A recent article in Bloomberg Crypto reminded us of the last lines from the song Hotel California. The issue is that while you can put your money into crypto ventures and you can be dazzled by the spectacular price surges you cannot always get your money out of a crypto investment when you want it!
Last of the lyrics for Hotel California
Last thing I remember, I was running for the door
I had to find the passage back to the place I was before
“Relax, ” said the night man, “We are programmed to receive
You can check out any time you like, but you can never leave”
So, is crypto now Hotel California of the song?
Difficulty Taking Crypto Profits
There are folks who are crypto or at least Bitcoin true believers. Their intent is to buy Bitcoin and never sell, holding on through market ups and downs. With Bitcoin now back to its previous all time highs this seems to be a viable approach to investing in Bitcoin. However, with the advent of spot Bitcoin ETFs regular mom and pop investors can also easily invest in Bitcoin. Not all of these folks are crypto true believers. Rather they are looking to make money with their investments. They are used to investing in an asset like a stock or ETF and then selling after the price goes up. Although the ability to rotate one’s investment portfolio in and out of various assets is standard in the world of stocks and bonds it does not seem to work in some crypto investments. For example, Anthony Scaramucci’s SkyBridge Capital is not letting folks cash out after the recent price surge.
What Is SkyBridge Capital?
SkyBridge Capital is a hedge fund with a heavy focus on cryptocurrencies. They hold a couple of billion dollars in assets with a mix that heavily favors cryptocurrencies but also includes other standard assets such as stocks and bond. They are the ones limiting client exits with their profits. According to a Bloomberg Crypto article nearly three-fourths of SkyBridge investors want to take their profits after the recent crypto price surge. The fund is telling them that it can control who is able to get their money and when. The fund has redemption periods and in the one that just passed a majority of shareholders wanted to take their profits. The fund returns money to shareholders via tender offers. They brought back about seven percent instead of the seventy percent requested. The rules of the fund allow them to do this. It made perfect sense for the fund when people wanted to bail out during crypto winter but is not welcome news today.
Why Do Folks Invest in Cryptocurrencies?
Most folks invest in order to make money. They are looking for a better return than the passbook savings account at their bank. They want to stay ahead of inflation. And they want sufficient liquidity so that if they want or need their investment capital for other purposes they can get it back. Investors in bonds or US treasuries can get trapped in an unprofitable investment situation when interest rates fluctuate but they can simply sell the asset and take a loss and move their investment capital elsewhere. While some crypto true believers want their assets in crypto forever and ever, big investors typically expect to be able to rotate their investments, take profits when investments have worked out well, and be able to move their money wherever they want it.
Why Is SkyBridge Holding Assets Hostage After the Crypto Rally?
Many funds like SkyBridge have some degree of discretion in regard to limiting asset withdrawals. Generally this option is used when the underlying assets have plunged in price and are hard if not impossible to sell and raise the money to pay off investors. What puzzles many today is that Bitcoin and the rest of the crypto world have rallied back to the approximate level of the last peak in 2021. As such crypto assets should be easy to sell in order to pay off investors who want to take their profits. On suspicion that we have that no one is talking about is that some of those held crypto funds are tied to hidden obligations or do not exist in the numbers reflected in the fund’s balance sheet. One is reminded of the Madoff pyramid scheme and how he dug in his heels and never wanted to let investors take their money but rather kept promising greater profits if folks simply kept their money, in his case phantom money, with his firm.
So, here we have a crypto investment where you can get in, see paper profits, but cannot leave. Is this the crypto version of Hotel California?