VCs Wary of Secondary Digital Markets

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Venture capitalists who invested in initial coin offerings during the frenzied days of 2017 and 2018 are finding sparse liquidity on the nascent secondary market as their holdings exit their Regulation D lockup periods.

A common refrain from panelist during the Blockchain Fund Summit in Manhattan was to take the wait-and-see approach with their holdings.

“When the market has volume, we will sell,” said Rui Zhang, managing director Gumi Crypto Capital. “Given the markets are not ready, we are considering an OTC option.”

For fellow panelists, the presence of liquidity is only one of the conditions that must be present before they exit their positions.

“Typically, it is when the crypto network is large enough to support itself,” said Cindy Leow, a principal and partner at 256 Ventures. “We don’t sell when there is just liquidity. We have to understand the rate of return.”

However, for some venture capitalist funds, the decision about when to sell is out of their hands.

“We invested in ICOs in early 2017, but our auditor said we would have to be all cash by the end of the year because they did not want to valuate the ICOs,” said Mitchell Dong, a managing partner at Pythagoras Investment Management during a separate panel. “It was the first time that auditors have added value.”

When it comes to trading digital assets and cryptocurrencies, Pythagoras prefers routing its trades to the 20 oldest crypto exchanges rather than the ones with the reportedly highest volumes given the amount of phantom liquidity present on many of the venues.

“When we trade, we measure the slippage, which is the sign of fake volume,” he added.

Although the securities token market experiences a rough start, the VC firms may not be fully bullish on cryptocurrencies, but some see the recent bear market ending.

“The bear market is over, but the bull market is not coming soon,” said Jay Liang, a managing partners with OES Capital Group. “There are two drivers for a bull market- new money coming in and new users coming in. I see more traction in the enterprise space, but I’m not seeing traction where the new money is coming in.”