The Alternative Investment Manager’s Guide to Cryptoassets
As the blockchain industry evolves and cryptocurrency markets mature, people are starting to take cryptoassets as an investment vehicle seriously.
The blockchain has the potential to revolutionize how the world works, particularly in the financial sector. With its disintermediating and decentralizing potential, blockchain technology is poised to create major disruptive innovations in banking, payment and value transfer services, and of course, securities, investments, and financing.
2019 has been a great year for the blockchain in terms of public adoption despite seemingly bearish markets, with crypto awareness at an all-time high.
This has led to increased interest in alternative investment funds, as a lot of investors are eager to capitalize on the steady growth of cryptocurrency markets over the long term. Alternative investment managers play an important role in this growth, particularly in easing investors into the market.
What should alternative investment managers know about cryptoassets and what can they do to manage client funds effectively?
The Growing Popularity of Crypto Funds
Investment funds are popular choices among investors as they can sit back while teams of financial analysts grow their investments — essentially a steady stream of passive income.
Another aspect of investment funds is that they look to improve returns by diversifying into alternative investments, which includes non-conventional assets like real estate and commodities. Today, top investment funds are buying into cryptocurrencies as part of their strategies, with some companies opting to create specialized crypto-only funds (crypto funds).
The incredible growth of bitcoin since its launch has attracted many fund managers, even in the face of volatile markets. A study by PWC estimates that there are close to 150 crypto funds operating today with a collective AUM value of over $1 billion.
Interest is rising quickly as regulations around cryptoassets are put in place legitimizing them as worthy financial vehicles, while innovative startups are making cryptocurrencies more accessible than ever before. Trading cryptocurrencies is a piece of cake today compared to how it was a few years back; another reason for institutional investors to come onto the scene.
Fund managers have also noticed the fast-growing, but still small market size ($239 billion total market cap as of today) of cryptoassets as well as increasing demand among the populace, two factors that further justify the existence of crypto funds.
The Crucial Role of Alternative Investment Managers in Easing Investors into the Cryptocurrency Market
Managing cryptocurrencies is not an easy task even for the experienced investor. Making the right decisions in a market where prices can jump up and down within seconds is best left in the hands of market experts. This is why alternative investment managers play an important role in easing investors into crypto markets.
Managers are expected to constantly analyze markets, keep up on important news and updates, invest in the right tokens, and occasionally rebalance portfolios — all of which cannot be achieved by the average investor without a lot of time and effort.
As more and more crypto funds appear, we’ll see a shift from token holders managing their own portfolios to fund managers making the majority of trading decisions, as in the case of traditional funds.
Investment managers will function more and more like consultants, educating and assisting their clients in investing within the ever-changing landscape of the cryptocurrency industry.
What the Future Holds for Alternative Investment Funds
Price volatility of cryptoassets is often cited as the reason some investment funds don’t invest in cryptocurrencies. This negative stance is not helped by the doubts cast over the legitimacy of crypto coins as useful or necessary.
Thankfully, the future is bright for alternative investment funds as regulators step in to control the volatility of crypto markets and put an end to harmful speculation. Lawmakers are starting to recognize cryptoassets as a technology that could benefit financial systems immensely, with some countries even going as far as building their own digital tokens, as in the case of China’s soon-to-launch government-backed cryptocurrency.
Although bitcoin and other cryptoassets represent a tiny percentage of the hedge fund industry, that’s not stopping firms from including cryptocurrencies in their portfolios. These firms realize that when blockchain adoption rises, the value of cryptoassets could explode in a similar fashion to the bull run of 2017.
The outlook for market growth is also optimistic for 2019 and beyond as new blockchain products and services launch in the coming years. A good example of this is the increase in the average AUM of crypto funds, which grew by three times in 2019, even with the lower prices of cryptoassets.
3 Important Pieces of Advice for Cryptoasset Fund Managers
1. Embrace Diversification
The bear market of 2018 has shown that like traditional asset classes, crypto markets are not a place to invest in one asset and hope for the best. Crypto investments should be researched and managed just as carefully as traditional asset portfolios.
This means embracing diversification instead of going all-in on BTC or ETH, for instance. Investing in a basket of cryptoassets protects profits from going out of the window when the market is bearish and some assets plunge in value. Ideally, fund managers should manage 20 or more cryptoassets at the very least when diversifying their client portfolios.
2. Avoid Extreme Trading Decisions
Taking extreme actions in the crypto market is a grave error that has caused investors millions in unnecessary losses. Managers should avoid buying or selling cryptoassets all at once. Instead, gradually scaling into and out of trades is suggested no matter how tempting it is to go all-in or panic sell.
This avoids the problem of buying too high or selling too low — two negative outcomes that often happen in bulk trades — which results in more consistent profits.
3. Use Technology to Gather Important Market Data
The cryptocurrency industry is constantly changing, with new technological, business, and regulatory developments continually impacting prices in hard to predict ways. This requires managers to analyze the market from a broad perspective while also performing thorough due diligence on projects that have real potential for public and enterprise adoption.
For this, managers need access to insightful, accurate data to help them make informed decisions. However, balancing research at the same time as managing portfolios is not easy, as it takes a huge amount of time and effort.
To overcome this challenge, cryptoasset managers need to leverage technology to help gather market data automatically while they focus on higher-level client work.
How Cryptoasset Managers Can Leverage Technology and Data to Make Smarter Decisions
For cryptoasset managers, nothing is more important than keeping up with the latest updates and insights in the cryptocurrency space. This is where the right information aggregation system comes in handy. A professional-grade, multi-channel big data platform like Blue Swan can give managers everything they need to know about the latest news and analyses in the industry to make informed trading decisions.
Blue Swan Grading can benefit cryptoasset managers immensely by offering a comprehensive analytical framework that aggregates essential data from a diversity of sources, offering a comprehensive market overview.
Blue Swan does everything from analyzing news and media coverage to assessing project development status. The platform also takes into account the skills and reputations of the teams behind crypto projects while keeping up with their regulatory compliance (or lack thereof). In short, the platform offers unbiased market analysis and project ratings and classifications that investors need, allowing them to make faster and smarter trading decisions.
Blue Swan Grading also offers API tools and customizable features for developers to make full use of the platform.
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