WARWICK CAPITAL MANAGEMENT LTD. IS A MEMBER OF NFA AND IS SUBJECT TO NFA’S REGULATORY OVERSIGHT AND EXAMINATIONS. WARWICK CAPITAL MANAGEMENT LTD. HAS ENGAGED OR MAY ENGAGE IN UNDERLYING OR SPOT VIRTUAL CURRENCY TRANSACTIONS IN A COMMODITY POOL OR MANAGED ACCOUNT PROGRAM. ALTHOUGH NFA HAS JURISDICTION OVER WARWICK CAPITAL MANAGEMENT LTD., AND ITS COMMODITY POOL OR MANAGED ACCOUNT PROGRAM, YOU SHOULD BE AWARE THAT NFA DOES NOT HAVE REGULATORY OVERSIGHT AUTHORITY FOR UNDERLYING OR SPOT MARKET VIRTUAL CURRENCY PRODUCTS OR TRANSACTIONS OR VIRTUAL CURRENCY EXCHANGES, CUSTODIANS OR MARKETS. YOU SHOULD ALSO BE AWARE THAT GIVEN CERTAIN MATERIAL CHARACTERISTICS OF THESE PRODUCTS, INCLUDING LACK OF A CENTRALIZED PRICING SOURCE AND THE OPAQUE NATURE OF THE VIRTUAL CURRENCY MARKET, THERE CURRENTLY IS NO SOUND OR ACCEPTABLE PRACTICE FOR NFA TO ADEQUATELY VERIFY THE OWNERSHIP AND CONTROL OF A VIRTUAL CURRENCY OR THE VALUATION ATTRIBUTED TO A VIRTUAL CURRENCY BY WARWICK CAPITAL MANAGEMENT LTD.
THE INFORMATION CONTAINED IN THIS PRESENTATION (THE “INFORMATION”) HAS BEEN PREPARED SOLELY FOR INFORMATIONAL PURPOSES, IS IN SUMMARY FORM, AND DOES NOT PURPORT TO BE COMPLETE. IN PARTICULAR, THE INFORMATION IS NOT, AND IS NOT INTENDED TO BE, AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES. ANY OFFERING AND SALE OF SECURITIES BY US OR ANY RELATED ENTITY (IF ANY) WOULD BE MADE ONLY ON THE BASIS OF CERTAIN DOCUMENTS INCLUDING AN OFFERING MEMORANDUM AND RELATED GOVERNING AND SUBSCRIPTION DOCUMENTS PERTAINING TO ANY SUCH OFFERING AND SALE. THE INFORMATION DOES NOT PROVIDE AND SHOULD NOT BE TREATED AS FINANCIAL OR INVESTMENT ADVICE. THE INFORMATION DOES NOT TAKE INTO ACCOUNT SPECIFIC INVESTMENT OBJECTIVES, FINANCIAL SITUATION OR THE PARTICULAR NEEDS OF ANY PROSPECTIVE INVESTOR. NO REPRESENTATION OR WARRANTY IS MADE, EXPRESSED OR IMPLIED, WITH RESPECT TO THE FAIRNESS, CORRECTNESS, ACCURACY, REASONABLENESS OR COMPLETENESS OF THE INFORMATION. WE DO NOT UNDERTAKE TO UPDATE THE INFORMATION. IT SHOULD NOT BE REGARDED BY PROSPECTIVE INVESTORS AS A SUBSTITUTE FOR THE EXERCISE OF THEIR OWN JUDGMENT OR RESEARCH. PROSPECTIVE INVESTORS SHOULD CONSULT WITH THEIR OWN ADVISERS BEFORE MAKING AN INVESTMENT DECISION.
VIRTUAL CURRENCY RISKS
Unique Features of Virtual Currencies. Virtual currencies are not considered legal tender in many jurisdictions including the United States, and many question whether they have intrinsic value. Their underlying value is highly subjective and unpredictable. The price of many virtual currencies can be based on the agreement of the parties to a transaction and their value can be completely derived by market forces of supply and demand. Market prices can swing widely without warning. In addition, virtual currency futures and options contracts are complex instruments that present additional risks including price movement, illiquidity, and volatility.
