmental developments, and consumer preferences. These factors may not impact all cryptoassets equally. The market tends to move in cycles, with prolonged periods of rising and falling prices. The goal of AMKT is to mirror the overall cryptoasset market, which means that the Net Asset Value of AMKT and its market price are subject to these same fluctuations in value.
Index Sampling Risk
The AMKT index methodology, including the selection of the underlying cryptoassets and rebalancing / reconstituting the AMKT portfolio, may negatively impact tracking efficiency, impacting the value of AMKT in comparison to other assets.
While the goal of AMKT is to track the broader performance of the cryptoasset category, limitations in asset selection and index rebalancing/reconstitution may result in lower tracking efficiency with the broader market. At any given time, the AMKT index, and the corresponding holdings of AMKT, may under-represent digital assets that are increasing in value and/or overrepresent digital assets that are declining in value. Should this be the case, AMKT may underperform relative to other instruments that do invest in such digital assets and use a different methodology. Moreover, AMKT will only be rebalanced on a quarterly basis, meaning that rebalancing that could achieve more favorable results for AMKT token-holders may occur on a delayed basis. This could have an adverse effect on AMKT and on the value of AMKT.
Smart Contract Risk
The structure and function of AMKT is governed by a blockchain-based smart contract, which may be susceptible to exploitation or other adverse events.
AMKT utilizes a series of smart contracts to govern its architecture and execution. While the AMKT smart contracts have been thoroughly audited by external security auditors, those contracts could be exploited. If this were to occur, irregularities surrounding custody of the AMKT underlying assets, or the minting, redeeming, buying, and/or selling of AMKT could occur. This could impact the ability of participants to create AMKT, or to redeem AMKT for a basket of AMKT underlying assets, which could impact the price at which AMKT trades on secondary markets. The AMKT underlying assets are held on the Ethereum blockchain in a smart contract. This smart contract could be the subject of an adverse event, such as a cyberattack, security breach, or operational failure, which could impact the custody of those cryptoassets, and/or the ability to deposit or withdraw those cryptoassets in order to create or redeem AMKT. This could lead to a loss of the AMKT underlying assets, which could impact both the value and the liquidity of the AMKT underlying assets and AMKT.
AMKT operates on the Ethereum blockchain, and the functionality and/or value of AMKT may be impacted by any changes or adverse events to the Ethereum blockchain.
AMKT is an ERC-20 token deployed to the Ethereum blockchain. Any downtime, network congestion, or exploit impacting the Ethereum blockchain could adversely impact the functioning of AMKT, such as the creation and redemption of AMKT, and the value of AMKT.
Aspects of AMKT are governed by a decentralized autonomous organization (DAO), which could vote to make changes to the composition or the infrastructure of AMKT that may materially change the operation or the value of AMKT.
AMKT is governed by the AMKT DAO, which is composed of AMKT holders and a governance multi-sig DAO participants may propose, and the governance multi-sig may accept, a variety of changes to AMKT and its structure, including changes to composition of AMKT, the underlying AMKT index methodology, expense structure, and/or service providers. These changes and the manner in which those changes are implemented may materially impact the composition of AMKT and/or its operation, which could impact the value of AMKT.
In addition, the AMKT DAO could be subject to a governance attack if, for example, a malicious actor acquires sufficient AMKT to control the voting process. A malicious actor with sufficient AMKT could use the governance process to enact changes that are not in the best interest of AMKT token-holders and could negatively impact AMKT. Any such governance attack could have an adverse effect on AMKT.
Purchasing AMKT presents various risks, including but not limited to those described above. Potential purchasers should carefully consider whether an investment in AMKT aligns with their financial objectives and risk tolerance. Prospective buyers are urged to consult with professional advisors regarding the suitability of investing in AMKT and the associated risks.
Note: This is a fictional disclosure for educational and illustrative purposes only.