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Crypto-funds: pros and cons

By Olga Grinina

Once a playground for solely venture capitalists and funds, the investment market now is being disrupted like never before by Initial Coin Offerings. Crypto-funds founded by young and bold recent college graduates keep popping up, and many experts predict the end of classic investment tools in the nearest 5 years. According to a recent report by financial research firm Autonomous Next, there are now 124 crypto funds, 90 of them having launched this year. They manage a total of $2.3 billion worth of digital assets. So basically now there you have classic VCs interested in equity and specialised crypto funds investing in ICOs and cryptocurrencies.

Key players

Let’s have a quick look at major players in the field. The first crypto fund — Exante — was launched in Malta in 2013. Around the same time Grayscale was launched to manage the Bitcoin Investment Trust. In 2014 Naval Ravikant (now the chief executive officer and co-founder of AngelList) and Joshua Seims started Metastable — a macro strategy fund based in San Francisco. Metastable Capital now manages more than $45 million in digital assets. Pantera Capital launched its crypto fund backed by Ribbit Capital, Benchmark and Fortress and until late 2016 these five formed the majority. Polychain Capital, a successful crypto-fund founded by the Olaf Carlson-Wee, the Coinbase employee, launched with $4 million in 2016. It now has $200 million worth of digital assets under management. Blockchain Capital, a VC firm that specializes in blockchain projects, recently launched two new venture funds valued at $150 million to invest in ICOs. It should be no surprise that the success of the first crypto-funds inspired other players, including traditional financial experts, to enter the field. A good example of financial veterans entering the cryptocurrency market is Galaxy Digital Assets Fund, the $500 million crypto-fund. Once launched, it will be the largest crypto hedge fund.

How do crypto-funds operate?

From the perspective of start-ups and private investors who are lost in crazy variety of ICOs and try to figure out where to invest, the common question would be: are there any criteria that a crypto-fund would typically apply when making their investment decisions? Upon analysing some of the investment portfolios, we came to the conclusion that they willingly invest in cryptocurrencies: Bitcoin, Ether, Dash and others are in portfolios of almost every crypto-fund. Then there are solid projects like ‘Golem’ that boasts an original idea (claiming to be the 1st global computer ever) and decent team on board. But unlike traditional venture and hedge funds, they would not give that much of scrutiny to the start-up nor will they request additional verifications and guarantees (like support of at least one other venture capitalist). Same as with ICOs: it’s gotta be a blockchain-based platform with a couple of cool advisors on board and community support. Why so? Well, the thing is that such investment will most likely generate profit in any event — at least at first stage of project development. In cryptoworld everything happens pretty fast — same goes about making money on investment.

But why would you want to hand over your crypto-assets to portfolio managers and traders in the first place? Because cryptoworld is a complicated and volatile investment landscape. Prices can rise and drop by the hundreds in one day, regulations are vague or non-present. User interfaces are often unfriendly and trading between currencies can be a complicated process. Being an adaptation of traditional funds, crypto-funds make it easy for investors to navigate through their assets. Portfolio managers and traders will decide which ICOs to enter and which to avoid, which currencies to buy and sell. And in return they take a percentage of the profit as management and performance fees.

Still, there opinions to outline some major downsides to crypto funds. For instance, crypto funds can spread the risks associated with cryptocurrencies into the mainstream financial systems. Also, whereas there’s a general consensus that the world needs more of these since they benefit the entire crypto market, the tricky part here is legality: it’s hard to legalize them completely.

Alternatives to crypto-funds — autonomous ecosystems as new investment vehicles

Some new generation blockchain platforms started to emerge in attempt to solve these issues by registering an umbrella fund that would sublicense other funds and individual traders. A noteworthy example here is Tokenbox, a platform that leverages the power of blockchain to provide tools for creating, managing and investing in crypto-funds. Fund managers and traders can use Tokenbox to create their own tokenized portfolio of digital assets. Investors, on the other hand, use Tokenbox to discover crypto-funds and purchase their tokens. Tokenbox incorporated KYC (know your customer) and AML (anti-money laundering) processes in order to prevent scams. The idea of Tokenbox was conceived at The Token Fund, a crypto-fund that launched in early 2017 and has enjoyed great success. Iconomi, another player in the space, will provide a high transaction speed without necessarily inputting or withdrawing assets to an external exchange market. In this way, the transaction expenses decrease as well. There’s also a lower risk for glitches and delays in Blockchain networks during transactions.

With blockchain and inter ledger distribution being deployed, the area of investment is undergoing pretty much the same transformation as major other industries nowadays. Smart contracts that are used in crypto-funds provide for transparency and efficiency making once elite investment market available for vast majority of people. The only question is what happens next when the crypto-market is finally officially regulated? We’ll see in the next episode.




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