This year’s continuing bearish market sentiment is making itself increasingly known through recent downturns. Now the founder of Morgan Creek Digital, Anthony Pompliano, says that cryptocurrency hedge funds could soon close down.

This comes as the Bitcoin price has reached a new year-low

Moreover, this news comes as Bitcoin has recently dipped below the $5,000 line for the first time during this year. In addition to this, other cryptocurrencies are also feeling the pain and seeing similar price reductions.

Pompliano recently published a blog post in which he details his take on these price drops. Furthermore, he also theorized how they might ultimately affect cryptocurrency businesses.

The blog post, entitled ”ICOs and Crypto Fund Managers are in trouble”, argues that these price reductions might have more adverse effects than most people realize. First and foremost, Pompliano cites ”high water mark issues” as a factor that might force cryptocurrency hedge funds to close,

Specifically, a high water mark (HWM) is a form of contractual clause, which dictates when fund managers’ receive their performance fee. The performance fee usually consists of 20% of profits for cryptocurrency funds. However, HWMs dictate that managers only receive this if the fund’s asset value is high today than in previous periods.

Moreover, the last investment period was highly lucrative and ended in December of 2017. Pompliano notes that some funds have experienced net asset decreases of 50% to 80% since 2017.

As a result, these fund managers will, therefore, not fulfill the HWM criteria. This also means that they will not receive their performance fee – drastically lowers individual managers’ income.

Crypto fund managers could go without a performance fee for 2018

The managers will additionally be left without future performance fees unless the net asset values improve. According to Pompliano, it might take fund managers until 2020 to realize the types of 2x-4x gains needed.

As a result, Pompliano speculates that some fund managers will shut down their funds and return capital to the investors. The managers could then conceivably ”sit it out” for months or even a year, before returning with a new fund.

In fact, Pompliano speculates that such an occurrence ”should” logically have happened even sooner.

”The most plausible answer is that many of the managers are young/inexperienced and they won’t realize the issue until they don’t receive their performance fee for 2018,” Pompliano writes.

Pompliano also notes that ICOs could face trouble in the future due to falling cryptocurrency prices. As ICOs generally raise funds through cryptocurrencies, projects could now find that they owe more money to investors than they own in USD.

This could potentially leave some ICOs unable to pay their investors back, as the projects’ assets have fallen in price.

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