Risks and Disclosures
Index Token Risk Factors Disclosure
A purchase of index tokens (AMKT) is subject to a variety of risks, which could cause the index token to lose value over short or long periods of time or be subject to operational disruptions. You should expect the index token'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 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.
The index token is designed to track the top 25 cryptoassets by market cap and enable broad-based exposure to the entire cryptoasset category with a single ERC-20 token. A complete look at index token asset exclusion and inclusion criteria can be found here. By receiving exposure to the index token, you receive exposure to the underlying 25 assets that are tracked by the 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 index and held by the index token. Due to changes in the supply or demand for the index token at any single point in time, the price of one AMKT may deviate from the NAV of the 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 and the NAV differ significantly on secondary markets. Thus, you may pay more or less than NAV when you buy the index token on the secondary market, and you may receive more or less than NAV when you sell those tokens. Index tokens are fully redeemable by authorized merchants for their underlying assets. This means a merchant in the network is able to redeem the underlying in-kind cryptoassets or their equivalent market value in the event index token price deviates with a discount to NAV, enabling them to arbitrage the price back from its NAV deviation.
Crypto Market Risk
The index token 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 the index token is to mirror the overall cryptoasset market, which means that the Net Asset Value of the index token and its market price are subject to these same fluctuations in value.
Index Sampling Risk
The index methodology, including the selection of the underlying cryptoassets and rebalancing / reconstituting the index portfolio, may negatively impact tracking efficiency, impacting the value of the index token in comparison to other assets.
While the goal of the index token 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 index, and the corresponding holdings of the index token, 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, the index token may underperform relative to other instruments that do invest in such digital assets and use a different methodology. Moreover, index token will only be rebalanced on a monthly basis, meaning that rebalancing that could achieve more favorable results for index token-holders may occur on a delayed basis. This could have an adverse effect on the index token and on the value of an investment in the index token.
Smart Contract Risk
The structure and function of the index token is governed by a blockchain-based smart contract, which may be susceptible to exploitation or other adverse events.
The index token utilizes a smart contract to govern its architecture and execution. While the index token smart contract was thoroughly audited by external security auditors including Sigma Prime and Oak Security, the index token contract could be exploited. If this were to occur irregularities surrounding minting, redeeming, buying, and selling index token tokens could occur. This could impact the ability of participants to create or redeem index tokens, which could impact the price at which the index token trades on secondary markets.
The index token operates on the Ethereum blockchain, and the functionality and/or value of the index token may be impacted by any changes or adverse events to the Ethereum blockchain.
The index token 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 the index token, such as the creation and redemption of index tokens, and the value of the token.
Aspects of the index token are governed by a decentralized autonomous organization (DAO), which could vote to make changes to the composition or the infrastructure of the index token that may materially change the operation or the value of the index token.
The index token is governed by the AMKT DAO, which is composed of AMKT holders and governance stewards. DAO participants may propose, and governance stewards may accept, a variety of changes to the index and its structure, including changes to composition of the index, the underlying index methodology, expense structure, and/or service providers. These changes may materially impact the composition of the index token and/or its operation, which could impact the value of the index token.
Because the index token is traded on decentralized and centralized exchanges, tokens are subject to additional risks:
The value of the index token is based on the value of its underlying cryptoassets, and the value of those cryptoassets is typically established by cryptocurrency exchanges and other cryptocurrency trading venues. These platforms may be subject to operational disruptions or other events or behavior that disrupt the market for, and the pricing of, those cryptoassets.
Exchanges and other trading venues on which both the index token and its underlying cryptoassets trade are relatively new and, in most cases, are less regulated than exchanges for securities, derivatives and other currencies. These platforms may be more exposed to adverse events and improper behavior including fraud, security breaches, and insolvency. Such events could have a significant impact on the pricing and liquidity of the index token's underlying cryptoassets, which could impact the corresponding value of the index token, or the index token itself. Exchanges or other platforms may also not maintain a continuous market for certain cryptoassets, including the index token. This could impact the liquidity and the corresponding price of those cryptoassets and/or the index token and the operations of the index token, such as the creation and redemption process.
Custodian Counterparty Risk
The underlying cryptoassets are held in an account with Coinbase Custody Trust Company, LLC. The custodian 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 the index token. This could impact both the value and the liquidity of the index token.
Service Provider Counterparty Risk
The AMKT DAO has contracted with a third-party service provider to provide certain operational support to the index token. This service provider could be the subject of an adverse event, such as a cyberattack, security breach or operational failure, which could impact the ability to deposit or withdraw cryptoassets, and the ability to create or redeem the index token. This could impact both the value and liquidity of the index token.
The AMKT DAO contracts with Battery Labs, a service provider, to perform the following functions on behalf of the DAO:
- Verify KYC/KYB and whitelist participants in the network (Merchants, Governance, Redemptions).
- Holder of the Coinbase Custody account.
- Facilitate AMKT DAO governance by implementing approved proposals.
- Coordinate auditing functions.
- Operate APIs to integrate with the smart contract.
A failure to successfully perform any of the above functions could impair the ongoing operation of the index token and its corresponding value.
No FDIC or SIPC Protection
The Trust is not a banking institution or otherwise a member of the Federal Deposit Insurance Corporation ("FDIC") or the Securities Investor Protection Corporation ("SIPC"). The index token and its underlying cryptoassets are not subject to the protections of FDIC or SIPC member institutions.
As cryptoassets have grown in popularity and market size, various countries and jurisdictions have begun to develop regulations governing the cryptoasset industry. To the extent that future regulatory actions or policies limit the ability to buy, sell or redeem cryptoassets or utilize them for payments, the demand for cyprtoassets may be reduced. Furthermore, regulatory actions may limit the ability of end-users to convert digital assets into fiat currency (e.g., U.S. dollars) or use digital assets to pay for goods and services. Such regulatory actions or policies could result in a reduction of demand, and in turn, a decline in the underlying digital asset unit prices, and a corresponding decline in the value of the index token.
Annual Total Returns
The index token will hold investments that track the index regardless of current or projected performance of the index or of the actual cryptoassets that are held. Past performance of any of the underlying cryptoassets or of the index is not indicative of future results of those cryptoassets or of the index.
Prior to any decision to purchase the index token, it is recommended that you consult a tax professional to determine the tax implications of buying, holding or selling the index token.
If you sell, exchange, or spend cryptocurrency, you may also have to pay capital gains tax on any profit you made from the transaction. It is important to keep accurate records of your cryptocurrency transactions and report them accurately on your tax return to avoid penalties and interest. Please consult a tax specialist to find out about your unique tax situation.
The following table describes the fees and expenses you may pay if you buy, hold, redeem and sell index token tokens. You may pay other fees, such as exchange fees and other fees to financial intermediaries, which are not reflected in the table below.
- Index token Annual Fee: 0.95%
- Transaction Fee on Purchase or Sale: 0.00%
- Transaction Fee on Redemption: 3.3 AMKT + 0.20% of redemption amount
Last revised: 1/1/23