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Diving into Cryptocurrencies

Cryptocurrencies are one of the hottest topics in the financial world. To learn more about the market, challenges and opportunities surrounding this exciting asset class, FundCount sat down for a discussion with Mikhail Davidyan, managing partner, Theorem Fund Services.

FundCount (FC): What is driving the interest in cryptocurrencies?
Mikhail Davidyan (MD): This cryptocurrency asset class has experienced tremendous attention over the last year and more – and for good reason. The performance numbers can be explosive, in both directions. Investors are looking to diversify their portfolios and for something new to drive returns. Cryptocurrency fits the bill.

FC: Is interest coming from clients or from managers?
MD: It’s actually coming from both. However, traditional managers tend to stick to the basics, so it is the new managers that are launching brand new funds that are the most receptive to cryptocurrencies.

FC: What are some of the operational challenges fund managers face with this asset class?
MD: The biggest challenge is the ability to obtain all required information and normalize it to calculate net asset value (NAV). We have to gather data from various exchanges and OTC counterparties, which makes it harder to crunch the numbers. Fortunately, we can then load data into FundCount and do all the reporting for clients, audit review, tax, etc.

FC: Any other challenges?
MD: Cryptocurrency exchanges operate 24×7 so there is no traditional end of day where the window drops for NAV calculation. It is up to the manager to decide what the firm considers to be end of day and use that as a snapshot to capture price. The most important thing is consistency.

Then there is the challenge of supporting the stream of new variations of cryptocurrencies and crypto derivative products that are continually added. Managers must have the technology to stay on top of this curve. If a client creates something, managers must make sure they can support it.

FC: Are there other developments in the market that you’re watching carefully?
MD: The issue of custody comes up frequently in conversations. Currently, there are very few fund custodians supporting this asset class. Each uses different wallets to store currencies and it is impossible for each custodian to support every type of currency that a manager can trade. So it’s complicated from a regulatory perspective.

FC: Where do you see the market headed?
MD: The evolution of the asset class will drive out fund managers that don‘t have the right strategy, technology or infrastructure. This is the same for any asset class. Whether a fund manager or service provider, you need to have a thorough infrastructure in place.

Theorem thought through all the components needed to support clients and surrounded ourselves with expert partners and the right technology platforms to gather information for accounting and reporting. FundCount is extremely flexible and enables us to track and account for cryptocurrencies as if they were any other traditional asset. We can systematically load data from all exchanges into FundCount, and then have an integrated picture for analysis and reporting. FundCount helps us streamline operations and provide accurate, informative reports to clients.

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