Cryptocurrency Investment Funds and How They Work
The period from 2013 to 2016 can be defined as an era where a large number of venture investments took place in blockchain startups and Bitcoin. VCs invested billions of dollars throughout this period. But it was only in 2017 that public market investors started noticing cryptocurrencies and the market ballooned from $18 billion in January 2017 to more than $750 billion in January 2018. The market cap of Bitcoin alone has jumped from $16.5 billion to $320 billion in this period.
Such a massive growth has attracted several hedge funds and asset managers into the cryptocurrency market. Many of them have launched their cryptocurrency investment funds to benefit from this rising tide.
But what are these funds? How do they work? What are the different types of investment funds available? Let us have a detailed look.
What are Cryptocurrency Investment Funds?
As the concept is still pretty new in the industry, there is no formal definition of what these funds are. You can think of them as pooled capital that is professionally managed where most of the asset under management is invested in cryptocurrencies like Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin, NEO, and others. As a matter of fact, there are more than 1,500 alt coins and digital tokens listed on CoinMarketCap, the most popular website for tracking capitalization of cryptocurrencies.
While new funds are being launched every week, most of them can be divided into three different categories-
- Publicly Traded Cryptocurrency Funds
- Cryptocurrency Hedge Funds
- Buy and Hold Cryptocurrency Funds
What are Publicly Traded Cryptocurrency Funds?
The Publicly Traded Cryptocurrency Funds follow the popular “buy-and-hold” investment strategy and generally focus on a single asset. Currently, most of the funds focus on Bitcoin but there are new funds lined up which focus on Ethereum and many other top cryptocurrencies and digital tokens.
These funds charge management fee which can range from 1%-2.5% for a year. With more such funds entering the space, the fee would definitely decrease and settle around 1% which most of common ETFs charge.
A lot of traders and investors might wonder why you need to invest in funds that would invest your money in Bitcoin while you can yourself buy and hold Bitcoin. The same question can be asked for gold-based ETFs too. The Standard & Poor’s Depository Recipient (SDPR) Gold Trust, which is one of the largest gold-based ETFs in the world, manages more than $40 billion which is almost 20% of the current market capitalization of Bitcoin in a single fund.
There are many different reasons why investors prefer this indirect investment in Bitcoin through a fund. Some of the most common reasons include easier access and simpler regulatory regimes.
Currently, there are two different types of publicly traded cryptocurrency funds- ETNs and ETFs. The major difference between the two is that ETFs work on a collateralized value principle which is equal to its underlying asset of benchmarking like Bitcoin. You get to redeem the ETF for the underlying asset. On the other hand, you cannot redeem ETNs and they do not even provide any kind of guarantee of how much underlying asset they hold.
You can think of ETNs as a form of unsecured debt which tracks the value of the underlying asset but with looser compliance and reporting requirements. As a result, they carry higher credit risk as compared to ETFs.
Some of the most popular ETFs which are currently being reviewed by SEC are GBTC, XBTC, and COIN. Out of the three, GBTC is a type of hybrid fund which is an ETN current and has filed to turn into an ETF. Apart from these, there are funds like ARKW and ARKK which are currently available for investors. However, these are not official cryptocurrency investment funds as only 0.3% of the AUM is invested GBTC.
- What are Cryptocurrency Hedge Funds?
A hedge fund in the world of cryptocurrencies is a capital pool which is lightly regulated and invests your money in any digital asset within a broad parameter. Their operations include using many different types of trading strategies like price arbitrage, leveraged trading, algorithmic trading, etc.
Apart from the management fee, these funds also charge a performance fee which can range from 15% to 45%. However, you are only required to pay this performance fee if the fund is able to beat a benchmark that is previously agreed-upon. For instance, the benchmark can be the price of Ethereum or Bitcoin. This outperformance in comparison to the benchmark is known as alpha. If the fund is able to generate alpha, this shows that investing in this particular fund is better than holding its underlying asset and the fund is paid handsomely for doing so.
Some of the most popular cryptocurrency hedge funds are-
- Global Advisors
- Logos Fund
- Galaxy Digital Assets Fund
Out of the three different types of cryptocurrency funds, the hedge funds would probably witness the highest growth as they are lightly regulated. Even their market speed is much higher than other types of funds and fund managers also get the opportunity to make large profits in the developing and volatile asset class of cryptocurrencies.
- What are Private Buy and Hold Cryptocurrency Investment Funds?
As compared to Publicly Traded Cryptocurrency Funds, the Private Buy and Hold Investment Funds come with restrictions in terms of the amount of money you can invest or investor status. For instance, a fund might only accept investments above $50K USD or only allow accredited investors.
You cannot trade these funds on public trading exchanges or track or trade them with the help of investment software. Apart from this, these funds are similar to public funds in terms of investment strategy and fees.
One of the most popular Private Cryptocurrency Funds is Pantera Bitcoin Fund from Pantera Capital. The company invests in blockchain technology and offers several cryptocurrency funds. The private cryptocurrency fund of the company has more than $100 USD asset under management and it charges 1% fee in redemption and 0.75% annual fee for management.
Another popular example is the Ethereum Investment Trust from Grayscale which provides private investors an access to securely invest in Ethereum Classic (ETC). DLT10 Index is another unique private cryptocurrency fund which provides a basket of ten different cryptocurrency assets. Its index combines popular cryptocurrencies as well as digital tokens like Bitcoin, Ethereum, Ripple, Stellar, MaidSafeCoin, NameCoin, Factom, NXT, etc.
Is It The Right Time To Invest In These Funds?
While cryptocurrency investment funds are still new for general investors, major developments can be seen in the next 2-3 years, especially as SEC has now started giving importance to these funds. We’ve already entered an era where cryptocurrency is no longer a fad and professionally managed money is now moving into these digital currencies.
While the Wall Street was prevented from investing these assets due to risks like regulatory uncertainty, lack of liquidity, lack of proper technologies and currencies, etc. most of the risks have been reduced considerably and things are now more transparent. As a result, people hungry for the massive returns that cryptocurrencies can generate are leading the market with innovative products which are now taken into consideration by market investors.
If you want to invest in cryptocurrencies but believe that direct exposure could be risky, these are the three different types of cryptocurrency investment funds that you can prefer. The funds are pretty much in their nascent stage now and building a position in them now could generate exceptional returns in future.
But before investing, make sure that you understand the risks associated with such investments. Also, try to know as much about these funds as possible along with how they work and what assets they invest the capital in to make the right investment decision.
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