Is Football Index a Good Investment?

Last month, this YouTube video on Football Index was published.

It outlines 5 potential risks that should be considered before using the platform, check it out here…

At the time of publishing, the Guardian newspaper was looking into this platform, so when the Football Index community bit back with personal attacks, rather than proving the points wrong, interest intensified and this article was published:

Football Index clients ‘money could be trapped after fall in players’ share price.

Since that time there have been several other well-thought-out points appear. Of those using factual information, such as terms and conditions, it appears the conclusions are similar…

‘Rolex Collector’ via Twitter has been somewhat objective in understanding the platform over the following weeks.

The Football Index community were quick to brand the account as Caan when it didn’t align with their agenda, although it’s clear to see for anyone that looks — it is indeed, not Caan.

Here is the overall conclusion posted by ‘Rolex Collector’ to Paste Bin on the 23rd of January 2021:

Football Index is a gambling product which offers football bets which it terms ‘shares’ analogous to a stock market and provides a market wherein these shares, ultimately purchased from the company itself, may be transferred between customers.

While ‘shares’ remain transferable between customers they are neither establishing a bet against another customer (exchange model) nor transferring products with intrinsic value or a fixed contract (stock exchange model). It is more accurate then to describe the product as a bookmaker with a secondary market attached.

Football Index make money both through initially selling the players’ shares via a process they term ‘minting’ and through a 2% commission on customer share transfer. In other words, customers must buy shares in order for Football Index to gain revenue.

In fact BetIndex (Football Index’s operating company) go to pains to make this clear in their terms and conditions if not elsewhere — all bets taken are with BetIndex as the counterparty as per clause 2.1.

The product is in effect an I.O.U. on payouts Football Index call ‘dividends’. There are a number of these in place but can be classed into two broad categories — payouts on player performance, limited to a small group of top performers on a match day, and payouts on media interest, determined via a proprietary sentiment analysis.

These payouts are provided over the entire career of each player — while technically shares are time-limited to 3 years, the period over which payouts are due is ‘refreshed’ on transfer, granting a further 3 years.

A vital thing to realise is that Football Index shares are not like, for example, a future contract or a fixed income instrument in the finance industry as these will have specific, unalterable contracts attached. The shares are also, of course, not at all analogous to equities which have intrinsic value. As per section 4 of the terms and conditions Football Index may adjust the dividend payouts in any way they like at any time with 30 days’ notice.

While they repeatedly claim (in the terms and conditions) that they offer ‘fixed odd’ bets, the odds can be changed by them at any stage.

This alone is an argument against putting a penny into Football Index. No further justification is required, no further debate is required. If they choose to render your ‘shares’ worthless, they can do so at any time. 30 days notice will be irrelevant as the secondary market will immediately crash in such an instance.

However, further arguments can in fact be made. It’s useful to think in terms of fundamentals I think — for example, when taking a bet with a standard bookmaker like William Hill or Ladbrokes, you are offered odds and receive a payout if the bet wins. From a business perspective however — the odds offered must be less than the ‘real’ odds of the event occurring. This way the customer is always in a position where even if they win short term, they lose long term, and of course vice-versa for the bookmaker themselves. While the ‘true odds’ are always an estimate and the bookmaker sometimes gets these wrong, this is generally how companies make money in this industry.

Analagous to this, in order for Football Index to be a viable bookmaker they must ensure that the prices that players are originally minted at MUST be greater than the estimated lifetime dividend payouts minus any expected commission income per single share, and in fact likely must be at a substantial margin above this to cover operating costs including a substantial advertising spend.

This poses something of a problem — if Football Index are to be conservative they will need to ‘mint’ players at a fair premium above expected dividend payout, but this means the price is absolutely overinflated from a customer’s point of view. If Football Index ‘mint’ at a fairer price they then must rely on sufficient market activity to recoup dividend liability and operating costs on commission.

The true value of a player ultimately must tend towards their likely career dividend payout (less commission paid on refresh every 3 years), and this value must reduce over time as time left in their career diminishes.

However, given the 2% commission, a rational purchaser must only wish to purchase another share if its value is over-inflated by at least 2%. This would have to happen a number of times for Football Index to recoup anything close to enough revenue had they minted at a fair price and it is hard to see prices remain over-inflated long enough for that to work across all shares.

As a result, I feel that Football Index really must be minting at over-inflated prices. This means that the second there are insufficient new unsophisticated customers coming in the prices will experience a sharp decline and there will be a reluctance to purchase shares except at a steep discount.

