Cryptocurrency funds have jumped in popularity amid turbulent financial markets in 2020.
Speculation among some is large institutional investors are looking for different solutions to provide returns and keep their portfolios safe in an economy ravaged by COVID-19.
But how does a cryptocurrency fund vary from more ‘traditional’ financial investments? There’s many parallels between the two, aside from the fact crypto funds are (obviously) comprised of virtual assets.
Crypto Fund Research says just a bit over half of current cryptocurrency funds operate as a venture capital fund. The remaining are mostly structured as hedge funds.
Many crypto funds require large investment capital upfront from qualified individuals who are interested in investing.
One common strategy among fund managers is to study virtual assets they feel are over or undervalued. Long and short positions are then placed to (hopefully) make money as the market moves.
More conservative fund managers might reduce risk by taking a 50% long and 50% short on an asset, ultimately trading a higher return for more security.
The volatile nature of the virtual currency world leads some crypto fund managers to buy assets on one exchange and then sell them on a different one – a strategy known as arbitrage.
Speed wins with arbitrage, making it a popular choice for people who love to trade frequently.
The Explosive Growth Of Crypto Funds
Cryptocurrency funds really started to take off in 2017. Crypto Fund Research noted 2017 was a major year for the industry after over 100 new funds launched. There’s now more than 400 existing funds in 2020.
As of summer 2020, institutional investors have not been shy with dipping their toes in the cryptocurrency world. News from late July covered the rise in popularity for Grayscale’s cryptocurrency trusts.
“The Grayscale arb is a pretty common trade,” according to Multicoin Capital Investment LLC co-founder Kyle Samani. He noted “riskless profits” come about for investors if shares for Grayscale’s main Bitcoin and Ethereum trusts trade at a premium to the underlying assets.
Arca Capital Management indicated their leading hedge fund – the Arca Digital Assets Fund – was up 76.74% across 2020, according to an investor note seen in the summer by Coinbase. According to Coinbase, the fund’s strongest growth so far was 35.37% (January 2020), while it gained 9.9% in June.
Considerations When Looking At Different Crypto Funds
There’s several factors to examine if you’re curious about different cryptocurrency funds and are interested to see which might be a better investment. Doing your homework definitely becomes a requirement if you’re looking to actively invest in a fund (or many).
You should first get an understanding about the different factors crypto fund managers consider when coming up with investment strategies.
Some who are focused on long-term stability might just focus on top cryptocurrencies by market capitalization. Others might look at ICOs or smaller-cap digital currencies to potentially reap larger profits.
When looking at a particular cryptocurrency fund, it’s vital to think about the type of trading those involved with the venture carry out.
Manual trading is great for more careful selections (usually for long-term growth), but algorithmic trading is primed to take advantage of rapid market moves. Each have their advantages and disadvantages.
It’s also prudent to think about trading fees. They can really eat into any returns, especially since cryptocurrency can be very volatile.
Like with any financial investment, be ware of the adage of ‘history repeating itself.’ Past performance does not mean the future will be just as rosy, no matter what a fund manager might try to tell you.
The Rise Of Crypto Funds Only Looks To Strengthen The Digital Currency World
Increased popularity of crypto funds exposes a wider range of investors to the world of cryptocurrency. This trend only looks to be a positive sign for the industry, even as regulatory bodies continue to release clearer guidelines and scrutinize cryptocurrencies closer.