Many new investors can find the almost endless number of choices in the crypto economy to be both a daunting and intimidating barrier to entry. With all of the possible coins to choose from, it’s nearly impossible to keep up with what projects are doing what, who is actually following their roadmap and keeping promises made to investors, and what projects are really just duds. But what about those who believe in cryptocurrency as an important long-term investment but who can’t put in all the time to research and do their due diligence on all the cryptocurrencies out there (currently more than 1,500 coins/token on CoinMarketCap alone)? That’s where crypto funds come into the equation.
Crypto funds are still growing in number and recognition in the industry, but they’re nothing new to the financial markets. Just like some of the trusted time-tested investment vehicles for the markets (mutual funds, ETFs, index funds, etc.) crypto funds offer investors an important advantage: diversity.
Not everyone has the time or ability to spend their day researching and discovering new cryptocurrency projects coming to market; however, there are plenty of people who specialize in doing just that! Crypto fund managers spend their time eating, sleeping, and breathing crypto and that is how they make their money. For the casual investor interested in the long run, crypto funds can be a great idea for growth in the crypto economy.
How Does it Work?
The concept behind crypto funds is similar to more traditional investment vehicles and focuses on the same benefits. One of the oldest pieces of wisdom in finance is to not put “all your eggs in one basket.” When investing, you can distribute your funds to mitigate your risk of losing all of your initial investment in case a project goes under or the value of a coin tanks. While this strategy is not likely to offer the highest possible returns, it is able to focus on more steady growth with the market and minimize your chances of major losses overall.
Regardless of financial jargon and buzzwords used by some of the institutions offering funds, crypto funds are actually pretty simple. Because most individual investors don’t have a lot of money to diversify their investments across a wide variety of crypto assets, funds allow individuals to pool their money together with others to have a substantial fund for investing. A group of investors contributes money to a large fund which is then run by a fund manager.
A fund manager is the expert who makes the decisions on what to invest in, how much of the fund should be allocated to it, and what the overall portfolio should look like. The fund managers are doing the job that most investors at home don’t have the time to do. Because of the upkeep, the fund manager earns his or her living through a fee and it incentivizes them to see the growth of the fund in order to attract more contributors.
The most important aspect that normally attracts the attention of investors is the opportunity to invest in something more stable with less risk. Risk mitigation means that even if one of the projects in the fund were to go completely under and lose all of its value, everyone invested suffers a loss, but a substantially smaller loss than if you were to invest in the project on your own.
If we take a look at some recent examples of Bitconnect and DavorCoin where the entire system ended up essentially being fraudulent, then even if a crypto fund were to invest in either project (which likely would have never happened by managers conducting proper due diligence) then at least investors would not run the risk of having their entire portfolio invested in one project that failed, resulting in a complete loss.
If you’re an investor looking to get started in the cryptocurrency markets, crypto funds can offer a more traditional experience with a focus on risk mitigation for you. Individual investors can always pursue diversification of their portfolio on their own, but to find a good balance between risk averse strategies and reasonable gains made, investors typically need a much larger fund to make the <5% gains worth the effort. With crypto funds, investors can get the benefit of both the volatile and rapidly growing cryptocurrency sector along with the risk management typically only seen in more traditional financial markets.
If crypto funds are something you’re interested in, and would like to do some more reading about individual funds, who runs them, and what the fund’s track record is when it comes to financial performance, here are a few current funds, among many more, to take a look at and do some proper due diligence on if they catch your interest.
ICONOMI: One of the biggest names in the crypto fund industry, ICONOMI is a platform that offers others to run crypto funds and users to invest in them using the platform. You can find their list of current fund options here.
Crypto20: A fund which refers to itself as “The First Tokenized Crypto Index Fund.” In this case, users are actually purchasing a token as a portion of an index fund consisting of the top 20 cryptocurrencies
Astronaut Capital: Already putting the image of “going to the moon” in your mind, Astronaut Capital is taking the approach of similar stock apps like “Acorns” of being incredibly user-friendly and “investing on autopilot.”