Cryptocurrencies have certainly evolved since Bitcoin was first introduced in 2009. What began as a simple concept involving digital currency has grown into a thriving new asset class. Investors buy digital tokens and trade them on cryptocurrency exchanges. It is also possible to now trade cryptocurrency options as well as trade Bitcoin and other tokens on margin. One of the newer developments is the availability of cryptocurrency funds.
Cryptocurrency funds give investors the chance to pool investment capital so that they can control larger blocks of Bitcoin, Ethereum, Ripple, and other digital tokens. Just like traditional mutual funds, these crypto funds have the potential to produce consistent gains year after year. Let’s take a closer look at cryptocurrency funds and how one goes about investing in them.
What is a Cryptocurrency Fund?
Cryptocurrency funds are a type of crypto investment. The money that investors contribute to the fund is invested on their behalf by a fund manager. The job of the fund manager is to make the investments that he or she believes will produce the highest return. Most funds are governed according to a specific investment strategy. These strategies can vary from fund to fund.
Just like with stocks and other asset classes, a fund may be a hedge fund or a publicly-traded fund. For an example of a publicly-traded fund-type investment think of Warren Buffet’s Berkshire Hathaway. In that example the investors purchase stock in Berkshire Hathaway while the executives of the company decide how that money will be invested.
With cryptocurrency funds the focus may be on a single digital token like Bitcoin. A crypto fund may also be one that invests in multiple digital assets. There are funds which focus on a long-term growth strategy. There are still others which are more focused on short-term market movements and active trading to increase the fund’s equity.
Those who operate a cryptocurrency investment fund will typically take a portion of the returns that are generated from buying and selling tokens. This fee is used to support the management costs of the fund and reward fund managers for its performance.
Cryptocurrency Funds Are Increasing in Popularity
It would be fair to say that cryptocurrency assets are increasing in popularity across the board. In just ten short years Bitcoin has gone from a novelty to a serious player on the world’s financial stage. This has created multiple opportunities for investors to profit from buying and selling cryptocurrency.
In traditional forms of investing funds have been a mainstay for many years. What funds are designed to do is give investors access to higher levels of investment classes like bonds, property, stock shares and commodities. Think about the 401K plan that you might have at work. When you receive your statement you will see a list of all the asset classes that are held by the 401K. The contributions you make to the retirement plan are invested on your behalf in a various funds. An investment fund is slightly different from a 401K, of course, but this is the general idea behind a fund.
In 2017 there were more than 100 new cryptocurrency funds launched. This speaks of the popularity of this type of investment class. There are now more than 400 crypto funds for investors to choose from, and this number is expected to grow. Some believe that increased efforts toward regulation by governments is actually a positive development for crypto funds. This increased regulation could open the door to the creation of more funds.
Comparing Cryptocurrency Funds, Venture Capital Funds, and Other Funds
It is important to make a necessary distinction between cryptocurrency funds, venture capital funds, and other types of funds. At the heart of all of these is the opportunity to buy into various projects, most tech related because that is what forms the foundation of cryptocurrency.
A venture capital fund is one that allows investors the opportunity to pool funds together in order to support a tech start-up. Just like other funds the investment capital is overseen by a fund manager who helps manage the development of a company from a financial stand point in its early stages. The venture capital fund takes an equity stake in the company that it supports. Therefore, it assumes a certain amount of risk which is tied to the company’s ability to succeed and grow. Of course, there are great rewards when the company is successful and perhaps goes public.
It is also common for a venture capital fund to be more proactive in the day-to-day operations of a company. The fund may even secure a seat on the board of directors of the company it is helping to fund.
With cryptocurrency funds things are a little bit different. They are generally created for the specific purpose of managing cryptocurrency investments. Those who invest in the fund profit when gains are realized from trading digital tokens. Here is a closer look at the various types of cryptocurrency funds that are available to investors today.
Cryptocurrency Fund Types
Just like traditional investment funds, cryptocurrency funds come in a variety of forms. Some of the most popular are publicly-traded funds, private buy-and-hold funds, and hedge funds.
A publicly-traded cryptocurrency fund is one that is listed on a major cryptocurrency exchange. The overall strategy behind these types of funds is to invest in cryptocurrencies for the long term. A publicly-traded crypto fund may be one that focuses solely on Bitcoin, or it may be one that takes a position in the top cryptocurrencies as determined by market volume.
Private buy-and-hold crypto funds are those which are not available on crypto exchanges. As such, these funds are not subjected to the same type of regulatory control as other cryptocurrency funds. It is common for these types of funds to require a large minimum investment. A good way to explain them would be a group of wealthy investors all contribute $50,000 to the fund. They designate a fund manager to make the cryptocurrency purchases, and they hold the crypto in the anticipation of long-term gains.
Crypto hedge funds are those which have a more complex investment strategy. These funds are designed to actively take advantage of market movements that will result in short and long-term gains. The funds might include trading with leverage and speculation on market movements. As such, these types of funds can present more risk but they can also offer larger rewards. The fees associated with a hedge fund can also be higher, especially if the fund outperforms certain expectations in terms of growth.
Things to Consider About Cryptocurrency Fund Types
Before making an investment in a cryptocurrency fund it helps to consider some variables. All of these will play a role in the investor’s decision to invest in a fund. Ask yourself:
- What is the overall investing strategy of the fund I am interested in?
- How does the fund choose which digital tokens it will invest in?
- How does the fund trade with the capital that has been invested?
- What is the minimum investment to participate?
- Who is the fund manager and team responsible for the fund’s management?
- What is the track record of the fund for returns?
- What is the chance I will profit from my investment?
These are factors that any wise investor is concerned with before they make a commitment to invest their hard-earned money in a fund.
The Negatives of Cryptocurrency Funds
Without question cryptocurrency funds can be profitable for the wise investor. Still, there are downsides to consider. Perhaps the most relevant of these is the overall volatility of the cryptocurrency market.
All investments carry a risk of loss. This is especially true with crypto investments. The Bitcoin market can swing wildly from day to day, and with those swings comes the potential of great profit or great loss. This is why most funds require a sizable investment. The more capital a fund has to invest the less susceptible it is to market fluctuations in the short term.
For example, if a fund controls 50 Bitcoin it can weather the short-term downturns that can happen in the market on a daily basis. The fund is hoping that long-term growth will help investors make it through the bear markets as they wait for a bull run.
Those who invest in crypto funds are also giving up control of their investments to someone else. The fund manager is the one who will make the final decision about which currencies will be bought and held. Fees can also be a negative to this kind of investing.
Increasing regulations about cryptocurrency asset classes can also be a thorn in the side of fund investors. Governments are still trying to puzzle out where digital tokens belong and how they should be regulated.