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Cryptoassets are considered by many to be a nascent asset class. A crypto asset is a bearer instrument that has both its usefulness and its scarcity fully defined by computer systems. In the wake of the success of bitcoin, the first cryptocurrency, many other crypto assets were created. Cryptoassets can be used as monetary assets, but they also have other applications. For example, crypto assets can be used as a type of digital record that proves that certain information existed at some point in time (“time-stamping”); as a digital representation of goods or assets, so that they can be leveraged in more efficient transfer mechanisms; or as digital tokens that incentivize a smart contract to work according to pre-set incentives.
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Blockchain is a data structure used by the Bitcoin network and several other networks that emerged later. A blockchain is made up of blocks that record information about transactions performed. Blocks are cryptographically interconnected, so this chain is a trusted record of transactions. Each block contains a summary of the information contained in the previous block (this summary is called a “hash”), so that a network participant is able to validate the entire chain of blocks to confirm that it has not been altered at some point. If used in conjunction with proper validation and incentive systems, a blockchain can act as a decentralized ledger, where it is only possible to add new information, not remove already validated information. In the case of the Bitcoin network, a new block is produced every 10 minutes, on average.
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For all of our investment products, we have dedicated processes that rely on the approval of a committee with independent members to evaluate the choice of exchanges, custodians, and OTCs. In addition to understanding in detail each service provider’s technology, we delve deeply into its organizational structure. This includes proving the existence of the controls needed to ensure the service provider’s regulation is aligned with the local requirements of the funds. All of the individual crypto assets we invest in are part of indices that also have their own strict standards. For example, the Nasdaq Crypto Index™ (NCI™) has what we believe is a best-in-class methodology for eligibility criteria. For any asset to make its way into the NCI™, it must be supported by core exchanges and core custodians. Each exchange or custodian must be an institutional-grade and regulated service provider with compliance practices (including AML and KYC) that meet Nasdaq’s strict due diligence process.
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New bitcoins are created through a process called mining. Network participants, called miners, perform energy-intensive computational calculations to provide network security. As remuneration for this work, miners receive newly created bitcoins in a special transaction on each block, known as a “coinbase” transaction. Currently, the participant who mines a block is remunerated with 6.25 new bitcoins. Every 210,000 blocks produced, or roughly every four years, the number of bitcoins created in each block drops by half, in an event known as 'halving'.
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Smart contract” is a term coined in 1997 by computer scientist, lawyer and cryptocurrency pioneer Nick Szabo to define a contract that is purely implemented by computer systems. Smart contracts are self-executing contracts that can be written in programming code. They enable transactions that are more sophisticated than simply sending and receiving digital assets, and are considered one of the most important applications that digital assets can provide.

Cryptoassets and Blockchain

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New bitcoins are created through a process called mining. Network participants, called miners, perform energy-intensive computational calculations to provide network security. As remuneration for this work, miners receive newly created bitcoins in a special transaction on each block, known as a “coinbase” transaction. Currently, the participant who mines a block is remunerated with 6.25 new bitcoins. Every 210,000 blocks produced, or roughly every four years, the number of bitcoins created in each block drops by half, in an event known as “halving.”
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A crypto asset is a completely digital currency or token that uses a blockchain to provide a medium of exchange. A key attribute is the use of cryptography, which allows two parties to securely send and receive data anywhere in the world without a trusted third party. Bitcoin (capital “B”) is the network that hosts the world’s first cryptocurrency—bitcoin (lowercase “b”). Thousands of other currencies and tokens have launched since the first bitcoin was created in 2009, but bitcoin remains the largest, making up more than 40% of the total market cap for crypto assets. The Ethereum network token, ether, is the second largest with approximately 20% of the total crypto asset market cap.

