There are more cryptocurrency funds and crypto-related businesses popping up every day, making it challenging to figure out which funds are reliable, reputable, and safe, and which are not. Before making an investment decision be sure to check with you tax and financial advisor and ask for a complete, recent, AIMA DDQ (a lengthy due diligence document). Even then, you can still be deceived, but hopefully the info contained herein is a good start. Caveat emptor.
If you’re a limited partner (LP) looking to invest in a cryptocurrency fund, asking these questions to a fund manager is a good place to start.
What Safety Measures Does the Fund Have in Place?
The manager of the fund you’re thinking about investing in should have a straightforward answer when you ask this question. All reputable cryptocurrency funds should be using ledgers and cold storage (i.e. offline) to protect their funds, so it’s important that the firm you’re analyzing use these technologies to protect its assets. BitGo, for example, is reputable cold storage custodian based in the US.
If the fund you’re looking at is not using cold storage — or some similarly-reliable technology — do not invest! Security and reliability are everything in the cryptocurrency space.
What is Bitcoin Exactly?
Spend an hour or two watching YouTube videos on things like cryptocurrency, and you’ll quickly come to realize that most folks inhabiting the crypto world have no idea what Bitcoin is. Ask your fund manager his or her thoughts on Bitcoin; test their knowledge of the crypto space. Explore their technical and philosophical understanding of digital currencies. If they cannot clearly explain the space, the assets in the space and the governing dynamics — move on.
If you’re confident in a fund manager’s understanding of Bitcoin, that’s a good start.
What is the Fund Manager’s Background with Cryptocurrency?
The blockchain space is relatively young compared to other industry segments and might be readily classified as a sub-segment of the tech sector. Ask a fund manager about their experience with cryptocurrency, the longer they have been involved the better – and the more likely they are to be connected to influential project leaders. Regard that in the blockchain space market participants refer to their companies as ‘projects.’
Nothing contained herein should be construed as investment advice or as creating a fiduciary relationship. PLEASE be sure to talk with you tax and financial planner before making any investment decision. Cryptocurrency and blockchain investing comes with unique risks and uncertainties that may lead to total and immediate loss of principal. Tax and regulatory regimes vary wildly depending upon jurisdictions.