Crypto funds used to have different structures depending on their targets and strategies. Here we’ll discuss the main kinds of cryptocurrency funds.
Venture-style vs Index funds
Depending on the level of risk crypto funds could be classified as Venture and Index funds.
For Venture funds they are quite risky because their strategy is based on operating with cryptocurrency of one certain unicorn project. The success of venture fund depends on the profitability of one certain company and it definitely provokes extra risk considering that it’s rather difficult to predict the future and to pick the right project.
The advantage of venture-style funds is in the case of success they allow their investors to get quite high profits.
But making the right bet at the right time becoming more and more difficult – that’s why instead of investing into venture funds more and more market participants prefer to invest into Index funds.
Index funds used to operate different tokens issued by different companies. They mainly make deal with average amounts – that’s why for one who invests into index crypto fund the risk of a loss is much lower.
If the rate of one token goes down it will not provoke any dramatic consequences because it will be compensated by the raise of another token.
We also can classify crypto funds into following groups depending on their goals and policy towards investors:
1. Publicly traded funds
2. Private buy-and-hold funds
3. Hedge funds
Publicly traded funds
Funds of this type are mainly venture (they used to focus on one single asset – for example bitcoin) They used to follow buy-and-hold strategy and to charge the investors the certain management fee. Now its 1.5-2.5% per year but the amount of fee is becoming lower step by step as new funds enter the market.
There are roughly two types of such funds: ETFs and ETNs (what are also called asset backed notes). The main difference between them is that an ETF’s value is collateralized by an equivalent value of its underlying benchmark asset – eg, bitcoin – and allows an investor to redeem their ETF shares for the asset.
An ETN doesn’t allow redemption and doesn’t make the same guarantees about how much eg bitcoin it actually holds.
Nowadays the most of publicly traded funds are Bitcoin ones but Ethereum funds are coming and quite very soon we’ll probably have publicly traded funds making deal with all main kinds of cryptocurrencies.
Private buy-and-hold funds
The main difference between public and private buy-and-hold funds is that private funds usually have restrictions either on investment size (eg, $100K USD and above) or status (eg, accredited investors only).
Private funds are not listed on public exchanges and as a rule it’s impossible to use investment software to place trades with them. But the main principal is the same: they clients quite simple and safe opportunities to invest and charge an annual fee for their services.
The last category we have is crypto hedge funds. The main difference between hedge cryptocurrency funds and the other categories is that strategy parameters of hedge funds are much wider. A hedge fund is a pool of lightly regulated capital that invests in whatever it likes. They have active trading strategies including eg leveraged trading, price arbitrage, and algorithmic trading.
Hedge crypto funds used to charge their investors not only management fee but performance fee as well which can be quite high – 15-45%. But the performance fee is only charged when the hedge fund beats an agreed-upon benchmark, such as the price of bitcoin.
In this guideline we discussed the main categories of cryptocurrency funds. To see real examples of crypto funds please use the following link:
This list will also help you to make your decisions about possible future investments.