What Is a Crypto Hedge Fund?

The hype around cryptocurrencies and their fantastic returns in 2016-2017 became a key factor in the emergence of investment funds in the crypto sector. At that time, investments in cryptocurrencies looked very attractive in comparison to low returns on traditional assets. This was facilitated by such factors as the emerging market, relatively weak competition in it, many inexperienced novice investors and the opportunity to earn hundreds and thousands of percent per annum.

Cryptocurrency funds are investment funds that either invest entirely in cryptocurrencies or combine them with investments in other assets. Their task is to get the maximum return by managing the coins of their contributors or investing their funds in crypto projects and initial coin offerings (ICOs).

Large cryptocurrency funds with a high entry threshold are the necessary intermediaries for institutional investors to enter the crypto market. Due to legislative restrictions, especially large investors in many countries cannot buy digital assets directly.

Smaller crypto funds aimed at retail investors are suitable for those who want to earn income, but are not ready to invest in the crypto market on their own. In such funds, specially trained managers are involved in asset selection and trading. The investor does not need to monitor the news, choose coins, worry about the exchange rate and portfolio balance – all this is done  by professionals. Of the minuses of small crypto funds, it is worth noting that, as a rule, money cannot be withdrawn before a certain period, and there is also a risk of entrusting your funds to inept managers or simply a fraudulent project.

What Are Hedge Fund Crypto Types? 

There are many classifications of crypto hedge funds. We will focus on two main ones.

According to the access of investors, crypto hedge funds are divided into:

Closed – only qualified investors can buy their shares. These are the largest funds on the market, accumulating tens of billions of dollars, such as Grayscale.

Open – available to retail investors. Such funds are unregulated, when the investor simply buys the fund's shares, and regulated, or exchange-traded (ETF), when the fund's shares can be traded on the stock exchange.

According to the type of investments, crypto funds can be divided into:

Venture – when the fund invests money in blockchain and crypto companies. Among them are BlockTower Capital, Pantera Capital and Digital Currency Group. These are funds for large capital – an ordinary investor cannot enter them.

Hedge funds – they allow to earn profits from investing in digital assets such as Polychain Capital, CoinCapital, Multicoin Capital and BitSpread.

Let's take a closer look at ETFs and hedge funds.

ETF (Exchange-Traded Funds) is a crypto fund whose shares are traded on the exchange, they can be purchased by anyone. The fund itself buys crypto assets and then sells a portfolio share in the form of a security. This allows users to invest in cryptocurrencies without buying them directly. All they need to do is open a brokerage account. 

It is believed that the development of ETFs will dramatically increase the number of investors in digital assets. After all, even those who trust traditional investment instruments more could invest in them, since ETFs are regulated by securities laws, and responsible for the safety of coins.

Unfortunately, due to regulatory complexities, there are only a few officially approved ETFs in the world right now. It is noteworthy that so far no ETF application has been approved in the US. Since 2013, some companies have been trying to obtain permission from the Securities and Exchange Commission (SEC) to launch Bitcoin ETFs, but the regulator refuses, citing strong risks. As a result, several ETFs have been launched in other jurisdictions such as Toronto, Gibraltar and Bermuda.

Crypto hedge funds also make money on rising prices of crypto tokens, but their shares are not traded on the exchange. Most often, units of regulated funds are available only to qualified investors, and the entry threshold itself starts from several hundred thousand dollars. Thus, American crypto hedge funds can only work with qualified investors with a capital of $5 million or more, while funds in offshore jurisdictions can only work with investors with a capital of $100,000 or more. Unlike ETFs, crypto hedge funds are much less regulated. They can invest in almost any risky assets, including cryptocurrencies.

At the same time, there are also unregulated crypto hedge funds on the market that sell shares in their portfolios in the form of shares to any network user. The entry threshold to them is from $10–$20. But investing in such funds is a dubious idea. It is easier, more profitable and safer to just buy cryptocurrencies directly.

Traditional hedge funds tend to have active trading strategies in which they buy and sell cryptocurrencies in short periods of time in order to profit from price fluctuations. However, most of the money is now in passively managed crypto hedge funds – they simply buy coins and are waiting for them to rise in price. 

Cryptocurrency funds charge a commission for asset management: on average, from 5% to 20%. At the same time, money, as a rule, cannot be withdrawn before the investment period.

The average return of a cryptocurrency hedge fund is very variable, but most crypto funds consistently outperform Bitcoin in terms of returns.

How Does Crypto Hedge Fund List Grow?

The financial world has been slowly recognizing cryptocurrencies as a viable type of investment. The first cryptocurrency fund, Metastable Capital, appeared back in 2014. But until 2017, they were not very popular – in 4 years, only a few dozen crypto funds entered the crypto market. Development was hindered by too many questions and disputes: how to regulate the cryptosphere, how long the growth will last, how to deal with the high volatility of digital currencies, and how to identify fraudulent projects.

But 2017 was the year of cryptocurrencies among retail investors. Millions of people around the world began to buy cryptocurrencies, but inexperienced beginners needed the help of professionals. The first institutional investors began to appear. 

Large crypto hedge funds are the most important part of the infrastructure of the crypto market. They act as intermediaries between the crypto sector and institutional investors, whose entry into the market has been one of the key factors in the maturation of the industry. The more crypto hedge funds and the larger they are, the more mature the entire crypto industry becomes. The growth potential of the sector is huge.