Cryptocurrencies are in the news every week, whether it’s someone saying that Bitcoin will reach $100,000 or go bust. Recently, we have also seen a rise in the number of funds dedicated to investing in cryptocurrencies and blockchain companies.
In this article, we’re going to explore what a crypto hedge fund is and the three main tips for understanding where the crypto landscape is headed.
What Is a Crypto Hedge Fund?
A traditional hedge fund is an investment vehicle where money is pooled together and invested with a particular strategy. For instance, there are hedge funds that invest in US equities and other funds that focus on concrete strategies, like convergence trading.
In a nutshell, a crypto hedge fund is a hedge fund that has the specific goal to invest in assets related to the cryptocurrency and blockchain space. These companies may invest in Bitcoin, Ethereum, Ripple, Litecoin and other major cryptos directly. They may purchase altcoins during ICO or pre-ICO sales.
Some funds invest in emerging blockchain startups, while others invest in companies that benefit from the boom in crypto, like graphics cards manufacturers.
According to Autonomous NEXT, there were only 37 crypto hedge funds at the beginning of 2017, and there are more than 226 as of February 2018. Combined, these funds have over $3.5 billion in assets under management (AUM).
So why is so much money being raised by these specific funds and what benefits do they provide their investors?
Tip #1: Research
First and foremost, crypto hedge funds are specialized companies and investment vehicles. When a fund manager raises a fund, they must detail their investment thesis. Fund managers then build out a team to accomplish that specific goal.
As a result, crypto funds are able to perform research and due diligence on crypto companies in a more formal and structured way than an average investor or an institutional investor who is new to crypto.
This research and experience is attractive to family offices and institutional offices looking to participate in the crypto market.
The other added benefit is the ability to detect patterns and perform reference checks. If you have read 50 crypto white papers and talked to 30 blockchain entrepreneurs on the phone, you start to get a better sense of the market and also detect who is in crypto for the long term (versus who wants to make a quick buck).
Tip #2: Broadening the Appeal
The second major benefit, particularly to the large institutional investor, is the ability to gain exposure to crypto price gains without actually having to hold tokens and coins. Consider a 100-year-old university endowment or pension fund. These organizations are large, have strict compliance standards, and (most) are new to cryptocurrencies.
The last thing this organization wants to do is begin to understand the nuts and bolts of trading in this market, like how to securely set up and use a digital wallet and how to correctly comply with the local crypto tax laws. Investing in a crypto hedge fund lets them invest U.S. dollars (or their preferred local currency) and receive their returns in fiat.
On their books, they invested $10 million and hope to get a return of $30 or $50 million in several years. The specific transactions, currency conversions, and related activities are all handled by the crypto fund. It’s important to note that there are exceptions.
As an example, TechCrunch and Crunchbase founder Michael Arrington’s fund will be denominated in Ripple’s token XRP, meaning investors will “buy shares of the fund and receive distributions in XRP.”
Tip #3: Strategies & Stages
Interestingly, calling yourself a crypto hedge fund does not actually divulge your investment strategy. Some crypto hedge funds, like Blockchain Capital and Pantera Capital, among others, invest in initial coin offerings (ICOs) or ICO presales. These same funds are also interested in investing in blockchain companies themselves, exchanging their cash for equity positions.
Because the crypto market is so new, we see the blurring of the lines between what a “hedge fund” is and what a “venture fund” is. Many crypto hedge fund managers are placing bets in the earliest days of a company’s lifecycle.
We are also starting to see more specific financial products be created. Apex Token Fund, for example, is the first tokenized fund of funds focused on the crypto landscape. Apex provides its investors with access to the top crypto fund managers as well as increased diversification.
And in contrast with traditional fund-of-funds investments, Apex has instant liquidity thanks to their APEX ERC 20 token.
We are still in the early days of cryptocurrencies, and there are a large number of funds, companies, and token projects being created. As the market matures, we expect to see more defined strategies and a more clear distinction between the investment stages in crypto.
For now, we will watch the market closely, and we anticipate 2018 to be another newsworthy year.