What profitability can a crypto fund show? 10, 20, 100, 1000% per year? Every figure is suitable, because no one is responsible for it. This is the feature of the business, bringing to mind a financial pyramid. However everything is not so banal. New economy always generates both brilliant investment ideas and outstanding scams. But it is difficult to distinguish them at the initial stage.
Crypto funds are often compared with venture ones. There are even the headlines like “Crypto funds will kill venture”. Although this comparison, frankly speaking, is very tense. Even high-risk financing means strict reporting: profits and losses amount; portfolio of the projects – both successful and ending in failure; amount of the dividends received by the investors in the time perspective; reports of respected audit companies; analysts’ team list. And also the strict, legally competent documentation, following the investment process. Basically, crypto funds have to report too. But this is the only similarity.
Units of foreign digital investment companies publish such data on their websites. And most of them originate from the same venture of hedge funds. For example, one of the world’s popular crypto funds Blockchain Capital was founded by a famous investor Bart Stephens, who had earlier managed a hedge fund in the Silicon Valley. Or Pantera Capital. Before joining the crypto it was a usual venture fund.
Founding Fathers of these structures transferred traditions of the classical investment business to crypto financing. But at the same time they do not reveal specific mechanisms of investment. Investors either have to guess how financial specialists work or take on trust.
But let the reader cast a stone at me – it is not bad. Lack of business information is a natural process. Market of cryptocurrencies and blockchain is so young that has not formed a scientific approach to investment yet. Therefore, even the respected crypto funds have nothing to say about their financial strategy to potential investors. As a rule, there is no strategy at all. Intuition and luck rule the crypto market today.
The same can be said about legislation. Investment contracts of crypto funds remind of documents of venture companies, but with vaguer wording. It is clear that they are based on a different legislative and judicial practice. Hence there are some specific points, e.g. the audit of organization activity is described vaguely. Because there is no legal and regulatory framework of virtual market in the world yet. May we consider the activity of structures, managing virtual currency, fraudulent only on this basis? Probably we should not.
“Before investing into a crypto fund I would advise to pay attention to the team list, background of the team members, reality of their promises. There are often such organizations that promise 20% profit and do not mention risks, - Ruslan Yusufov, director of special projects of Group-IB says. – All this reminds of old schemes, but in a new cryptocurrency package. When old-school financial pyramids try to rise on hype. But if there are no such features, it would be nice to talk to fund team members. Ask them about the investment strategy and mechanisms that will be used. The deeper their understanding of the market is, the more reliable the project is. And again, if the say only about the profits of the project, but nothing about the risks, one should be careful. If you do not want to be the loser, you have to dig deep”.
Uncertainty of crypto market is now an objective condition. Profitability is a different matter. Many demonstrate the profitability of about 100%. In a super-volatile market it is possible. But what do you think about the profitability of 5078%? According to Prime, one of Russian blockchain funds has shown such percentage of profit.
If Central Bank of Russia regulated crypto market, this announcement would lead to criminal case. Such percentage of profit is a clear feature of a financial pyramid. Moreover, crypto fund Alpari CryptA Capital was liquidated by the head office in October 2017 after it had shown the profitability of 1356, 79% per year. Parent company, a large and respected financial structure, did not want to quarrel with the regulator and have anything in common with crypto financial pyramids.
Of course, the market of cryptocurrencies and blockchain is extremely attractive for a risky investor. It is profitable, and what is important, unregulated. However the area of digital investment organizations can now be compared with the “Comanche territory”, where there are “good guys” and “Comanche” themselves, waiting for a lonely fool-traveler. But isn’t the whole virtual world like this now?
Economy is an exact science, when it comes to calculating money. But when it is about trends and tendencies, it is like geography of XV century. How one can find the way to India? Only get aboard and sail. And it is not necessarily true that the goal will be achievable. One can sail to India and discover America. Or get drowned on the way.
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