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Whether you realize it or not, the crypto world has changed nearly every aspect of our world today. Suddenly banks don’t hold our money. Suddenly an idea can be valued at $1b. We at Boost VC have been in the crypto space for 5 years now and I feel that LPs (Limited Partners) don’t always know the right questions to ask fund managers offering crypto assets. Instead, it seems many LPs are desperate to simply gain access to this new asset class.
So I thought I would give everyone some good questions to ask.
This is directed at LPs who are interested in gaining exposure to the Crypto asset class through Venture Funds or Hedge Funds. With the rapid price growth of Bitcoin, the last 6–8 months has led to the rise of the Crypto Hedge Fund manager. I believe the ideal asset manager is one who understands Crypto and Asset management. Also general guidance: don’t pay 3 and 30 (Management fee/carried interest), 2 and 20 is fair everywhere.
Before we get to the questions, here are some good places to learn more about Crypto Assets:
The Boost VCÂ Podcast:
- Listen to: Charlie Lee — Litecoin, Olaf Carlson-Wee — Polychain, Will Warren — 0x, Luis Cuende — Aragon,
Twitter — Follow:
@Ljxie @BraytonKey @Erikvoorhees @Brian_Armstrong @melt_dem @naval @mhluongo @licuende @therealxinxi @cburniske @eiaine @myetherwallet @etherscan
Blogs
- https://tokeneconomy.co/ — @stefanobernardi Stefano Bernardo’s Newsletter
- https://thecontrol.co/ — @NTMoney Nick Tomaino’s Blog
Now — Some general questions to ask that sound obvious, but should not go overlooked.
1. How do you keep the tokens safe?
In a world of banks not storing the money anymore, this is a VITAL thing for funds to have thought about. The manager need to have a confident answer, and if they don’t use the world “Ledger” or “Cold Storage” during the answer, stop talking to them. That being said, I will admit that most won’t say exactly what they do because there is a lot of value in security through obscurity.
There are custody products like Coinbase Custody. These products are being built for institutional funds, which should solve this for every fund manager in the future, but right now, it’s still a risk.
2. Can you explain Bitcoin to me?
If they can’t explain it to you, they shouldn’t be doing this. You might disagree with the answer, you might disagree with the entire concept, but at the end of a conversation with a fund manager, you should have some structure of what Bitcoin is. And if you already know, this is a good test to gauge their understanding and articulation.
3. What is your thesis?
As of right now there are a lot of different approaches to the Crypto space: VC, Hedge Fund, Trading, Arbitrage, Vertical, Index, Futures. If there is a financial product for it, it’s being traded in tokens. This question shouldn’t be so much about the answer, which should be clear and straightforward, but about where they fit in the spectrum of what approaches are out there.
For example, how are they different from Polychain (a Boost VC portfolio company)? How are they going to compete in a space dominated by the Boost VC Network (not so humble brag)?
4. $HIT hits the fan, how do you cash out?
Believe it or not, it’s not super straightforward to cash out large amounts of crypto. In fact, I think this is a process that some fund managers leave as an afterthought. While some of these issues can be solved with an account on exchanges like GDAX, BITTREX, KRAKEN, liquidity is not incredible across the board, especially for the latest tokens..
For example, what happens if those exchanges go down? What happens if your tokens not traded on any exchanges yet? We have portfolio companies SFOX, Wyre, Coinbase and Coinhako, (or non portfolio companies like Circle and Cumberland) that do OTC trading or Exchange, which can help in a pinch. I also think it’s important to have a network of Crypto friendly VCs and investors, because they might want to buy as well.
At the end of the day, the hard part is not Crypto to Crypto transactions, the hard part is going to be cashing Crypto out to USD, which can only be done a few places.
5. How do you get your deal flow?
This is a normal question to ask any fund manager that applies just as well to crypto asset managers. If their fund thesis depends on them getting pre-sale access, what other funds are referring them deals? Do they have a network of other tokens they have previously invested in where they know the founders? In other words, how do they KNOW that they are getting into the deals that they want to get into, and no getting the worst picks.
6. When was the first time you bought Bitcoin/Ethereum? Why?
This gives you an idea of the depth of their knowledge. When they look at the market, do they see crazy protocol ideas, or do they see the history of the people behind the projects. I think that the latter is more important. Additionally, I think that for a Crypto Fund resume it’s very important to have had history of network.
BTW, I do think it’s good to give emerging managers a shot, but the time someone has been in the ecosystem should give you an idea of how committed they are to the space.
6 Questions Every Potential LP Should Ask a Crypto Fund was originally published in Boost VC on Medium, where people are continuing the conversation by highlighting and responding to this story.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.