Efficient Frontier

Table of contents

Crypto ratings

Challenges of Traditional
Portfolio Management in Crypto

Evai ratings are designed to help investors pick the best crypto assets portfolios. Traditional portfolio management focuses on balancing risk and profitability by selecting a mix of assets.

However, this approach faces unique challenges in the crypto market:

1
High Correlation and Volatility
Unlike traditional assets, cryptocurrencies tend to be highly correlated and extremely volatile. This means their prices often move in similar patterns and can change rapidly.
2
Different Investor Profiles
Crypto investors often have different expectations and risk tolerance compared to traditional investors.
3
Liquidity Issues
Many cryptocurrencies have uneven liquidity distribution, posing challenges for medium and large investors who might significantly impact market prices due to the limited availability of assets.

Adapting Portfolio Management
to Crypto Market Dynamics

To address these challenges, EVAI has chosen a more nuanced approach to portfolio construction is needed in the crypto space. This includes:

1
Portfolio Construction with Artificial Intelligence
This advanced AI-driven strategy is designed to intelligently maximize the returns of your cryptocurrency portfolio, ensuring the distribution of your investments among various assets is optimized for the best possible outcomes.
2
Considering Nonlinear Profitability with Q-functions
The approach involves calculating returns based on both linear and nonlinear relationships between the investment size and the potential return of each asset. This means understanding how different investment amounts can yield different returns and capturing these dynamics within Q-functions.
3
Maximizing Portfolio Return
The goal is to optimize the portfolio in a way that gives the highest possible return for the amount invested, taking into account the unique behaviors of crypto assets.

Key Concepts

Evai ratings are designed to help investors pick the best crypto assets portfolios. Traditional portfolio management focuses on balancing risk and profitability by selecting a mix of assets.

However, this approach faces unique challenges in the crypto market:

1
Efficient Frontier
This is a concept from Modern Portfolio Theory (MPT) which we use as a foundation. It represents the best possible return you can get for a given level of risk. The top one efficient frontier corresponds to the "Peak Portfolio" EVAI product.
2
Nested Efficient Frontiers
For every crypto asset there exists a portfolio where this asset is dominant in a given portfolio and outperforms the remaining set of assets that have lower rank. "Optimal One" EVAI subscription product is created to help the users interested in some specific asset(s) - to find what other similar/complementary assets from the portfolio point of view are on the market.
3
Portfolio Construction AI
We use an advanced AI technique, that takes as input Q-matrix that represents the current state of the cryptocurrency market and as output finds the most efficient portfolio - the mix of cryptocurrencies in optimal proportions for any given investment strategy at any given point in time.
4
Q-Value Functions and Q-matrix
We use the Q-value function to assess the risk-adjusted return on investment size for each crypto asset on the market, considering various features that capture market dynamics and investors' risk preferences. For any given point in time Portfolio Construction AI uses Q-Value functions packed into Q-matrix to find all portfolios for all assets for a given time horizon.

Understanding the Q-Function
in Evai Ratings

The Q-function is a core part of Evai's system to determine the potential return on your investment in a cryptocurrency.
Here's a simple breakdown:

1
What It Does
The Q-function calculates the expected amount of return (in dollars) from your investment in a cryptocurrency. This calculation varies significantly based on the amount you invest.
2
Factors Considered
The function takes into account:

1. Profitability

The expected and historical returns from the asset.

2. Risk Factors

Adjustments based on the risk associated with the asset, which depends on market size and volatility.

3. Risk Tolerance

The Q-function balances the expected ROI with the investor's risk tolerance. This means it factors in how comfortable you are with the fluctuations in small or large markets.

4. Market Dynamics

It adjusts the expected return on investment (ROI) by considering market slippage (how much the price moves when you trade) and liquidity (how easy it is to buy or sell large amounts). More liquid assets are preferred. Lower slippage for the asset, especially with large investments, is better. Market Cap feature is also taken into consideration as well, - the smaller the market cap, the more likely the prices will fluctuate wildly.

5. Investment Size

Different outcomes for small vs. large investments.