Price Volatility. The price of a virtual currency is based on the perceived value of the virtual currency and subject to changes in sentiment, which make these products highly volatile. Certain virtual currencies have experienced daily price volatility of more than 20%. The risks associated with the extreme price volatility of virtual currencies and the possibility of rapid and substantial price movements, could result in significant losses.
Valuation and Liquidity. Virtual currencies can be traded through privately negotiated transactions and through numerous virtual currency exchanges and intermediaries around the world. The lack of a centralized pricing source poses a variety of valuation challenges. In addition, the dispersed liquidity may pose challenges for market participants trying to exit a position, particularly during periods of stress.
Cybersecurity. The cybersecurity risks of virtual currencies and related “wallets” or spot exchanges include hacking vulnerabilities and a risk that publicly distributed ledgers may not be immutable. A cybersecurity event could result in a substantial, immediate and irreversible loss for market participants that trade virtual currencies. Even a minor cybersecurity event in a virtual currency is likely to result in downward price pressure on that product and potentially other virtual currencies.
Opaque Spot Market. Virtual currency balances are generally maintained as an address on the blockchain and are accessed through private keys, which may be held by a market participant or a custodian. Although virtual currency transactions are typically publicly available on a blockchain or distributed ledger, the public address does not identify the controller, owner or holder of the private key. Unlike bank and brokerage accounts, virtual currency exchanges and custodians that hold virtual currencies do not always identify the owner. The opaque underlying or spot market poses asset verification challenges for market participants, regulators and auditors and gives rise to an increased risk of manipulation and fraud, including the potential for Ponzi schemes, bucket shops and pump and dump schemes.
Virtual Currency Exchanges, Intermediaries and Custodians. Virtual currency exchanges, as well as other intermediaries, custodians and vendors used to facilitate virtual currency transactions, are relatively new and largely unregulated in both the United States and many foreign jurisdictions. Virtual currency exchanges generally purchase virtual currencies for their own account on the public ledger and allocate positions to customers through internal bookkeeping entries while maintaining exclusive control of the private keys. Under this structure, virtual currency exchanges collect large amounts of customer funds for the purpose of buying and holding virtual currencies on behalf of their customers. The opaque underlying spot market and lack of regulatory oversight creates a risk that a virtual currency exchange may not hold sufficient virtual currencies and funds to satisfy its obligations and that such deficiency may not be easily identified or discovered. In addition, many virtual currency exchanges have experienced significant outages, downtime and transaction processing delays and may have a higher level of operational risk than regulated futures or securities exchanges. If virtual currencies are traded or held through an exchange, intermediary or custodian, market participants can be exposed to a higher level of operational risk including outages, delays, errors, or theft.
Regulatory Landscape. Virtual currencies currently face an uncertain regulatory landscape in the United States and many foreign jurisdictions. In the United States, virtual currencies are not subject to federal regulatory oversight but may be regulated by one or more state regulatory bodies. In addition, many virtual currency derivatives are regulated by the CFTC, and the SEC has cautioned that many initial coin offerings are likely to fall within the definition of a security and subject to U.S. securities laws. One or more jurisdictions may, in the future, adopt laws, regulations or directives that affect virtual currency networks and their users. Such laws, regulations or directives may impact the price of virtual currencies, their acceptance by users, merchants and service providers, and the ability of market participants to trade and invest in virtual currencies.
Technology. The relatively new and rapidly evolving technology underlying virtual currencies introduces unique risks. For example, a unique private key is required to access, use or transfer a virtual currency on a blockchain or distributed ledger. The loss, theft or destruction of a private key may result in an irreversible loss. The ability to participate in forks could also have implications for investors. For example, a market participant holding a virtual currency position through a virtual currency exchange may be adversely impacted if the exchange does not allow its customers to participate in a fork that creates a new product.
Fees. Many virtual currencies allow market participants to offer miners (i.e., parties that process transactions and record them on a blockchain or distributed ledger) a fee. While not mandatory, a fee is generally necessary to ensure that a transaction is promptly recorded on a blockchain or distributed ledger. The amounts of these fees are subject to market forces and it is possible that the fees could increase substantially during a period of stress. In addition, virtual currency exchanges, wallet providers and other custodians may charge high fees relative to custodians in many other financial markets. Management fees and other costs and expenses can also be incurred regardless of profitability.
Please review all offering documentation for a full discussion on risk.