Risk Factors

Investing in Belief Index series involves substantial risk, including the possible loss of your entire investment. This page provides a comprehensive, educational discussion of material risks that investors should understand before participating. It is written to be informative, not to serve as legal advice.

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Market Risk

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Prediction Market Volatility

The underlying assets are prediction market outcome tokens — binary contracts that pay $1 or $0 at resolution. These markets can be highly volatile:

• Event-driven gaps: A single news event (a court ruling, an economic data release, a political development) can cause a market to move from 80% to 20% within minutes
• Binary resolution: At maturity, every position resolves to exactly $1 or $0 — there is no middle ground, no recovery, and no partial outcomes
• Sentiment-driven pricing: Prices reflect crowd expectations, which can shift rapidly and unpredictably based on information, rumor, or market dynamics

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Jump Risk and Correlation

Even in a diversified basket, multiple correlated events can resolve unfavorably simultaneously. For example:

• A series focused on interest rate expectations could see several markets move sharply in the same direction following a single Federal Reserve announcement
• A political series could see correlated movement across multiple races if a national political event shifts overall sentiment
• An economic data series could see cascading effects if a single data release (e.g., GDP) changes expectations for related indicators

Diversification reduces but does not eliminate jump risk. The methodology treats each market as independent and does not discount for information overlap. This means the diversification benefit may be overstated for correlated markets.

Worst-case scenario

If every market in a series resolves against the tracked outcome, the series NAV goes to zero. With an equal-weighted 7-market basket, this requires all 7 events to resolve unfavorably. While unlikely, it is not impossible — especially for series tracking correlated events.Even partial adverse resolution can be significant: if 5 of 7 markets resolve unfavorably, the series could lose approximately 70% of its value from those resolutions alone.

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Liquidity Risk

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Thin Markets

Some prediction markets have limited trading activity, which affects price reliability: Markets within a single series can have vastly different liquidity profiles. A market with $30 million in depth may sit alongside one with $400 in depth — both carrying equal weight in the index.

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Execution Risk

When minting or redeeming shares, the system must buy or sell underlying positions. In thin markets:

• Slippage: Execution prices may differ from the theoretical midprice used in NAV computation
• Market impact: Large orders can move the market price itself, especially in low-depth markets
• Partial fills: If market depth is insufficient, orders may be only partially filled

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Redemption Timing

Belief Index is not a liquid product. Key constraints:

• Redemptions occur at periodic NAV windows, not on demand
• In stressed market conditions, redemptions may be delayed, restricted, or scaled down
• The system may pause redemptions to protect remaining holders from adverse liquidation
• There is no guarantee of immediate access to your invested capital

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Methodology Risk

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Theoretical vs. Executable NAV

The published NAV is based on midpoint pricing — a theoretical value that does not reflect the cost of actually executing trades. It does not account for:

• Trading fees on the underlying markets (typically 0.5-2%)
• Slippage from market-sized orders
• Market impact of replication trades

The actual value realizable through liquidation may be lower than the published NAV, particularly for series with large positions relative to market depth.

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Static Weighting

Weights are fixed at composition time and do not dynamically adjust for:

• Changes in relative market liquidity
• Shifts in the importance or relevance of individual events
• Emerging correlations between markets

This means a market that becomes illiquid after inclusion continues to receive its full weight in the index, potentially reducing NAV reliability.

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Single Data Source

NAV computation depends entirely on price data from Polymarket’s order book. There is no secondary data source for price verification. API outages, data errors, or changes to the API could affect NAV accuracy.

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Custody Risk

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Operational Control

During the alpha program, Belief Systems maintains unilateral operational control over custody arrangements:

• Withdrawals can be delayed, restricted, or suspended at Belief Systems’ discretion
• Custody procedures may change without notice
• There is no independent custodian, trustee, or oversight body

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Smart Contract Risk

Assets interact with smart contracts on the Polygon blockchain (USDC, outcome tokens, prediction market exchanges). Smart contracts may contain undiscovered bugs or vulnerabilities that could result in partial or total loss of funds.

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Key Management

The security of the custody wallet depends on proper private key management. Compromise, loss, or mismanagement of the custody key could result in loss of access to custody assets or unauthorized fund movements.

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No Insurance

There is no FDIC, SIPC, or equivalent insurance on any custody assets. Unlike a bank account or brokerage account, there is no government-backed guarantee that protects your funds in the event of loss.

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Technology Risk

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System Failures

The NAV computation system, order processing, and custody operations depend on software and infrastructure that may experience:

• Software bugs, errors, or unexpected behavior
• Infrastructure outages or performance degradation
• Data corruption or loss
• Integration failures between system components

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Price Feed Dependency

If the system cannot fetch current prices from the underlying markets, it falls back to stale data. Stale NAV computations may not reflect current market conditions, potentially leading to mispriced mints or redemptions.

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Blockchain Risk

The Polygon blockchain, on which assets are held, may experience:

• Network congestion affecting transaction processing
• Consensus failures or chain reorganizations
• Protocol-level vulnerabilities or exploits
• Bridge failures affecting the USDC stablecoin

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Regulatory Risk

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Evolving Regulation

Prediction markets operate in an evolving and uncertain regulatory environment. Changes in regulation could:

• Restrict or prohibit access to underlying markets
• Impose new compliance requirements on Belief Systems
• Affect the legality of holding or trading prediction market positions in certain jurisdictions
• Require changes to the product structure, fees, or availability

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Jurisdictional Uncertainty

The legal status of prediction market products varies by jurisdiction. Investors are solely responsible for determining whether their participation is permitted under applicable law in their jurisdiction.

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Counterparty Risk

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Platform Dependence

Belief Index depends on Polymarket as the source of underlying markets and price data:

• Polymarket service disruptions could prevent NAV computation and order execution
• Changes to Polymarket’s API, fee structure, or market rules could affect the product
• Polymarket’s continued operation is not guaranteed

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Oracle and Resolution Risk

Market outcomes are determined by resolution oracles. Risks include:

• Disputed resolutions: Ambiguous event outcomes may lead to contested settlements
• Oracle failures: Technical failures in the resolution mechanism could produce incorrect settlements
• Resolution delays: Events may take longer to resolve than expected, extending the series’ timeline

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Concentration Risk

Each series contains a relatively small number of markets (typically 5-15). This means:

• A single market resolution can significantly impact series NAV (approximately 7-20% for a single market in a typical basket)
• The level of diversification is substantially less than a broad index fund with hundreds of constituents
• The series is more sensitive to individual event outcomes than a highly diversified portfolio

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Early-Stage and Alpha Risk

Belief Index is in private alpha. This carries specific risks:

• The product is experimental and may be discontinued at any time
• Operational processes are still maturing and have not been tested at scale
• Features, fees, and mechanics may change without notice or prior consultation
• The team is small, and operational resilience may be limited during the early phase
• There is no track record — historical performance data is limited
• The system has not undergone independent third-party audit