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Digital Economy:
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Catching A Fish Or What Are The Crypto Funds

04 October 2018 14:49, UTC   |   5170
 Catching A Fish Or What Are The Crypto Funds
By Oleg Koldayev, Alina Belkovskaya

In the previous interview with the managing partner of the investment funds AddVenture and ADDCAPITAL Alexei Prokofiev Bitnewstoday.com started the talk about the structure of the digital market. This time, we are talking about the activity of the funds managing digital assets.

To tell the truth, the situation in the market leaves much to be desired. The cost of virtual coins continues to decline. And the funds were the first to suffer from the fall of the market. Thus, for example, according to the report of the Eurekahedge cryptocurrency hedge fund, since the beginning of the year, their profitability has fallen by 50.8%. For comparison, last year, investors ended up with the profit of + 1,708.5%.

The high volatility of assets is always a double-edged weapon. On the one hand, it helps play gainfully, on the other hand – it can destroy even the most profitable business. According to the director of the FinTech strategy Autonomous Research LLP Lex SOKOLIN, 10% of organizations should not survive until the beginning of the next year.

BNT: So, what is the situation with the investment fund playing on the “digital playground”?

AP: Now, there are about 180 cryptocurrency funds in the world. At least there was such a situation at the end of August. Of these, fifty-fifty are hedge funds and venture funds. There are few private investment funds. But this is not a very popular form.

And, of course, everyone says the business is getting on well. Maybe, it is so with some of them. But if the organization claims that the business is going well, but does not want to disclose reports, then this should at least put the potential investor on alert.

However, some behave very honestly; they say clearly how things are going. But here, too, the question arises: how to objectively monitor this information. If the fund is regulated, then checking the information is, in fact, simple: it has audit reports or at least administrative records. However, are there many regulated funds?

BNT: But startups do not care what funds invest money in them?

AP: Yes, ICO is a consumer in this case. The money came, businessmen invested them somewhere, they are doing something with them. And then, if it’s God’s will, this money will not be stolen from them. And if it’s God’s will, their business model will work, or they will correctly do market-making and organize a pump so that the first investors could take out their money and earn something. And then, everything bumps up against the problem: what will happen to those who bought assets from those who had already managed to make money (laughing)? But this is their complexity.

The US Securities and Exchange Commission (SEC) announced the termination of the Crypto Asset Management LP (CAM) hedge fund. According to the regulator, the company manager Timothy ENNEKIND attracted $3.6 million of investors saying that Crypto Asset Management was the only US fund regulated by the SEC. “Hedge funds that are looking to make money continue to thrive riding on the wake of the popularity of digital assets,” said Dabni O’RIORDAN, the co-director of the asset management unit. “And therefore, investment advisors must make sure that the funds they represent meet the requirements for registration and must disclose the regulatory status of their funds to investors.”

BNT: But there are investors whose money is managed by the fund, aren’t there? They cannot stay indifferent. What should one look at? How to judge the status of the fund and accuracy of its organization?

To begin with, one needs to look at age. The organization must be on the market for at least 10 years. Further, the fund must be regulated sufficiently. In other words, it should be registered properly, with a portfolio, with all administrative units, analysts, investment programs, and so on.

A crucial point: any real fund should have a custody problem resolved. That is, the manager of the fund itself must be necessarily banned from the possession of the property in the form of assets.

In general, in any serious institution, the functions are as divided as possible. One person should own, the other person - store, the third one - manage, the fourth one – have the keys, and the fifth one - have half a key, and so on. In this case, the risk that someone will take a person out to the forest and, under pressure, will get from him access to his own assets will be reduced to zero.

It is also important to study the principles of the fund’s work and its philosophy: how and where it will invest your money, what tools it uses, and how reliable the company itself and these tools are.

BNT: In the world, there are no uniform rules for regulating the activities of the funds-operators of virtual assets. Often, they do not exist even in one country. Therefore, it is not possible to define clear criteria for the reliability of a company. Before investing your money, experts advise to pay attention to the following:

1.    Investment story of the company. Typically, one can find this information in the Internet.

2.    Objective reporting. Funds are not always required to publicly disclose such information, but at the request of the investor, the management is obliged to provide it. And if it does not contain audit reports and extracts from balance sheets, the organization should arouse suspicion.

3.    Reasonableness of the investment strategy. Companies describe their products on their corporate sites, but for an objective picture, you need to secure yourself with the opinion of a specialist.

4. Official registration of relation. The fund must offer the investor either a public offer (investment using a PAMM-account) or a written contract.

BNT: If we talk about cryptocurrency products of funds, they imply the ownership of tokens of different projects, which are traded by the fund itself on different exchanges. What do these projects get?

AP: If the fund is large, well-known, and serious, then the very fact that it owns the currencies of some projects attaches value to the projects themselves. The more their tokens are bought and the longer the worthy financial institutions own them, the higher their liquidity is. Conversely, the more they sell, the less it is.

In other words, technically, for such currencies as monetary ones, which are designed to store and transfer values, the buy&hold strategy attaches value to the project itself. That is why it is profitable to attract funds.

BNT: Well, let's imagine that I am holding the ICO. I come to you and say: “Alexei, please, include my coin in some of your products”. What's happening?

AP: There is always one problem in all new coins: a very low liquidity. Today they cost a dollar, tomorrow - a cent, and the day after tomorrow - three. Therefore, I will send you home.

This year, ICO's losses reached a record $6 billion, the analyst firm Diar has reported recently.

According to the experts, about 70% of digital coins are now cheaper than during the token sale procedure. Moreover, 324 assets, which collected a little under $2.3 billion, were not listed on any of the exchanges at all. At the same time, the number of initial coin offers decreased from 100 in February 2018 to 17 in August.

