Sign in Subscribe
BRR

Why the London Market Close is the best time to strike NAV for new Aussie Crypto ETFs

CF Benchmarks has leveraged its unique position as administrator of the most liquid, established and trusted, regulated Bitcoin benchmark, CME CF Bitcoin Reference Rate (BRR), to determine the optimal time to strike NAV for Aussie Bitcoin ETFs.

Ken Odeluga

• 4 min read
Why the London Market Close is the best time to strike NAV for new Aussie Crypto ETFs

Our research shows that the calculation of NAV from CME CF Bitcoin Reference Rate at 15:00 to 16:00 London Time is optimal for Australian crypto ETFs

With the first Australian crypto ETFs launched on CBOE Australia today, the question of the optimal time to calculate net asset value—‘strike NAV’ of crypto exchange trade products—is back to the fore.

It’s a dilemma that CF Benchmarks has conducted extensive quantitative research into in recent years.

It’s not a unique one to crypto. Exchange traded commodities products, many of which invest in assets with structural similarities to cryptoassets, have wrestled with the problem for decades.

That is because the time at which NAV is struck has significant downstream impacts for investors. Chiefly, fair, representative and robust ETF valuations demand that net asset value be struck at a time of optimal liquidity.

Doing this enables the ETF to undertake transactions in its underlying commodity as part of the NAV striking process, at a time when the least possible slippage is likely, reducing tracking error and minimising price manipulation risk.

One key difference between ETPs holding international equities or commodities, and ETPs investing in cryptoassets is that crypto is a ‘distributed’, 24/7 market, as opposed to conventional markets which trade on one type of venue, at defined times of the day around the world.

This poses unique challenges for financial products with Bitcoin as the underlying investment.

That is why CF Benchmarks has leveraged its unique position as administrator of the most liquid, established and trusted, regulated Bitcoin benchmark, CME CF Bitcoin Reference Rate (BRR), to determine the optimal time to strike NAV for Aussie Bitcoin ETFs.

We’ve updated and extended our empirical research on the BRR and the optimal time to strike NAV with it, with particular reference to crypto ETPs listed in Australia

Those new to the BRR can understand it in just over 2 minutes by watching the video below.

Findings from this new specific analysis are detailed in our latest research paper: ‘A Time to Strike: Determination of the optimal time for NAV strike of Crypto-asset ETPs listed on Australian Stock Exchanges’.

We summarise its key points below.

Representation and robustness from optimal liquidity

A key aspect of determining the optimal NAV striking time is market representation.

15:00 to 16:00 London Time is the observation window chosen for calculation of BRR. The rationale is illustrated in Figure 1.

Figure 1 – CME CF Bitcoin Reference Rate – Liquidity at 15:00 – 16: 00 London Time

Essentially, the window is the most liquid time of the day. As Table 1 illustrates, the mean and median trading volumes observed at 15:00 to 16:00 London Time are almost double those observed at 15:00 to 16:00 Sydney Time.

Table 1 – Summary of BRR volume data observed at 15:00 – 16:00 London Time

London market close, or Sydney?

Now let’s examine how representative of the Bitcoin market the observation window of 15:00-16:00 London Time is for the BRR on a more granular level.

We can do this by looking at the strength of correlations between Bitcoin prices from BRR Constituent Exchanges at that time.

As well, this will demonstrate the best time on the basis that the period of the day evincing the highest liquidity will be the one most resistant to price manipulation.

This exercise will reveal the likelihood of a BRR price being calculated that is unrepresentative of the Bitcoin price at that time of day.

Summary results of a pairwise correlation (AKA cross-correlation) of prices from Constituent Exchanges at the 15:00 – 16:00 London Time observation window are presented below. (See Figure 2 and Table 2).

For comparison, summary results of a pairwise correlation of prices from Constituent Exchanges at an alternative observation window, 15:00 – 16:00 Sydney Time, are also presented.

Figure 2 – BRR Constituent Exchange Correlations at 15:00 – 16:00 London Time vs. 15:00 – 16:00 Sydney Time
Table 2 – BRR Constituent Exchange Correlations London Time vs. Sydney Time (Summary)

With a higher preponderance of days when correlations dropped below 0.9 and 0.95 shown in the Sydney Time alternative observation window, we can have a high degree of confidence that the London Time is the optimal of the two for NAV striking.

Read or download the research report here.

Read more about CME CF Bitcoin Reference Rate (BRR) here

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell any of the underlying instruments cited including but not limited to cryptoassets, financial instruments or any instruments that reference any index provided by CF Benchmarks Ltd. This communication is not intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. Please contact your financial adviser or professional before making an investment decision.

CF Benchmarks Ltd (“CF Benchmarks”), a company registered in England and Wales with company number 11654816 and authorised and regulated by the Financial Conduct Authority. Information about us can be found on the Financial Services Register (register number 847100).

Registered Office: 6th Floor One London Wall, London, United Kingdom, EC2Y 5EB.

You agree not to, and have no rights to, use the CF Benchmarks Data to create, calculate, issue, settle, maintain, support or develop any financial instruments (including but, without limitation exchange traded products, certificates, warrants, contracts for difference, swaps, binary options, structured products), indices, products, services (including but without limitation, portfolio management services, pre- and post-trade risk management services, or valuation services) or any other derivative works without the express written consent of CF Benchmarrks.

You agree not to analyze, reverse-engineer or disassemble any CF Benchmarks data and not to insert any code or product to manipulate the Website content in any way that affects any user’s experience. Unless CF Benchmarks gives you prior written permission, use of any Web browsers (other than generally available third-party browsers), engines, scripts, software, spiders, robots, avatars, agents, tools or other devices or mechanisms (such as crawlers, browser plug-ins and add-ons, or other technology) to navigate, access, copy in bulk, retrieve, harvest, index, search or analyse any portion of the Website is strictly prohibited.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of CF Benchmarks Ltd. Use and distribution of the CF Benchmarks data requires a license from CF Benchmarks or its authorized licensing agents.

All information is provided for information purposes only. All information and data contained on this website is obtained by CF Benchmarks, from sources believed by it to be accurate and reliable. Such information and data is provided "as is" without warranty of any kind.

CF Benchmarks, nor its directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or implied, either as to the accuracy, timeliness, completeness or merchantability of any information or of results to be obtained from the use of the CF Benchmarks indices or the fitness or suitability of the same indices for any particular purpose to which they might be put. Any representation of historical data accessible through CF Benchmarks indices is provided for information purposes only and is not a reliable indicator of future performance.

No responsibility or liability can be accepted by CF Benchmarks nor their respective directors, officers, employees, partners or licensors for any loss or damage in whole or in part caused by, resulting from, or relating to any error (negligent or otherwise) or other circumstance involved in procuring, collecting, compiling, interpreting, analysing, editing, transcribing, transmitting, communicating or delivering any such information or data or from use of this website or links to this website.

CF Benchmarks and its respective directors, officers, employees, partners or licensors do not provide investment advice and nothing accessible through CF Benchmarks, should be taken as constituting financial or investment advice or a financial promotion. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of any assets.

CF Benchmarks is a member of the Crypto Facilities group of companies which is in turn a member of the Payward, Inc. group of companies. Payward, Inc. is the owner and operator of the Kraken Exchange, a venue that facilitates the trading of cryptocurrencies. The Kraken Exchange is a source of input data for certain CF Benchmarks indices. Payward, Inc. is the owner and operator of the Staked, a venue that operates the block production nodes for decentralized PoS protocols on behalf of institutional investors. Staked.us is a source of input data for certain CF Benchmarks indices.

Please refer to the individual product family documentation for more information about applicable input data sources.