Walking through the development of a crypto hedge fund.
The story first appeared on Unmade where I share a tech business idea from the future every week.
I consider myself one of the very vocal advocates of blockchains. I am an advocate of the blockchain protocol, not merely of cryptocurrencies and their ever exploding value in dollars. Cryptocurrencies are inevitable in the world of blockchains. They are the incentives that make the nodes work and form the network. Without them, there would be no blockchain.
Cryptocurrencies are to blockchain what fuel is to your car.
Therefore, no matter how much we label blockchain as the technology of the future, it also is an alternate economy. And where there is an economy, there will be traders and investors. And where there will be investors, there will be an opportunity of a hedge fund.
Crypto Hedge Fund
“Risk comes from not knowing what you’re doing.” — Warren Buffett
The whole crypto ecosystem is in its infancy and volatile. But volatility can only be noticed if you look at an individual crypto asset over a short period. In the long run, the whole crypto market can be seen to be always growing. This feature of this market makes is a ripe one to build a hedge fund for.
For investors, the best strategy would be to invest in a lot of crypto assets (thus hedging the risk) and trade fiercely to convert the volatility in profits. But not everyone can do it because it simply is too much of work for an individual. It makes it a huge market of investors who want their money to be invested but do not have enough time and resources to do it on their own. Moreover, every coin or token requires to be stored in a wallet securely. It adds up to a headache.
A hedge fund would attract thousands of such investors.
Trust via Token
“The trust of the innocent is the liar’s most useful tool.” — Stephen King
Unlike the hedge funds in the stock market, a crypto hedge fund can be entirely transparent and offer trust via a token. The token would be a representative token that would represent the underlying fund’s total value such that:
Value of a token = Total value of the fund / Number of tokens in supply
Consider an open-ended fund, every time, someone invests their money in the fund, new tokens would be created to maintain the current value of the token.
New tokens to be created = Amount invested / Value of a token
Every time, someone returns their token in exchange for the profit, the tokens will be destroyed, and the money from the fund will be returned.
Amount to be returned = Value of a token * Number of tokens returned
I am over simplifying the formulae, and of course, you can put in some fee (entrance or exit or both) that would make up the revenue for the fund.
The core idea that I am trying to put forth is that there can exist a hedge fund in the world of crypto assets that can impart trust and transparency via tokens.
“The road to profits is paved with unfair advantages.” — Lewis Howes
Every successful hedge fund in the conventional world works on a unique insight that only they have access to. It could either be a better way to trade or access to some insider information or something else entirely.
If you are in the market with nothing extraordinary, you might survive, but you are there to thrive, not mere survive.
A hedge fund has to have an unfair advantage that no one else has. The unfairer the advantage, the more profitable the fund will be.
For the world of crypto assets, I have an idea. Cryptoassets are different from conventional stock in one manner, which is that they can be brought into existence out of thin air by contributing work to their blockchain.
I predict that most of the hedge funds in this market too will be built by finance experts who will be mighty beasts with trading. Because the blockchains are very transparent and distributed, there is a very less scope of getting insider information as there won’t be much. What part most of these hedge funds will miss is the part that would be the most alien to them. It will be the part where they would completely ignore the fact that crypto assets can be earned as rewards too.
Mineable Hedge Fund
“Before the reward there must be labor. You plant before you harvest. You sow in tears before you reap joy.” — Ralph Ransom
A hedge fund that somehow figures out how to put the mining part of crypto assets to use would have a clear unfair advantage over the others. What should not be done? Setting up large mining farms. It is costly to set up such farms, and you will not be a hedge fund anymore.
What might be done is that there could be a way that creates a global network of mobile and computer devices. This network of a vast number of devices will cluster the devices in various groups and mine different crypto assets throughout the day. Almost every laptop sits idle consuming electricity at least for a couple of hours. Almost every mobile phone gets plugged in for charging throughout the night. What if that electricity could be invested to mine some crypto asset (no matter however small) and exchange it for the hedge fund’s token? The power would be wasted otherwise.
It is not about mining cryptocurrencies profitably. It is about minimizing the wastage by investing the idle electricity in crypto assets.
Software that can carry out smart switching, and can coordinate every node in the network in a formation to yield maximum returns can become the unfair advantage.
This idea has kept me awake at nights. I have spent countless hours perfecting its economics. Over time, I got so intrigued with the idea that recently I have started pursuing it myself along with a team.
With this idea, I would also like to also invite feedback on our venture — GOD.
I would be delighted if some of you also want to pursue the idea. Ideas are cheap. People who execute them are priceless. Or maybe, join the forces together? Write to me on mohit [at] godtoken [dot] org.
Ideas are cheap. People who execute them are priceless.
About the author
He writes regularly for world’s largest publications including HackerNoon, TechCrunch, TheNextWeb, CoinTelegraph among others.
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