“It was found that out of 562 projects, 402 that had collected $8.2 billion in the initial offer cost $2.2 billion that day,” Fabi ABUALFA, the founder and the chief editor of Diar, said on his Twitter. “The exorbitant sum of $6 billion paid to developers has been lost.”

BNT: It's frustrating. But in general, how does the fund own the currency? Trade currency? Which amount?

AP: Possibilities of funds, of course, still bump up against the tools of the exchanges. There are always restrictions on the trade volumes. And here is a picture: let's say I have a whole million dollars of some coin in the fund, one coin for the simplicity of the experiment. And it is traded, for example, at $100,000 per day. And I see that it will start falling now, and I need to withdraw from a million urgently, and it has all trades for a hundred thousand... If I move the price of this currency, what will happen? Yes, it will collapse while I am going out.

Now attention, there is a question: at what size of the fund what currencies can be used? It is clear that good funds cannot keep more than 25% of the available market liquidity in the portfolio.

There is such a thing: a liquidity risk. If I have one exchange connected, then, for example, the liquidity at this exchange is five million per day. So, I must not have more than 1,250,000 positions in this currency. If I have more, I put my investors at additional risk.

For small currencies, there are also some algorithms, but because of low liquidity and high flammability, large players do not like working with them. There is nothing behind many of the tokens but for the pump, about which we have already spoken. And taking on with the pump is meaningless.

In other words, those funds that claim that they have 30 cryptocurrencies in equal shares raise questions for me personally. It is dangerous to store low liquidity cryptocurrencies in the investment portfolio, including those that are generally not secured.

That is why one should look at the top cryptocurrencies. There shouldn’t be 30 of  them, 10 ones are enough. This way, the liquidity risk is lower and profitability is higher not least because the proved value stands behind them.

BNT: And has it ever happened so that some projects came and asked to take their coin?

AP: No, we are closed to such offers. It is rather for individual funds that deal with pre-ICO, and continue to work on the pump.

For the venture capital market, there are certain criteria and restrictions. We understand initially, which projects we will enter and which ones we will not.

After all, what is a venture project in general? This is a project that has not discovered the business model yet. That is, it still does not know how and on what its profit will be based. As soon as it understands, it will immediately stop being venture. But the one that has not discovered anything at all, except for a bright idea, is not even venture, it is not a project at all and is not worth anything at all. But they manage to collect on the ICO. The crypto market in its current state gives them an artificial cost.

BNT: And by what were the people who invested $10 million or $5 million mastered? There are such projects.

AP: Large projects that collected $300 million live a normal life. There is enough liquidity in them. And the rest…

BNT: Are there any known cases when funds invested, lost, and stopped existing because they never left the project?

AP: Yes, there are such cases. There is one subtle point: the funds must be separated by type. There are those that are registered more or less correctly and the investment activity is the main source of income for them. In Russia, there are about ten such financial structures. And there are few of them in the world.

And there are those who call themselves funds, but technically you cannot follow what they are doing. Nobody audits them, except for themselves. This is a completely different type of funds. Schemes for deceiving honest investors, as well as money laundering, may be hiding behind these structures.

BNT: Against the background of a falling market, Polychain Capital, the largest operator of digital assets ($250 million under management), gave up upon plans to enter the Canadian stock exchanges. Two other major market players, Crowd Crypto Fund and Alpha Protocol, decided to stop their operations at all. “Taking into consideration potential regulatory and market risks,” says the Alpha Protocol press release. “The best approach is a payback.

BNT: For example, a person needs to make a decision whether he should invest money in the fund or not. In other words, must he make up his mind what theory to choose anyway?

AP: I think that for serious investors, regardless of the capital account, it makes sense to be aware of themselves as a serious investor. That is, you cannot invest 50% of the capital in risky schemes.

You can afford the game when it is a case of 5%, well, a maximum of 10% of the capital. That is, you will not lose your money entirely. Of all the schemes, please choose the one in which the risks are maximally excluded and which will bring you something “in the long run”. After all, the investment is not a casino game. Set on red or black. Where will it lead? Three wins in a row, at best, and then - the loss of money.

If we continue the comparison further, the market differs from the casino in the fact that besides the roulette with red, black, and zero, there is a croupier here who tilts the table in one direction or another. The ball can roll not according to the rules that you suppose at all. So, it's hard to win.

Next, there is the question, in which markets and how to invest. It is important that the investments are a high-tech conveyor, not a piece-work production. Piece investment is dangerous because a one-hit wonder in one project may cause losses next time. Many singe their feathers at this.

BNT: So, how can one avoid singing feathers while investing in the digital market? What’s the catch of the players who manage to gather wealth in mere months, maybe, even in mere days? And can the funds help avoid losses?

It is necessary to assess the situation rationally. Many cryptocurrency traders live by looking for people who are fascinated by the market. Strongly believing in their fate and potential gains. Let’s consider the case of the stock market game. There is such a thing as a “two carrots” strategy. A non-professional investor is driven in by two assets, "carrots", and he begins to skip from side to side, taking actions of a "hamster". There is an expression among investors: "to shave a hamster."

Such professional investors are sitting on the stock exchange and are watching the hamster's actions. They are well aware of this psychology, they determine this type of people and calmly, again and again, they make pumps and dumps.

What does such a hamster-investor do? He cannot invest now on the ground, can he? No, he will invest only when it becomes clear that the asset is growing. But then, it's too late to invest.

My recommendation is the following: to keep out of that at all if you do not have sufficient knowledge and awareness of a certain market, and never in your life, you have turned out to be between two “carrots”. They have a great influence on psychology, literally, they control the brain. And if you synchronize with millions of other "hamsters", you will always give money to the one who controls the game.

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