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New Managers September 2017

PERSPECTIVES: Cryptocurrency investing, Side letters

Cryptocurrency investing: a lot of issues need to be addressed

As the number of hedge funds investing in cryptocurrencies or in ICOs has been rising, so have concerns surrounding such investments. Steve Nadel, hedge fund attorney and partner at Seward & Kissel LLP in New York, talks to Opalesque about those concerns.

Opalesque: Could you tell us about the issues around hedge funds investing in cryptocurrencies?

Steve Nadel: A lot of issues need to be addressed - for example, how do you get a proper valuation? Some of these cryptocurrencies are trading on multiple exchanges. Normally, with currencies, there is a set time, a fixing price - 4 p.m. Greenwich Mean Time - when the value is assigned. That really hasn't happened here. These cryptocurrencies may be trading at potentially different values on different exchanges. So that's a big issue that needs to be addressed.

Opalesque: What about the hedging?

Steve Nadel: Right now it's pretty challenging to hedge. We are expecting to see some futures coming out in the future, but right now there isn't much in the way of being able to hedge these transactions.

Opalesque: You mentioned issues concerning custodianship.

Steve Nadel: With respect to the custodian issue, the question is how do you actually physically hold custody of these cryptocurrency assets? And it's not just the assets, also how and where are the passwords held? Because they are all based on blockchain, where the passwords and keys are held, all the information relating to the proof of ownership is very important to look at. And how do you protect from loss? These are all issues that need to be worked through more thoroughly.

Opalesque: And the liquidi......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.
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