Founder and partner of Morgan Creek Digital Assets, Anthony Pompliano, believes that many crypto-related organizations are in a much more deplorable state than we might think. This is stated in his blog Off The Chain.
First, very soon, cryptocurrency hedge funds may begin to close when they begin to calculate their “watermarks” (indicators in accordance with the terms of the contracts) according to which managers receive payment only if the net asset value of their fund at the time of termination investment period exceeds the value at the end of the previous period (usually 20% of the fund's profit).
For most of the funds, the end of the previous investment period is December 2017, when the cryptocurrency market reaches its peak. Since then, the net asset value of these funds has decreased by 50-80%. This means that fund managers will not receive rewards for 2018, due to which their personal income for the specified period will decrease significantly. In addition, they will not receive a commission until they increase the amount of net assets of their funds relative to their current values by 2-4 times.
Pompliano suggests that they cannot reach these levels at least until 2020. Lack of financial incentives will lead to the fact that managers will start massively closing their funds and returning money to investors. Most likely, they will want to sit out for several months or even a year before opening new funds, which will be released from previous commitments.
Why are the managers still not aware of this and do not close the funds? According to Pompliano, most of them have no experience and will understand what they have fallen into when it is time to receive an award for the past year. Thus, it remains less than 60 days until the moment when they have to feel the pain of the situation. Time will tell how many of them decide to close, and how much will continue to fight the bear market.
Another factor is the changing environment in the ICO industry. Many teams have attracted millions of dollars through a new fundraising mechanism. Unfortunately, few of them listened to the warnings. SEC last week took action on two ICO projects. The text of the regulator's decision suggests that it will be far from the last, and then the ICO projects will have no choice but to comply with legal requirements and pay fines.
In addition, they will have to return the money to investors, if the investors themselves want it, in US dollars according to the exchange rate at the time of the investment. Almost all projects attracted funding in cryptocurrencies. For example, if an investor invested 50 BTC, when Bitcoin was worth $ 10,000, then the SEC believes that it invested $ 500,000, and it is this amount that will be required from the project, in addition to the fine.
Usually this situation does not cause any special problems, but cryptocurrency rates have decreased by 50-90% since the time of the ICO. It is unlikely that the projects will have enough money to pay off investors in dollars. In the above example, the project will be able to return to the investor only $ 250,000 from 50 embedded bitcoins, and then provided that he did not spend the money. The only way for such projects is bankruptcy.
Current conditions for ICO projects and cryptocurrency funds are rapidly changing from bad to very bad. Most crypto entrepreneurs never fall into this situation. Fortunately, some were more cautious, but their share is very small.
If ICO-projects go bankrupt, investment of crypto-funds will start to approach zero sharply. This factor, complemented by the lack of bonus payments, will wipe out all the enthusiasm of both fund managers and depositors. The closure of funds and the bankruptcy of ICO will be the impetus for a new wave of panic in the market.