Q-value functions for the top 800 crypto markets

Figure 1. - Q-value functions for the top 800 crypto markets.

Making Sense of the Q-Matrix

The Q-matrix extends the Q-function across all cryptocurrencies in Evai's system.

1. Purpose

Unlike traditional assets, cryptocurrencies tend to be highly correlated and extremely volatile. This means their prices often move in similar patterns and can change rapidly.

2. Q-matrix as the input to the portfolio construction AI

Crypto investors often have different expectations and risk tolerance compared to traditional investors.

3. Optimal Investment Calculations:

Many cryptocurrencies have uneven liquidity distribution, posing challenges for medium and large investors who might significantly impact market prices due to the limited availability of assets.

Q-values matrix representation for the top 147 crypto market

Figure 2. - Q-values matrix representation for the top 147 crypto markets.

Nested-Efficient Frontiers
Selection in Evai Ratings

Evai uses a process called 'Nested-Efficient Frontiers Selection' to determine the best-performing cryptocurrencies. Think of it like peeling an onion. The outer layer (the top-ranking cryptocurrencies) is removed to reveal the next layer. This process continues, ranking each layer, or 'sub-efficient frontier', until all cryptocurrencies are ranked. Here's how it works:

1
Iterative Process
In each step of the process, Evai's algorithm identifies the best portfolio combination for that moment.
2
Mapping and Selection
Each portfolio is mapped to one of the 'Nested-Efficient Frontier levels', representing a layer of optimal investment choices. The top-performing cryptocurrency from each portfolio is then selected and added to an overall ranking.
3
Refinement
After selecting the top asset, the algorithm removes it and previously selected assets from the pool, refining the choices for the next iteration.

Finding the top one efficient frontier

Figure 3. - Finding the top one efficient frontier and retrieving the top coin (BTC) from it

Finding the next of the nested-efficient frontiers

Figure 4. - Finding the next of the nested-efficient frontiers and retrieving the top-performing coin from it

Iterative continuation of finding the next sub-efficient frontiers

Figure 5. - Iterative continuation of finding the next sub-efficient frontiers and uncovering new hidden assets underneath, creating a ranked list of assets

How to Benefit from
Evai Frontiers' Associated Products?

At Evai we have four packages Prime Spot Efficient Frontier & Pro Spot Efficient Frontier, Prime Futures Efficient Frontier & Pro Futures Efficient Frontier. This services are the essence of the Efficient Frontier theory practical application in the cryptocurrency market. By balancing risk and return through advanced algorithms and real-time data analysis, the Evai Efficient Frontier services help investors identify and invest in the most efficient asset combinations possible. The benefit for users lies in gaining access to a portfolio that constantly adapts to market changes, aiming to maximize investment performance while minimizing undue risk. This is especially beneficial for those who seek to optimize their investment strategies in the volatile crypto market. It shows what proportions of assets in your crypto portfolio are optimal at a given moment in time. As well it can also indicate some new assets of interest worth investigating.
Evai Portfolio
Evai Optimal One Portfolio
Evai Outliers
With our rating service we are able to shine a spotlight on high-risk, high-reward assets that might be missed by conventional investment strategies. It unlocks the door to early investment opportunities in 'hidden gems'—assets that experience sudden surges and climb several rating levels, potentially yielding substantial gains. To bring this innovative approach directly to our community, we host free daily shows on our YouTube channel. These sessions delve into the fascinating world of Outliers and Crypto Gems, guiding you to uncover these exceptional investment opportunities. Whether an asset skyrockets or shows signs of a significant drop, our shows offer critical analysis and insights, suggesting when it might be time to welcome a new gem into your portfolio or when to let go of an asset.

Conclusion

Evai's Nested-Efficient Frontiers Selection and Rating Scoring offers a dynamic and detailed way to evaluate cryptocurrencies. By continually refining the pool of assets and updating scores, Evai provides users with an up-to-date and comprehensive rating system and a suite of tools, making it easier to understand the potential performance of various cryptocurrencies and wisely create balanced portfolios based on solid numbers.