Crypto Funds: Don’t Let Accounting Drive Economics

Accounting seeks to accurately describe the true economics of companies and their transactions. Since accuracy competes with achieving broad application, the degree of accuracy is not perfect. To manage gaps between the accounting story and the economic story, we use mechanisms such as EBITDA to better understand the economic story and make better decisions. When measuring fair value, we can look beyond accounting to active secondary markets.

When determining the fair value of private fund interests, there is usually no active secondary market or similar price discovery mechanism. For equity transactions such as subscriptions and redemptions, investors are typically required to transact at NAV. To state the obvious, the gap between NAV and what one considers fair value presents a problem. For traditional strategies and portfolios, this gap is typically not material because specialized fund accounting guidance has been developed over many years to address various asset classes and specific situations. Digital assets, however, do not fit neatly into existing accounting guidance. To make matters worse, the price volatility and illiquidity in cryptocurrencies can severely exacerbate these problems.

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*This article was co-written with XBTO.

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Marc Rinaldi, CPA
PKF O’Connor Davies, LLP
Partner-in-Charge, Financial Services

Brice Wilson, CPA, CFA
Global Head of Asset Management