All you need to know about crypto funds
Crypto funds — is an excellent tool to attract more and more investors in the nascent industry of digital assets. How do they work?
A crypto fund is an adaptation of traditional funds that makes it easy for new investors to navigate this enticing new asset class. Learn how all this works together.
One of the scariest days in the history of the American stock market is Black Monday. In October 1987, the Dow Jones Industrial index fell by 22.6%. A few months later, the Securities and Exchange Commission (SEC) issued an 840-page report. In one of its sections, the SEC offered to collect a basket of shares of the largest companies in a particular country or industry. This would address the high volatility and additional costs of trading individual assets, as well as attract institutional investors and help the stock exchanges stay afloat. This is how Exchange Investment Funds (ETFs) emerged, through which an investor can invest in any asset class: stocks, bonds and precious metals.
Over the past few years, the digital industry has been actively discussing the possibility of launching the first ETF on Bitcoin, an exchange fund that will buy the main cryptocurrency and sell its shares to investors, so that those with these securities will earn on the change in the price of digital coins. However, for the time being, the SEC is postponing approval of this instrument.
In early June 2019, U.S. Securities and Exchange Commission Chairman Jay Clayton said the SEC needs to make sure that there is no market manipulation and that reliable crypto storage services are in place before approving bitcoin-ETF applications. The SEC does not yet give any specific launch dates for the instrument. However, there are other crypto funds in the industry. They are similar to investment companies with the difference that they specialize in working with BTC and altcoins.
What is cryptocurrency fund?
Crypto funds — organizations that provide trading and investment services in digital currencies to private investors. A crypto fund is an analogue of investment funds, only its field of activity is limited to the cryptocurrency market.
Such organizations offer potential investors cooperation, in which their investment capital will be managed by professionals. A team of experts in the crypto market will conduct operations with digital currencies, which, according to their analysis and opinion, can bring profit, which will be transferred to investors. Of course, it will not be free of charge, the crypto funds will charge a fee for their services. Some funds charge a fee for their profits and some for their investment capital.
When applying to a crypto fund, the investor transfers his or her funds to a trustee and the company undertakes to dispose of them in order to multiply and pay out the profits on time. There are several responsibilities of an average crypto fund:
- competent formation of the investment portfolio for the client;
- searching for potential earning opportunities;
- choice of management strategy;
- investment analysis;
- risk assessment.
All existing crypto funds can be divided into two categories:
- Funds that invest exclusively in start-ups developed within ICO. In such funds, profitability is determined mainly by the growing popularity of the company’s products;
- Cryptocurrency hedge funds that exclusively trade cryptocurrency, and it is this hedge that determines the return of the fund.
According to Crypto Fund Research, the first crypto funds were established more than 6 years ago. But the real boom of such organizations began in 2017. At that time 224 funds were opened, which is 171 companies more than a year earlier. In 2018, the numbers were even higher, despite the collapse of Bitcoin, 239 funds. This year, 45 new investment organizations working with digital money are still known to have been established.
At present, there are more than 700 cryptщcurrency investment funds. Some of them have been created as hedge funds, and some as mutual funds or hybrid companies.
How do they work?
Cryptocurrency hedge funds generate income from professional trading. Mutual funds mainly invest in promising ICOs (a unit is a conditional share of property in this fund that an investor receives). In addition to the main differences, the entry thresholds differ as well. To become an investor of a unit trust it is enough to invest $15-$20, and to start working with a hedge fund you need larger amounts. Hybrid funds make money both in trading and investing in ICO.
Despite the fact that the main purpose of cryptocurrency funds is to minimize investors’ risks and bring profit, every investor can be left without money. The risks are due to the high volatility and low liquidity of digital money, as well as a high level of fraud in the ICO sphere.
Two years ago Forbes’ analysts wrote that investment crypto funds bring more than 1000% per annum as standard. Indicators of some of them in 2016 exceeded 3000%. But the crypto market is extremely unstable, so the rise and fall of Bitcoin price led to a significant decline in performance.
Recently, PwC and Elwood Asset Management analyzed the performance of the 100 largest cryptocurrency hedge funds and concluded that each fund lost approximately 46% of its profit in 2018 due to the fall in Bitcoin price. However, since January 2018, their assets have grown on average by $4.3m by the first quarter of 2019.
