Hedge fund attacks Chinese-backed crypto exchange

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A Hong Kong-based hedge fund has launched an attack on a Chinese-backed cryptocurrency exchange for helping inflate the price of a digital token whose market capitalisation has risen beyond $500m in a matter of months.

Negative reports in the $13.9bn initial coin offering market have increased in recent months as more institutional investors have entered the industry. ICOs have become an alternative source of fundraising for start-ups. However, regulators have raised questions about whether issuers are selling unlicensed securities.

In recent weeks, sceptics of cryptocurrencies such as bitcoin have prevailed as the world’s most traded digital currency has tumbled to below $7,000 per unit, down from almost $18,000 in December. Many of those critics, including the head of the Bank for International Settlements, have said the value of the instruments, which are designed using blockchain technology, are inflated and pose risks to financial stability.

Amber AI, a Hong Kong-based quant fund that trades primarily in cryptocurrencies, launched an attack on Chinese-backed FCoin Token on Friday, saying that the FCoin exchange was designed to inflate the price of its token.

Amber AI said in its report that people who trade on the exchange pay a trading fee to FCoin and that fee was paid back in the form of FCoin Tokens. Traders were then rewarded for holding the token with a daily payout from a pool that represented 80 per cent of the fees earned by the exchange.

The problem with the design, according to Amber AI, which said it does not have a position in FCoin Token, is that it encourages market participants to deploy bots that trade to reap those rewards. That activity, in turn, has driven the price of the coin from $0.10 to $1.05 in just a matter of months, pushing up the market capitalisation of the digital currency to above $500m.

“This creates a self-reinforcing spiral where the revenue-pool grows as the trading volume grows, hence creating more demand for [FCoin Token],” Amber AI said in its report. Amber AI was set up last year by former Morgan Stanley traders, and runs a quantitative strategy for investing in cryptocurrencies.

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FCoin did not respond to emailed questions. The exchange was set up earlier this year by Zhang Jian, the former chief technology officer of Huobi, one of the world’s largest cryptocurrency exchanges.

The value of the ICO market has risen to $13.9bn, according to industry intelligence provider Coindesk, with most of that issuance occurring over the past year. In step with that growth, institutional investors have moved into the market, with 167 crypto funds appearing in 2017, according to data from Autonomous Analytics.

Negative reports on ICOs have proliferated in 2018, with investors often posting online complaints. A number of alleged scams have also surfaced.