Lucas Ryan of MetaStable Capital took a deep dive into the computer code underpinning the digital currency Monero to see if it worked as promised. He even took a core piece written in C ++, and rewrote it in the programming language Python.
The extra effort paid off. After taking the time to vet Monero before its investment, the San Francisco-based hedge fund has seen a 100-fold return, said Joshua Seims, who started MetaStable with Ryan three years ago.
MetaStable, backed by venture-capital firms including Union Square Ventures and Sequoia, isn’t alone in trying to hack and understand what tech startups often promote as impenetrable software. That’s become especially important with the proliferation of initial coin offerings that have raised about $2 billion this year and swelled the ranks of digital tokens to more than 1,100.
"If you don’t have a deep understanding of this technology, you don’t know what you are buying," Olaf Carlson-Wee, chief executive officer of Polychain Capital, said in a phone interview. "There are a lot of projects right now launching. Most of them make very little sense, and the vast majority will fail."
The surge in ICOs had also led to an abundance of scams, prompting U.S. regulators to warn investors of fraudsters.
"What a lot of funds will do for their technical due diligence is, they’ll read the white paper, but our experience is, it’s very easy to make amazing claims in a white paper, but it’s hard to create the working code," Seims said in an interview.
There are now more than 68 crypto hedge funds focused specifically on digital currencies, and they have raised about $800 million -- and are aiming to raise $1.2 billion more, according to Autonomous Research LLP.
But while many of the funds were started by day traders, attracted by cryptocurrencies’ wild price swings and often easy-to-find arbitrage, such opportunities are likely to close up fast.<...