VCs and Hedge Funds played the Crypto Market

Last year was incredible for most cryptocurrency enthusiasts and investors. The entire cryptocurrency market cap shot up 3,224% in 2017.

But during past seven months, we’ve experienced a serious correction and a ‘bear market’. Take a look at the cryptocurrency market cap through today.

Figure 1: Cryptocurrency Total Market Capitalisation Aug 2017 — Aug 2018 (courtesy of Cryptolization — https://cryptolization.com/)

After soaring to over $800 billion in early January, the entire cryptocurrency market cap has tumbled 73% to around $219 billion in just over seven months.


HEDGE FUNDS, VCs CAUSED THE CORRECTION

Over the period of 2016 and 2017 more than 100 different crypto hedge and venture capital (VC) backed funds were launched. Much of the crypto gains last year were attributed to this huge influx of money pouring into the crypto universe but at the end of last year, many of these funds had accumulated substantial returns on their invested capital.

Any smart investor would decide to cash out their profits, right? Well, these VCs and hedge funds are no different and they decided to take a certain portion of those profits off the table. So they took the chance to book returns for their investors and for their shareholders. These realized gains are also directly tied to the bonuses they receive.

As a consequence, we saw a considerable amount of profit-taking in late December, and possibly in early January too. That’s when we saw immediate pullbacks of 50% and more in the price of many cryptocurrencies.

Going through these sorts of pullbacks can be painful. You might be lured to cash out of the crypto market altogether. But I’m here to tell you that that would be a mistake. Just like any market, there are boom and bust cycles. Crypto is no different and the whales will be returning shortly (they’re still on their summer holidays).


PERSPECTIVE

Cryptocurrency and in particular, its underlying technology — Blockchain, are here to stay and will continue to flourish but we need to always take a step back and see the bigger picture. The amount of money flowing from hedge funds and venture capital firms is still insignificant.

For instance, in a $3-trillion hedge fund industry, only $3 billion is allocated toward cryptocurrencies and blockchain technology. That’s only a measly one-tenth of a percent of the total industry. I forecast that this number will increase by at least 100x in the next 24 months.

I’m very bullish on crypto in the long-term, but a lot of the valuations have been driven by greed and retail (or unsophisticated) investors who only decided to jump on the band wagon because of FOMO or “Fear On Missing Out”, as is commonly touted in the crypto social network.

THE RETURN OF WHALES

In the crypto sense, these venture capital firms, hedge funds and other institutional investors are classed as “whales”. Have they “left” the market? Not a chance. They’re lurking on the sidelines, waiting for the right opportunities and for regulations and infrastructure to be implemented that will directly benefit them and not the average retail investor.

So what is holding these whales back?

Limited Regulations: Without formal regulations and protection from governments, the venture capital, institutional and hedge funds monies are on hold when it comes to investing in Initial Coin Offerings (or ICOs), which is the equivalent to IPOs for cryptocurrency and blockchain companies. A large number of the ICOs are founded and developed by organisations that offer little transparency on their operations and business model. In short, it’s very possible for ICOs to perform poorly or run away with investor money without any serious consequences and no legal recourse.

Poor Security: This is another major concern. Trading cryptocurrency is one thing, but securely storing it is another. Large-scale exchange heists, such as the recent US$400 million hack of Coincheck, highlight the risks of managing millions of dollars’ worth in cryptocurrency.

Lack of Custodians: This whole process of holding crypto assets yourself makes it excessively problematic for traditional institutional investors to even consider pursuing such investment models. In the old-fashioned finance world, there are custodians who act like “a safety net. What it essentially means is that when you do a trade, you’re operating on accounts that are held elsewhere, so you never have to worry about security. However, custodianship has still some way to fulfill a reasonable level of maturity in the cryptocurrency world, so venture capitalists, hedge funds and institutional investors will stay away until their security and risk concerns are mitigated.

IPOs instead of ICOs: Finally, and this is will be the sequel for the return of these whales in their droves to the crypto space:

“Traditional as well blockchain based companies will carry out their own IPOs in a guise of an ICO”.

It’s already happened and continues to take place behind the mainstream media. Telegram, a non-profit cloud-based instant messaging service founded in 2013 by the Russian Durov brothers, announced its ICO earlier this year. However, it had already carried out two private pre-sale rounds in “secret” with select investors raising a reported $1.5 billion (Source: Cointelegraph — https://cointelegraph.com/news/durov-brothers-file-telegram-and-ton-with-sec-report-850-million-already-raised). By the time the actual public ICO happens (which subsequently did not materialise) and retail investors like me and you can invest, the 10x opportunity that has been common place with most successful ICOs to date will no longer be a reality for us small investors. Instead it will be a dream that can only be realized by accredited investors i.e. venture capital firms, institutional investors, high net worth individuals and hedge funds. Doesn’t this sound familiar to you? Well it should, because it is basically what takes place with all IPOs in the traditional markets.

In the end, retail investors — the ones with the least capital and access to quality blockchain projects — will not be able to participate in the best ICOs, blockchain or cryptocurrency projects. Most ICOs going forward along with established companies looking to adopt blockchain technology will only work with institutional investors, VCs and high net worth individuals.


STILL EVOLVING

It’s not all doom and gloom though. The BIG money will flow into blockchain technology and cryptocurrency in a GIGANTIC way. I’m certain of this, but many of these institutions, funds and VCs continue to worry about the valuations of cryptos and blockchain based companies. At this present moment in time, all these securities have been correlated. These whales will be extremely interested in crypto when this correlation decouples; when you have winners and losers. Right now it is just viewed as a bubble and at some time it will go down in value.

The market is progressing, and money that’s been made in blockchain and crypto will be / is being reinvested into the sector. This in turn will cause increased competition and the creation of new coins and service providers, which ultimately will be majority owned by a few and will be centralized in their operations and management.

It all sounds so familiar …. Happy trading!

By Mawdud Choudhury, Founder & CEO of Meedah Group

Risk Disclaimer

Meedah Group, its partners, affiliates are not licensed financial advisers. The information presented in this newsletter is an opinion, and is not purported to be fact. Bitcoin and cryptocurrencies are volatile instruments and can move quickly in any direction. Meedah Group, its partners, affiliates are not responsible for any trading loss incurred by following this advice.