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“Smart contract” is a term coined in 1997 by computer scientist, lawyer and cryptocurrency pioneer Nick Szabo to define a contract that is purely implemented by computer systems. Smart contracts are self-executing contracts that can be written in programming code. They enable transactions that are more sophisticated than simply sending and receiving digital assets, and are considered one of the most important applications that digital assets can provide.
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The Bitcoin network establishes ownership of bitcoin via recorded transactions on its blockchain, which serves as a fully transparent, public record of bitcoin activity. A decentralized network of computers (nodes) validates and confirms transactions nearly instantaneously, regardless of location. These nodes can access the entire blockchain and collectively confirm bitcoin ownership. Once a transaction is validated, it is packaged with other recent transactions into a “block” to be permanently added to the blockchain. Before these blocks of data are added to the blockchain, the nodes assign each block a unique alphanumeric signature (a hash) which will be linked to the previous block, creating the “chain” part of the blockchain. This immutable linkage to the blockchain is the most important part of securing a bitcoin transaction, so the Bitcoin network provides incentives to nodes that spend the time and energy to make this happen. These nodes, called miners, are rewarded with bitcoin. Because Bitcoin has a fixed supply cap—there will only ever be 21 million bitcoin—the incentives for miners change as more bitcoins come into circulation.
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The simplest definition of a blockchain is a decentralized public ledger where transactions are confirmed by a network of compensated participants. Blockchains can have different consensus mechanisms, such as PoW or Proof-of-Stake (PoS), which define the rules for validating transactions. For most crypto assets, each network node maintains a copy of the blockchain. This helps ensure the blockchain’s security by preventing anyone from altering transactions or taking control of the network. Bitcoin’s blockchain was a novel idea due to the combination of technologies used to create a truly decentralized and immutable public ledger. Previously, financial transactions were dependent on banks and other entities managing both sides of the transaction, including maintaining personal information about the parties and placing restrictions on certain transactions. Fully decentralized blockchains do not rely on any intermediary to confirm transactions and are not limited by geography, allowing for the elimination of gatekeepers from nearly any type of peer-to-peer transaction.
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The Lightning Network was launched in 2018 and is considered by many to be the most impactful recent development in the Bitcoin network. The Lightning Network allows two users to transact on the network with unprecedented speed and lower relative costs.The Lightning Network is an example of a second layer (“layer two” or L2) solution that leverages the security and decentralization of the Bitcoin network.
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The bigger the problem a technology solves, the greater its value. Crypto assets and blockchain technologies have properties that have a lot of value in an increasingly digital world like ours. The total crypto market cap represents a tiny fraction compared to other asset classes. If the technology delivers its potential, it is reasonable that the market size will expand significantly.

NCI - Nasdaq CME Crypto Index

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The weights of the NCI constituents are given by their relative market values. The calculation of the market value of each asset uses its real-time price and available supply at the time of index rebalancing, each quarter. Quantities are kept fixed throughout the quarter so that the index can be followed passively by investors.
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The share of cryptoassets in Hashdex funds replicate, in the same proportions, the theoretical portfolios of the indices. The NCI is a crypto asset index jointly developed by Hashdex and Nasdaq to reflect the performance of a material portion of digital assets - the weights of assets in the index are weighted according to their market value. Quarterly, the index is rebalanced and may be reconstituted, i.e. new constituents may enter the index and existing assets may no longer be part of it. For a crypto asset to be part of the index, it must meet the eligibility criteria, defined and found in the index methodology document. - Have active markets listed on at least two major exchanges for the entire period since the last replenishment date; - Be supported by at least one main custodian during the entire period since the last replenishment date; - Considering all major exchanges, the asset must have an average daily trading volume that represents at least 0.5% of the average daily trading volume of the asset that has the highest median daily trading volume; - Have a floating price, that is, not linked to the value of any other asset; - The market capitalization of the asset cannot represent less than 0.5% of the total market capitalization of all constituents; - The asset needs to be accepted by the Nasdaq Oversight Committee. As bitcoin is currently the crypto asset with the highest market cap, it has significant weight in the NCI.
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At a minimum, any asset included in the NCI™ must: 1) Have a floating price. Stablecoins and other asset-pegged cryptos are excluded. 2) Trade on three core exchanges. Every exchange is regularly reviewed to maintain the integrity of the index. 3) Be supported by two qualified custodians. Each custodian is validated by an institutional-grade vetting process. 4) Have sufficient liquidity. Assets must have an average daily traded volume that is at least 0.5% of the volume for the crypto asset traded most frequently on a given day. 5) Represent a significant part of the market. Each eligible asset must represent at least 0.5% of the total crypto market capitalization. To adapt as more assets meet eligibility criteria, the selection of assets is reviewed quarterly by the Nasdaq CME Crypto Index™ Oversight Committee, which is responsible for the implementation, administration, and oversight of the index.

