Cryptocurrency Funds: Types and Returns

The boom around cryptocurrencies and their fantastic returns in 2016-2017 was a crucial factor in the emergence of investment funds in the crypto sector. Then, investment in cryptocurrency against the backdrop of low returns on traditional assets looked very attractive. This was facilitated by the emerging market, relatively weak competition, a plethora of inexperienced start-up investors and the opportunity to earn hundreds and thousands of per cent per year.

Cryptocurrency funds are investment funds that invest their money entirely in cryptocurrencies or combine it with investments in other assets. Their goal is to maximize profits by managing their depositors’ coins or investing their funds in crypto projects and primary coin supply.

Large cryptocurrency funds with a high threshold of entry are necessary intermediaries for institutional investors to enter the crypto environment. Because of legislative constraints, particularly large investors in many countries cannot buy digital assets directly.

Smaller crypto funds, directed at retail investors, are suitable for those who want to make a profit but are not prepared to invest in cryptocurrency on their own. In such funds, specially trained managers and managers handle asset selection and trade. The depositor does not have to monitor the news, choose coins, worry about the course and balance of the portfolio – all for him, professional will do. Among the drawbacks of small crypto funds is that usually, money cannot be withdrawn before a certain date.

Types of cryptocurrency funds

By investor access, cryptocurrency funds are divided into:

Private — only qualified investors can buy their shares. These are the largest funds in the market, accumulating tens of billions of dollars.

Open — available to retail investors. Such funds are unregulated when the depositor simply buys the shares of the fund and regulates, or stock exchange (ETF), where the fund’s shares can be traded on the exchange.

ETF (Exchange-Traded Funds) is a crypto fund whose shares are traded on a stock exchange, which anyone can purchase. The fund itself buys crypto assets and then sells a share of the portfolio in security. This allows investors to invest in cryptocurrencies without buying them directly. To do so, they need to open a brokerage account. It is believed that the extension of ETF to cryptocurrencies would dramatically increase the number of investors in digital assets. Indeed, even those who have greater confidence in traditional investment instruments could invest in them since ETF is governed by securities law, and the fund is responsible for safeguarding coins.

By type of investment, funds can be divided into:

Venture capital — when the foundation invests money in blockchain and crypto companies. These are funds for large capital – not for a usual investor to enter them.

Hedge Funds — make profits from investments in digital assets.

Hedge funds also make money from increases in the price of crypto assets, but their shares are not traded on the stock exchange. Most often, regulated fund shares are available only to qualified investors, and the entry threshold starts at several hundred thousand dollars. For example, American hedge funds can only work with qualified investors with a capital of $5 million, and foundations in offshore jurisdictions can only work with investors with a capital of $100,000. Unlike ETF, hedge funds are much less regulated. They can be invested in almost any risky asset, including cryptocurrency.

Traditional hedge funds tend to follow active trading strategies in which they buy and sell cryptocurrencies in short periods in order to profit from fluctuations in their exchange rates.

Background

The financial world slowly recognized cryptocurrency as a viable type of investment. The first cryptocurrency fund, Metastable Capital, was launched in 2014. But until 2017, they were not very popular – in four years, only a few dozen crypto funds were released on cryptography.

But 2017 was the year of cryptocurrency among retail investors. Millions of people around the world were buying cryptocurrencies, but inexperienced newcomers needed professional help. The first institutional investors also began to emerge.

LKS Consult OÜ offers “Creating a Cryptocurrency Fund” service. The team of experts of LKS Consult OÜ is happy to accompany your project in the necessary procedures for preparing documents and obtaining a license for an Alternative Investment Fund in Estonia. Our team offers full support on all stages of developing your business, and offer a variety of services, including accounting services in Estonia.