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What are cryptocurrency funds?
In essence, they are analytical firms that manage private funds invested in them. The firms themselves profit from commissions on depositors' profits.
The employees of these firms have a direct interest in the profits of their clients because they are reflected in the firm's results.
Principle of operation
Investment companies in digital currencies can be compared to exchange-traded funds that are tied to a specific industry or market sector. Only they work with crypto-assets. Organizations predominantly focus on Bitcoin and other liquid digital coins with growth potential.
Profits in the virtual sector depend on changes in quotes. Many are intimidated by the high volatility of the crypto market and its dependence on BTC, but large funds usually have the cash on hand to be able to influence and average their positions and thereby manage them. This is how asset price appreciation is influenced. The cryptocurrency investment funds then close the positions and the users get a share of the profits.
There are 3 types of funds, which differ in their operating principles:
Venture Capital
They invest in projects that are just starting to develop. It is an investment for the long term, but it can potentially bring users returns of hundreds or even thousands of percent.
Hedge funds
Invest in startups with potential growth prospects. Pay attention to the project's current status and developer promises. Investments are designed for a short term (1-2 years).
Mutual Funds
Provide users with the opportunity to buy a share of the company or immediately the whole "package" of shares.
Legal Basis of Operations
Most jurisdictions do not define the status of cryptocurrencies. Some countries are loyal to digital money - allow trading, mining, buying goods. Others are aggressive. For example, China, which in September 2021 completely banned all operations with cryptocurrency on its territory.
The legal status of companies is not officially recognized. Until regulatory legislation is in place, there is a great risk of investing in a fraudulent organization. Crypto funds are being considered for licensing by regulators such as the SEC.
Development of the fund market and its future
Auditing firm PWC in its study estimated the growth of the direction. Between 2018 and 2019, the total value of assets managed by the firms doubled. The return on investment is approximately 30%. These are huge numbers compared to traditional investments, where an annual return of 5-8% is considered excellent. Such results are due to the volatility of digital assets.
The industry of cryptocurrency organizations is a good promising field. With the appearance of regulation, investment companies will definitely develop.
Varieties of Funds
If you decide to invest in cryptocurrency with the help of funds, you first need to understand their types. They are differentiated by strategies. These approaches affect the potential returns and risks. A total of 5 types are distinguished:
- Fundamental
- Quantitative
- Opportunistic
- Venture capital
- Smart-beta
Fundamental
These are funds whose experts' task is to single out an asset from the general "noise" based on its value. The approach is based on methods of fundamental analysis, using various parameters (from the evaluation of prospects to the work of the development team). Typically, these funds follow two strategies:
Long. The firm acquires assets that are undervalued and holds them until the value rises to the projected value.
Short and Long. In addition to buying undervalued coins, the fund opens short positions on assets that are likely to lose value.
Quantum
These are funds whose experts' task is to identify potentially profitable assets based on complex mathematical analysis. There are 3 operating principles:
- Directional strategy. Receiving a profit is associated with investing when the market moves in a specific direction. Experts use the data, which is usually unavailable to traders. An example is massive BTC movements between users' wallets and exchanges. This can indicate that the price will fall soon. Machine algorithms are used to make calculations.
- Arbitrage strategy. Profits are made from selling the same crypto-asset on different platforms. For example, on a regulated platform, the price of the asset is higher than on an exchange that is not as developed.
- Volatility trading. Traditional earnings through the options mechanism. Such strategies allow you to profit from the transaction regardless of the dynamics of quotations. The asset generates income both when the rate falls and when it rises.
Opportunistic
Companies use new tools in the cryptocurrency industry. Examples of such mechanisms:
- Stacking, mining. The fund can make bets, independently mine coins and receive income in the digital currency of the network. Projects Polkadot, EOS, Cosmos have this opportunity. Quotes for assets periodically increase sharply.
- Lending. Crypto-loans are available on special platforms that allow you to lend assets. Lending is done at high rates (up to 8% per annum). Also, if you borrow crypto assets, you can provide more volume for trading.
Venture
Such companies are similar to traditional investment institutions. The firms invest in popular instruments:
- Trading platforms.
- Exchange services.
- Payment systems.
A hold strategy is popular among venture capital firms. That's when a digital asset is purchased for a long period of time in hopes of growth.
Smart-beta
These are funds whose task is to invest in indices (composite indices) that correlate with the crypto market. Such firms do not trade. There are 2 types of indexes:
- Active. Coin ratios are constantly redistributed to generate income.
- Passive. The weight of assets in the portfolio is focused on a certain proportion and does not change.
The best cryptocurrency funds
Most of the companies that manage billions of dollars are venture capital firms. Quantitative organizations have better results and higher returns. That said, those that operate on an arbitrage strategy have $10 million or more at their disposal. Notable crypto funds include:
- Andreessen Horowitz
- Bitcoin Investments Trust
- Flint Capital
- Blockchain Capital
- Satoshi Fund
- Three Arrows Capital
- Pantera Capital
- Dragonfly Capital
- Sequoia China
- Jump Crypto
- Alameda Research
- GSR Ventures
- MetaWebVC
Extremely recommend from time to time to look closely at the actions of these and other funds investing in cryptocurrency, as a rule their investments are long-term (from a year and more), but also very profitable.
How to choose a fund for yourself?
To find a good company, which is safe to trust the funds, you need to get as much information about it as possible:
- The organization's reputation. You can find comments from other users on websites. If there are no reviews, this is a bad sign.
- Historical profitability. Analyze the results of work for previous periods.
- The terms of the contract, the cost of services, the amount of commissions. Before investing in the fund, it is necessary to understand exactly under what scheme the organization works. The user needs to know all the conditions completely.
- Location and legality. It is important to understand the jurisdiction in which the firm is registered, and study the digital asset laws that are in place in the country.
- Notoriety of experts and founders. The reputation of analysts is an important issue when choosing a company. There are few well-known experts in digital currencies. However, if the names of analysts are associated with negative events - it is better to refrain from investing.
These are the main parameters by which investment organizations can be evaluated. Users need to choose responsibly.
Keep your nose to the wind and know that Fortune, Luck and Success always favor you when you are with us!
Always yours C.J.
All the above is not financial advice, but only a subjective opinion of the author. If you doubt something, do your own research and double-check the information yourself.
