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Pantera Missed Its Aim or How A Hedge Fund Is Turning Into a Hype Fund


Oleg Koldayev

The chief analyst and the investment specialist at Pantera Capital hedge fund Joe KRYUG predicted that by 2020 the capitalization of the virtual assets market would increase by 10 times, to $2 trillion. There have been lots of such forecasts lately. However, is it possible to rely on such statements when making investment decisions?

Currently, Pantera Capital is one of the largest investment companies. Nominally, it controls more than $700 million, which in one way or another work in the digital economy. And until 2013, Pantera was quite a usual hedge fund, which financed various electronic projects. Accordingly, its analytical team has the necessary assessment tools and many years of experience in the market.

What arguments was KRYUG guided by in its optimistic forecast?

The chief analyst of the fund believes that the price of virtual assets will run higher as soon as the blockchain scalability problem is solved. He complains that "modern services are very slow and resemble the dial-up Internet era." But at the same time, the analyst, probably, does not fully understand the seriousness of the scalability problem. “I don’t know if Bitcoin will be equal in transaction rate with Visa and MasterCard. But as soon as the blockchains appear at the same rate, this will lead to a tenfold increase in the market of virtual assets,”KRYUG says.

The analyst said nothing new. Everyone knows about the blockchain scalability problem. Everyone also believes that if it is solved, the market will run higher. Another thing is confusing: a well-known analyst builds a forecast on something that does not exist yet. The scalability problem can be solved tomorrow. Or maybe – in a year. Or maybe never.

At the same time, we must not forget about one simple fact. At the beginning of 2018, Dan MOREHEAD, the CEO of Pantera Capital, said repeatedly that bitcoin was screaming about the purchase and the price for it would only grow. Then, its value fluctuated somewhere around $9,000 and subsequently fell by a third. As a result, the losses of the fund, according to various estimates, ranged from 50 to 72% of the assets.

How to deal with the forecasts’ credibility? On the one hand, if we approach this issue from the assessing success point of view, then, it is probably possible to rely on the opinion of the analysts of the fund. From 2013 to the present, due to the rising cost of virtual assets, the price of the investment portfolio has increased by 10,000%. And no one will take away these merits.

On the other hand, there are examples in history when erroneous forecasts led to disastrous consequences.

In 2006, the investor Brian HUNTER traded all sorts of securities actively and earned several billion dollars on the projects to restore the infrastructure of New Orleans after Katrina Hurricane. But then, having predicted the turn of the gas market incorrectly, he lost $500 million in just one day. In total, the lack of the forecast skills cost Brian and his clients $6.5 billion.

Or let’s recall the scandal with the French bank Societe Generale when in 2007, its trader Jérôme KERVIEL lost more than $7 billion in Eurobonds. Moreover, the volume of trades carried out by this bank clerk exceeded France’s sovereign debt - $50 billion. As a result, for its actions, KERVIEL received 5 years in prison, and the credit organization was fined for $4.6 million (€4 million) for improper control over its employees.

There are a lot of such examples, and they motivated regulators to tighten control over the activities of investment companies. In 2004, the American SEC passed amendments to the Investment Advisers Act of 1940, which obligated investment advisors to register with the regulator.

And before that, in 2000, the hedge fund group took the form of the Sound Practices for Hedge Fund Managers report. The document should contain information on risk control mechanisms, methods for calculating unforeseen events in the market, development of information reports on counterparties, examples of standard contracts, and the description of the information protection system. This document is advisory in nature, but investment organizations operating in the fiat market are trying to adhere to it. And the courts take it into account when rendering verdicts in controversial cases.

Nothing like this exists in the digital economy yet. The culture of industry regulation is only taking its shape, and the responsibility of the funds' management for the accuracy of forecasts and decisions is not legally fixed. Therefore, they probably predict what is profitable for them.

For such cases, a special term has been invented: a hype fund. The business strategies of financial institutions are based on loud statements by “experts”, juggling with such terms as scalability, and, most importantly, predictions of an unprecedented rise in asset values. Perhaps, due to the new rush, Pantera Capital is aiming to win losses back. But such a strategy is unlikely to inspire investors confidence. Because, as the recent events show, the era of hype on the digital asset market is irrevocably gone.


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