2017 had seen a massive inflow of investments into cryptocurrencies. The all-time high Market Cap was more than 800 Billion in January 2018. Complementing the same, new investment models have emerged, gained momentum, or, have percolated from existing traditional models. The cryptocurrency market is still in the nascent stage and very volatile. The technology itself is complex for a traditional investor, thereby making it difficult to judge the high promises (Moon!) of individual projects. Cryptocurrency funds give a sense of relaxation! Or, does it?
Introduction of new crypto funds into the market is on the rise, the number is exceeding every year.
So, what are cryptocurrency funds?
Cryptocurrency funds pool money from investors and invest them into a group of assets focusing entirely, or partially, on cryptocurrencies or other decentralized digital assets. The funds are managed by dedicated experts or insider investors. The funds charge fees for their work on analysis and selection of investment opportunities and sometimes, also on performance. It is understood that some traditional funds also hold a small percentage of cryptocurrencies.
Benefits of Cryptocurrency Funds
With masses of new investors getting involved in cryptocurrencies every day, it becomes important to have a structured approach towards investment, and cryptocurrency funds promise to be a torchbearer. With an increase in liquidity and governments bringing in regulations, this is the right time to give some importance to these funds. The funds have the below benefits compared to direct investments:
- Time Savings: For traders who have less time to research on cryptocurrencies.
- Knowledge: For traders who do not know how to profitably trade in cryptocurrencies.
- Fund Manager: The fund managers are usually experts and have done this for their living for a long time. Their experience counts.
- Safety: Using a crypto fund means you can avoid risks of transacting on exchanges, dealing with the risk of hacking and theft.
- Diversification: Using a managed fund allows you to diversify, logically. This helps in managing risks.
- Buying power: Investment funds also have increased buying power. For example, because of the higher amount of capital it has, a crypto fund may be able to access projects that are out of financial reach for individual investors.
- Insider knowledge: Some cryptocurrency funds have directly invested in ICOs and regularly communicate with such projects, thereby enabling them to form an idea of the direction a project is heading.
Types of cryptocurrency funds
Depending on the risk appetite, investment strategy, return policy and a few other factors, cryptocurrency funds can be broadly classified into 4 types:
- Public funds: These funds are publically traded in exchanges and have a longer time frame for returns.
- Private funds: Private funds are traded outside exchanges and are open for exclusive high profile investors (who can invest large amounts). Their regulatory requirements are different public funds.
- Hedge funds: Cryptocurrency hedge funds try to maximize profits in a short period of time and hence adopt complicated alternative investment strategies in both rising and falling markets. As a result of this complexity, if a hedge fund outperforms a specific benchmark, such as a market index, they charge additional performance fees.
- Venture capital funds: Venture capital funds pool money from investors and invest in early-stage companies. These types of funds take private equity stakes in the business in which they invest. They also play a role in the company’s operations, provide guidance and sometimes sit on the Board.
Many cryptocurrency funds have their own tradable tokens. Example: Blockchain Capital (BCAP), TaaS Fund (TAAS), and Blackmoon Crypto (BMC).
The current market
The current cryptocurrency fund market has 769 Funds.
Both Hedge Funds and Venture funds lead the market
In recent times, Venture funds have surpassed hedge funds in numbers. We are also seeing Institutional tech/FinTech VC firms entering into this market. This has resulted in the formation of Hybrid funds those funds investing traditional asset classes, in cryptocurrencies as well as initial coin offerings. (They are listed above as hedge funds).
There are 41 Cryptocurrency funds, each managing over $100 Million Market Cap. Approximately, that’s same as the market Cap of Binance Coin, currently ranked 6th in Coinmarket Cap, at $4 Billion.
How has the cryptocurrency fund market performed?
Despite lower cryptocurrency prices in 2018, assets under management for crypto funds has actually increased.
However, everything is not as rosy. As per a report by Crypto Fund Research, in 2018, 42 funds dramatically closed their operations! Several of these were formed only months earlier. The main reason might be because of the 2018 bear market, but this could have been better managed.
An example, Eurekahedge Crypto-Currency Hedge Fund Index has incurred approximately 70% losses in 2018.
This leads us to an important question.
What are some of the risks of investing in cryptocurrency funds?
- Loss of control. Once you invest in a cryptocurrency fund, you do not hold control over where your money is invested. This leads to the second point.
- Bad strategies: Many cryptocurrency funds are victims of bad strategies. The greed of higher gains has often led to higher undesired risks, resulting in doom!
- Knowledge and Experience: Many cryptocurrency funds are small, lacking the experience and crisis management abilities which are needed to manage tough situations, such as bear markets.
- Volatility: Cryptocurrencies are volatile and need time to stabilize. In case of a downtrend and losses, the financials and backing of the funds should be strong enough to withstand the downward trend and recover its losses in time.
- Historical Returns: Historical returns does not mean anything in this market, as cryptocurrencies have not yet got out of the bubble trend.
- Fees: Hidden and complex fee structure. Make sure you are aware of all hidden costs before you invest.
- Local Tax Rules: Always be compliant and pay your taxes, the market is currently unregulated, however that does not mean that it will not be regulated soon.
- Regulatory uncertainty: Check out for Cryptocurrency funds which are regulatory compliant and also which are located in crypto friendly countries. This will mean legal stability.
- Frauds: Lastly and most importantly, always do your own research and seek feedback from experience crypto investors before investing in a particular fund.
So, what should you do? What are the various aspects of a cryptocurrency fund you need to check before investing?
There are not many available guidelines which are currently available, so we thought we will create one. To manage the size of the content we have included it in Part 2 (Understanding Cryptocurrency Funds Part 2- Top things to look out for when choosing a crypto asset manager) of this series. We are listing down a summary below:
Things to check includes
- Investment Strategy
- Risk Management (includes regulation)
- Trading type and quality
- Power in the market
- Assets under Management
- Community review
- Minimum investment
Some of the popular Cryptocurrency Funds:
Some well-known funds include:
In spite of the Bitcoin bubble bursting in 2018, the fundamentals of Bitcoin remains strong. However considering market volatility, it is essential to take a little conservative approach during investing. Investing in cryptocurrencies is an adrenaline rush, and your investment needs to be protected. There is a high chance that many funds might shut down operations and the industry will consolidate.
We think the future belongs to funds with a Hybrid model,- which has a right mix of Traditional Assets (Less Risk), Large Cap Cryptocurrencies, Low Cap cryptocurrencies and also invests directly in start-ups.
This article is not financial advice and we recommend you to do your own research before investing in Cryptocurrency Funds.