Guide on How to Choose a Good Cryptocurrency Fund
Investors that want to enter the virtual currency market need to have passion, dedication and energy to be all the time trading and analyzing different projects. It is very difficult to succeed in such a competitive market and with so many different investments options.
For example, the first step is having a cryptocurrency trading platform, but there are some that offer low fees, others that have more assets to trade, and there are even some platforms that allow users to trade with margin.
Because of this situation, individuals are deciding to automate various aspects of cryptocurrency trading. At the moment there are some ways to do that, for example, investing in cryptocurrency funds. You will be able to take part in the virtual currency market and avoid the problems related with it.
What is a Cryptocurrency Fund?
A crypto fund allows investors to diversify their investments and take part of the cryptocurrency market. These funds can be used by investors to minimize the risks of investing in virtual currencies by spreading the risks. Additionally, it is necessary to hand over the crypto assets to the portfolio managers.
There has been an important expansion of cryptocurrency funds in the last years with the exponential rise of virtual currencies. The first one opened in malta back in 2013. Grayscale, one of the most important cryptocurrency funds, was launched almost at the same time.
Metastable (managing over $45 million dollars in assets) was started in 2014. Pantera, instead, formed the largest cryptocurrency fund until 2016 when Polychain Capital released its own fund. Another important and newer player is Galaxy Digital Assets.
The funds can be categorized depending on their legal forms, capitalization, fundraising scheme, and management style, among other things. Some of them are actively managed while others do it passively.
It is important to mention that there are some funds that are a mix of classical real estate investing and others tha invest outside the cryptocurrency world. The best what an investor can do is to invest money in different funds to reduce risks and have better growth possibilities.
Cryptocurrency Hedge Funds
Mutual funds are companies that are highly regulated and that can raise money from accredited investors, not from the general public. These hedge funds can adapt to suitable strategies as they fit, use derivatives, leverage,etc. But, is important to mark that these funds are less liquid.
Mutual funds are required by law to disclose holdings to investors every some time. But there are hedge funds that can choose not to do it. Hedge Funds will usually charge some management fees
In sum, these cryptocurrency hedge funds are companies that invest in digital currencies and blockchain assets. In this way, they are able to generate high annual returns for investors. Unfortunately, hedge funds are only open to accredited investors.
Cryptocurrency investment trusts enable accredited investors to buy digital currencies that have been launched by Grayscale investments.
Digital asset investment platforms have been created for retail investors and allow them to invest in different digital assets. They are managed by crypto experts and some of these funds are funded through initial coin offerings.
Crypto Index Tracker Funds is a group of securities that represent a particular segment of the market. An individual token is usually introduced to work with the index and track the returns of the market index.
These funds buy and hold a market capitalization that is conformed of leading virtual currencies and are targeting both retail and bigger investors.
Public funds mean that they are listed on exchanges and the shares are traded, something different to private funds. Some hedge funds in the market are public while others are private. These funds include exchange traded funds (ETFs) that invest in different stocks and crypto-related assets.
There is also a categorization that distinguishes open ended verses and close ended funds. An open ended fund is one that issues new shares to investors without having a period limit to do so after starting. Close-ended funds are also selling shares at once to investors at the beginning of it and they have a fund term during which the money is locked up.
How to Select a Cryptocurrency Fund?
Cryptocurrency funds work by doing profitable trades. It is possible to do manual or algorithmic trading. If the fund operates manually, then it will be employing different personal strategies, knowledge and experience. If the fund is algorithmic, then a trader defines the algorithm on a computer and the program executes the trade.
But even if the funds use algorithms, there should be a trader that decides which cryptocurrencies are more valuables or present better opportunities to invest.
Indeed, most funds use their own technical experience, analysis and techniques to deliver the highest returns to investors.
Venture or Index Funds?
Venture funds rely on identifying companies that have the highest potential to grow in the future. In this way, it is possible to register the biggest gains in the future. We can mention BlockTower Capital as an example of such funds.
Other venture-styled funds allow investors to get exposure to other kinds of assets and not just cryptocurrencies. Index funds are very low-risk investments that let investors have a diversified portfolio. If most of the assets perform poorly but there is one that grew, then he will cover the losses.
The positive point about these funds is that the individuals do not need to understand how they work, which ICOs they invest in, or which assets the index includes. Furthermore, they do not even have to worry about storage and custody of tokens because the fund already does that.
Crypto index funds are the best for low profile investors, newcomers, or people that do not know a lot about the market.
Mining or ICOs?
There are some funds in the market that invest in cryptocurrency mining or ICOs. One of these funds is Logos Fund. The money that is raised by the company is used to invest in mining infrastructure, technology and mining computers.
The profits are related to the amount of virtual currencies that they were mining and receiving as a reward. Profits are shared then with investors.
The same happens with funds that invest in Initial Coin Offerings. They purchase coins in a pre-ICO stage or pre-sale, and they sell the tokens later when the price grows.
Holding and Arbitrage
Cryptocurrency traders tend to have different strategies. Is better to hold the currencies without trading or do arbitrage? Arbitrage is used by investors to earn some profits by buying cryptocurrencies in one exchange and selling them in another one.
It is possible to profit from a price difference in a specific cryptocurrency exchange when it is compared with another one. In general, cryptocurrency exchanges have different prices for the same virtual currency, and in some occasions the prices may be significant.
Virgil Capital uses arbitrage to trade digital assets. And indeed, some virtual currency funds use both strategies to maximize earnings. An example of a fund that works with both strategies is Pentafund.
There is a wide range of funds that would allow individuals to enter the market without having to heavily learn about which assets they decide to buy or which strategy to use. There are different options and strategies to maximize earnings. The best idea would be to use different funds in different periods of times to reduce risks and have a more complete experience.