In addition to the possible loss of funds invested, one should not forget the rather high fees (about 2%) on profits or deposits (depending on the rules of the company), which the funds charge for their services.
Why do investors need crypto funds?
With the growing popularity of cryptocurrencies, the number of people willing to invest in this young and rapidly developing field has also increased. But not everybody wants to study the market in detail or has enough time to constantly monitor prices. Almost every day new promising currencies enter the market, which are able to bring a significant return on investment at the initial stages, but if traders with many years of experience can immediately assess the viability of a particular cryptocurrency, it is not always an obvious fact for beginners.
For beginners, cryptocurrency investment funds are a chance to invest with minimal risk, as the distribution of investment capital is handled by professional traders, and for experienced investors it is an opportunity to reduce the time spent on making a profit.
The cryptocurrency market is quite unstable, due to this it is able to bring more income than the stock market. Professional traders can use it to their advantage, while for beginners it often has negative consequences. One of the obligations of a crypto fund is the correct distribution of finances and minimization of risks at price jumps.
How to choose the perfect crypto fund?
In order for a beginner to make a stable profit, one should transfer finances to the trust management of professionals. Professionalism of a company can be evaluated only after analyzing its previous activity. When choosing a cryptocurrency investment fund, it is necessary to pay attention to seven main indicators:
- History and achievements of the company. First of all, in order to evaluate the efficiency of the investment fund, it is necessary to analyze the success of its work in previous periods. It should be understood that in trading it is impossible to work completely without slippages, but their number and duration can indicate how the company management is able to cope with them and how well the investment portfolio is formed. The experience of the company in this sphere can also become a guarantee of professionalism;
- Openness of the team and statistics. It is good if a crypto fund provides full information about its team, does not hesitate to give real names and provides open statistics on its activities. Replacing this information only with promises and describing the benefits of cooperation should alert the potential investor. Behind such a promising website may hide not a productive investment fund, but a Ponzi scheme, which may cease to exist at any time by liquidating the investors’ capital;
- A formal agreement between the parties. Enter into cooperation only with those organizations that provide an opportunity to conclude a formal agreement of the parties. Otherwise, the investor remains legally unprotected;
- Adequacy of service cost. Cryptocurrency funds are engaged in commission fees. Some companies withdraw interest from profits, some charge a fixed interest rate on the entire asset, and a combined payment system is also possible. You should understand that no professional trader will work for a penny, and even more so for free. When choosing an investment fund, it is better to stick to the strategy of profit sharing with a team of professionals, rather than entrust your funds to the management of a beginner, but at a more attractive commission;
- Strategic planning. Each crypto fund has its own developed strategy for earning. Many use the tactics of long-term investment in reliable projects with minimal risk, for others, risky investments seem mostly profitable. Each option has a right to exist, whose success can be tracked by analyzing the fund’s experience. It is important that the strategy developed by experts is suitable for the investor in terms of risk;
- Reputation. Before you entrust your finances to management, you should seek investor feedback. It is worth paying attention not only to their content, but also to their manner of writing and uniqueness. Same reviews written in a non-living language from different users may indicate that they are fake;
- Legality. The crypto market is only developing and many countries lack legal regulations for crypto companies. In some states, cryptocurrencies are banned, and somewhere it is gradually coming to the state level. When choosing a crypto fund, one should take into account the laws of which country it is governed and whether its activities are legal.
If the fund has internal cryptocurrency, it is not superfluous to pay attention to its prices, which also reflect the reputation of the company.
How funds affect Bitcoin price?
Large investment organizations have a lot of digital money. Those in whose hands a large number of assets are concentrated are called “whales” of the crypto market. They are often accused of manipulating the exchange rate of Bitcoin and altcoins. If the fund starts selling digital money at a below-market price, it can cause panic, and the value of the coins will fall sharply. After that, the company that initiates the fall will buy back the assets at a favorable market price and stay in profit. This is just one way to influence the market.
The emergence of investment funds allowed a large number of institutional investors to enter the digital industry. The inflow of new funds to the market may also increase significantly if ETF approval for Bitcoin does occur. Before private investors buy shares in ETFs, dealers will need to buy a large number of BTCs, which in turn may affect the sharp appreciation of the first cryptocurrency. In addition, the SEC approval will be an important step towards obtaining Bitcoin legal status as a digital asset.
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