Why Cryptocurrency Funds are The Smart Way to Invest in this New Marketplace
The hottest investment product these days involves the new world of cryptocurrencies (CCs), block-chain managed products, and the sometimes scarily un-regulated concept of ICOs — initial currency offerings, as opposed to the very regulated process of IPOs.
A friend mentioned overhearing two waitresses in a California diner talking about crypto-currency investments. When the concept of CC investing has spread that far, you know it is either time to urgently join — or, a cynic might say, time to urgently abandon — the rush.
But picking and choosing individual cryptocurrencies to invest in is very difficult. Their unregulated nature means that information is not standardized and not always publicly accessible. The information that is provided is often incomplete, and the rapidly evolving nature of the CC marketplace means that investors can’t just buy a holding and then leave it to appreciate over time. Active investing is much more essential.
There are 1,119 different cryptocurrencies and tokens currently available for trading1. Over half have market capitalizations under $1 million. Even many of the larger capped issues are very illiquid. Only ten (currently) are valued in the billions of US dollars. This 1% represent 88% of the total market cap, most notably Bitcoin which itself represents almost exactly half the total capitalization of all cryptocurrencies.
Many cryptocurrencies — small and large alike — have very volatile valuations. And more are appearing almost literally every day — by the time this article is published, there’ll probably be another five or more CCs issued, and more will continue to appear every week.
What is a private investor to do? How to best take a prudent position in this risky but rewarding market?
Happily, there’s one positive answer to this problem. Invest into a fund, and have the fund managers do all the work of keeping abreast of the shifting sands of this strange new world. Not only do they have the ability to focus full-time on the CC marketplace, but due to the market’s unregulated nature, they can often access better, more complete, and more timely information than ordinary investors. This preferential access is of course supposed to be impossible in traditional equity markets, but with cryptocurrencies can be a further reason to choose a fund rather than direct investments.
Some traditional investor funds are now starting to include a small element of CC holdings into their portfolios, and new funds, fully focused on cryptocurrencies, are also appearing. Like traditional funds, Coin-Traded Funds (CTFs) come in the same range of different types — public and privately traded, and direct investment funds or hedge funds.
Management fees have been higher than ‘classic’ investment funds, sometimes reaching 2.5% a year, but we sense these fees have peaked and may be adjusting back down to closer to regular fund fees.
There are two important differences in these funds. Some are collateralized by and valued by their holdings in cryptocurrencies — ETF type funds. Others — ETN style — are more vaguely associated with notional CC valuations but may not actually have their assets in the currencies they are using to set their value claims. These simultaneously have lighter regulatory compliance requirements and greater risk.
Blockchain Capital, for instance, invests directly into a variety of blockchain projects, like a venture capital fund. The Satoshi Fund, on the other hand, invests in a mix of cryptocurrencies but also in ICOs. Then there is The Token Fund, which I co-founded earlier this year. We’re perhaps a little more conservative, with about 60% of our portfolio in the leading cryptocurrencies and the rest in the strongest tokens and ICOs.
Hedge funds are more active and aggressive traders than classic funds, and typically charge a performance fee as well as a management fee. The performance fee might, for example, be a 30% fee on the fund’s appreciation each year over and above a benchmark — say, the change in value of Bitcoin directly. The rapidly evolving nature of the cryptocurrency market calls for an equally rapid assessment and reassessment of investment positions that is a feature of hedge funds, and skillful application of high speed and algorithmic based trading.
The best of the new CC funds require no minimum buy-in, and will have a constantly varying mix of assets (for example, our own Token Fund typically has 25 different CC product in our portfolio and shifts assets around at least every day).
We see CTFs such as ours as offering the most potential for exciting return. In our case, we have created a 380% appreciation, in US dollar terms, in the last five months alone.
While the currently under-regulated nature of CCs can be cause for anxiety, a prudent investor would be well advised to risk a small part of their total holdings, and to minimize the associated risk by placing their investment into a fund rather than directly into CCs.
In five years’ time, maybe much less, the market will have stabilized, but until then, if you want to enjoy the maximum opportunity for return (with matching greater risk), the cryptocurrency hedge fund seems like the best E ticket ride in the park.