From a customer’s point of view, the price has only to drop by remaining lifetime expected dividend payouts to be rendered utterly worthless. So the larger the over-inflation, the more likelihood that the correction will render entire portfolios not only worthless but a very significant loss.

In fact, in a market where a large number of customers who joined earlier, engaged in the bubble and amassed a portfolio at a very inflated value, must now be sitting on very large losses.

Being stuck with a market with a large number of ‘losers’, some at very large liabilities, will make it significantly harder to sell shares to customers. This combined with over-inflation and caution around the 2% commission is likely to cause a very large reduction in the number of customers willing to actually buy shares, and thus for Football Index to make money.

From a customer’s perspective — both new and old — the situation is absolutely dire. Those who bought at over-inflated prices are very unlikely to avoid a seriously huge loss, and new customers are equally unlikely to find value in a nearly non-functional market.

The ultimate end state of a market where customers are unwilling to buy is a total ‘freeze’ — where nobody will purchase your shares in the secondary market and the only value you are left with are remaining dividends. You may not even be able to ‘refresh’ them after 3 years in such a market.

From Football Index’s perspective — a lack of customers joining and breaking this spell means a significant drop in revenue. However, as minting is pure revenue and very many shares have been sold in the past at over-inflated prices, it’s likely in my opinion that they are sitting on a large cash pile.

Ultimately from the company’s perspective, a market ‘freeze’ will mean a slow death. If budgets were cut to the bone and the market put on life support, this could be a very long death (depending on whether regulators would allow the situation to continue). Efforts to seriously address market dynamic issues would inevitably involve spend.

As there are very many participants sitting on what can only be a significant loss they can never be made whole even if Football Index spent all money reserves to buy back from them (they don’t have the money to be able to buy them ALL back). There is no solving things for this large segment of the existing market, nothing Football Index can do whatsoever.

This is the reason I think even them spending money cannot save things — the market would need to be started again and the old abandoned. This is something that would utterly destroy any trust in Football Index and thus would simply be a different form of death.

From a customer’s perspective, company death is far worse than a market ‘freeze’ as no further dividends would be paid, though holding a large portfolio at far above dividend value will make the difference only slight — a major loss is still a major loss.

In order to maximise income before any serious collapse, you’d expect Football Index to do all they can to reduce emphasis on actual portfolio valuation and add the ability to mint as much as they possibly can while players remain at inflated prices. You’d also expect them to cancel any dividends which eat into revenue too badly, while occasionally stimulating the market by introducing relatively low payout dividends, where payout cost for existing shares is likely to be offset by income from fresh mintings and commission.

This in fact what has happened — the portfolio valuation method defaults to ‘average all offers’ — a nonsensical evaluation which takes the average of open share offers, and the company do not even offer a sell price or volume-weighted bid price valuation at all. The best available is ‘mid’ which ignores available bids and large spreads altogether. Full order book depth is not shown and statistics on overall share issuance are not provided. Mintings are technically stated to only occur at price rises above current maximum (the terminology is vague and Football Index reserve the right to change how this occurs at any time) but a recent change now permits mintings at any price level.

A person might argue that it’s feasible to trade the market on standard market signals such as sentiment and expected value change based on a match — however the long-term nature of the value of the shares renders this pretty much a no-go — a single match is unlikely to significantly shift the % expected career div outcome and the dividend applicability cut off further renders this useless. only events such as dividend changes, injuries, major media events can be traded in this way and are rare and again may always only marginally impact price. The real death knell for this kind of trading is the illiquid, large spread condition of the market and inability to see full order book depth or even total available bids/offers.

I believe very many people have bought into Football Index under the misapprehension that it is more of an investment than a simple bet. In the early days with customers joining and pushing prices up, people made significant profits. This only encouraged people to pay in more, and with payout in pennies the motivation to add significant sums is clearly there. I have read many stories about people emptying ISAs into their accounts and I dread to think how many took out loans or other forms of credit to do so.

While at every stage it is always the customer’s responsibility to understand a gambling product before putting money into it, I feel there has been a very large misunderstanding of this product and it’s important for customers to make themselves aware of the risk.

Similarly, Paul Spry, founder of Geeks Toy trading software posted this:

Is Football Index a Ponzi Scheme? The Emperor Certainly Looks Naked.

Trying to see between the abusive backlash and defunct points has been hard. Football Index themselves declined to comment when the Guardian reached out, and have not attempted to correct any of the points made.

If you can offer an alternative view, please feel free to do so below!

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