Risk Factors

Belief Index levels are informational measurements with real, documented limitations. The first part of this page covers those limitations – what the published data can and cannot tell you, and where the methodology’s simplifying assumptions bind. The second part, clearly labeled, covers the additional risks that apply only to participants in the private Alpha Program.

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Index & Data Limitations

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Underlying Market Volatility

The constituents are prediction market contracts – binary instruments that settle at $1 or $0. Levels computed from them can move sharply:

• Event-driven gaps: A single news event (a court ruling, an economic data release, a political development) can move a constituent from 80% to 20% within minutes
• Binary resolution: At settlement, every constituent resolves to exactly $1 or $0 – there is no middle ground and no partial outcome
• Sentiment-driven pricing: Prices reflect crowd expectations, which can shift rapidly 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 smoothing benefit may be overstated for correlated markets.

Worst-case scenario

If every market in a series resolves against the tracked outcome, the series level 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 is significant: if 5 of 7 markets resolve unfavorably, the level could fall approximately 70% from those resolutions alone.

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Thin Markets and Midprice Reliability

Some prediction markets have limited trading activity, which affects the reliability of the midprice signal the index is computed from: 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 – and a midprice computed from a thin book is a weaker probability estimate.

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Theoretical vs. Executable Values

Published levels are based on midpoint pricing – theoretical values that do not reflect the cost of actually executing trades. They do not account for:

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

Any real portfolio attempting to replicate a series would realize values below the theoretical level, particularly at sizes that are large relative to market depth. Treat index levels as measurements, not attainable prices.

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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 the reliability of the published level.

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Single Data Source

NAV computation depends entirely on order book data from a single prediction market venue. There is no secondary source for price verification. Venue outages, data errors, or API changes could affect the accuracy or availability of published levels. Venue disruptions could also suspend publication entirely, and the venue’s continued operation is not guaranteed.

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Oracle and Resolution Risk

Constituent 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 that flow into published levels
• Resolution delays: Events may take longer to resolve than expected, extending a series’ timeline

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Concentration

Each series contains a relatively small number of markets (typically 5-20). This means:

• A single resolution can move the series level significantly – roughly 7-20% in an equal-weighted basket, and under the published weighting scheme a constituent may carry up to the 50% concentration cap, so a single adverse resolution can remove up to half the level
• The level of diversification is substantially less than a broad equity index with hundreds of constituents
• The series is more sensitive to individual event outcomes than a highly diversified aggregate

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Reconstitution (Perpetual Series)

Perpetual series change composition through formal reconstitution events, which introduces methodology-specific caveats:

• Composition drift: The basket measured today is not the basket that will be measured indefinitely. Reconstitution is rules-based and forward-looking, but the theme’s constituents evolve.
• Reconstitution drag: Aligning custody to a new composition has a real execution cost – spreads, slippage, placement costs – absorbed in NAV, consistent with ETF convention. A poorly-executed reconstitution could produce a meaningful NAV decline.
• Publication gaps: During a reconstitution gate, NAV computation is suspended and no new level is published – typically for less than 48 hours. The last pre-gate value remains authoritative during the gap.
• Abort tracking error: If a reconstitution aborts mid-flight, the prior composition is restored, but trades already executed remain in custody as tracking error until they reconcile forward.

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Publication and Technology Risk

The computation and publication pipeline depends on software and infrastructure that may experience bugs, outages, data corruption, or integration failures. If current prices cannot be fetched, the system falls back to stale data and flags the computation as stale rather than hiding it – but a stale level may not reflect current market conditions. Data-integrity halts may pause publication entirely while a discrepancy is investigated.

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Regulatory Environment

Prediction markets operate in an evolving and uncertain regulatory environment. Regulatory change could restrict the underlying markets, affect the availability or legality of the data sources the indices depend on, or require changes to how the indices are produced and published.

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Alpha Program Participant Risks

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Loss of Capital

Every index limitation above translates directly into participant risk: adverse resolutions reduce NAV, correlated events compound, and a worst-case basket goes to zero. There is no principal protection of any kind.

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Redemption Timing and Liquidity

Program interests are not liquid:

• 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
• During a reconstitution gate (typically under 48 hours), participants cannot transact at all and have no exit until the gate lifts
• There is no guarantee of immediate access to invested capital

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Execution Risk

When minting or redeeming, the system must buy or sell underlying positions. In thin markets, execution prices may differ from the theoretical midprice used in NAV computation (slippage), large orders can move the market itself, and orders may be only partially filled.

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Custody and 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 and Key Management Risk

Assets interact with smart contracts on the Polygon blockchain (pUSD, outcome tokens, prediction market exchanges), which may contain undiscovered vulnerabilities. Custody assets are held in a multi-signature Safe requiring multiple authorized signers for any outbound transaction – but simultaneous compromise or loss of enough signing keys could still result in loss of access or unauthorized movements. Signer onboarding, key storage, and rotation practices are operated by Belief Systems during the alpha program.

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No Insurance

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

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Bank-Transfer Funding Risk

Funds sent or received by US dollar bank wire move through a dedicated bank account maintained by True Craft Ventures LLC, used solely for participant subscriptions and redemptions and not commingled with operating funds. It is a company account – not a third-party escrow or custodial account – and it is not insured. Bank wires are final and cannot be reversed; participants are responsible for the accuracy of bank details they provide. International wires may arrive reduced by correspondent-bank fees, and only the amount actually received is credited. Until a wire is identified and credited, it is not reflected in the participant’s cash balance.

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Jurisdictional Responsibility

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

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Early-Stage and Alpha Risk

The Alpha Program is experimental:

• It 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