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The NCI is an index Nasdaq developed in partnership with Hashdex in 2021 to provide a reliable and dynamic index for the crypto markets. It is a simple solution to gauge price trends and reflect the ongoing evolution taking place in the rapidly developing crypto ecosystem. The NCI represents the performance of the most mature and liquid crypto assets and the allocation to each NCI constituent is weighted by its relative market capitalization. The index only includes assets that meet strict eligibility criteria.

Security, regulation and governance

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Hashdex does not have direct access to private keys, which are the cryptographic tools that control ownership of cryptos. All keys are institutionally held by at least one of our partners. These custodians implement sophisticated processes to prevent attacks from hackers and other criminals. The fund's assets are transferred daily to secure storage locations disconnected from the internet (cold storage). This means that we do not hold any significant amount of assets on exchanges or hot wallets which are often the focus of hackers. Asset redemptions with our custodians use multisig technology that requires multiple authorizations to initiate the transaction signing process. The deadlines for the movements are up to two days from the authorization to the transfer of the assets.
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For all of our investment products, we have dedicated processes that rely on the approval of a committee with independent members to evaluate the choice of exchanges, custodians, and OTCs. In addition to understanding in detail each service provider’s technology, we delve deeply into its organizational structure. This includes proving the existence of the controls needed to ensure the service provider’s regulation is aligned with the local requirements of the funds. All of the individual crypto assets we invest in are part of indices that also have their own strict standards. For example, the Nasdaq CME Crypto Index™ (NCI™) has what we believe is a best-in-class methodology for eligibility criteria. For any asset to make its way into the NCI™, it must be supported by core exchanges and core custodians. Each exchange or custodian must be an institutional-grade and regulated service provider with compliance practices (including AML and KYC) that meet Nasdaq’s strict due diligence process.

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Safety is paramount in our operation. All of our assets are stored by institutional custodians who employ the most advanced practices, such as geographic dispersion, sharding, and deep cold storage. Our technological infrastructure is monitored 24/7 and constantly improved to protect our customers' information. In addition to the issue of physical security and custody of crypto assets, we offer our investors access to regulated investment products with the highest standards of governance.

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Hashdex uses the best market practices for asset security and fraud prevention by using institutional-grade custody to protect assets under management. Our custodian is Coinbase Custody Trust Company LLC, a New York State-chartered Trust which is authorized to provide fiduciary custodial services to institutional customers. As the leading mainstream crypto exchange in the United States, Coinbase has become a standard on-ramp for new crypto investors. The company offers a wide variety of products including cryptocurrency investing, an advanced trading platform, custodial accounts for institutions, a wallet for retail investors, and its own U.S. dollar stablecoin.
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Hashdex simplifies access to this new class of assets in a safe and regulated way. Investing through Hashdex funds, you do not have to worry about relevant issues that you would have if you were to invest in crypto assets independently: • You don't need to keep the private key of your cryptos and you also don't run the risk of storing them on exchanges (risk of hacking and fraud); • You don't have to deal with the complex tax obligations imposed on those who own crypto directly - our funds have long-term multimarket taxation; • You have no inheritance risk as Hashdex funds easily integrate into inventory like any other investment. If crypto assets are held directly, access to the private keys needs to be planned or the assets could be lost forever in an eventuality; • You gain exposure to an entire asset class, having access to a basket of crypto assets that change as the market matures, without having to manually purchase and rebalance multiple different crypto assets.
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