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How to Navigate Crypto Investment Funds

Crypto investment funds can give investors exposure to digital assets without the need to directly purchase or trade them.

Category TradingandInvesting

Summary

When building a portfolio, asset diversification is often central to managing risk. However, because every investor has a different risk profile, asset allocation varies across each portfolio. For example, a high-risk investor might choose to hold mostly stocks, while a low-risk investor might hold mostly bonds. Beyond specific securities, investors can diversify their investments by investing in funds that track a pre-selected basket of assets. Investment products like index funds and exchange-traded funds (ETFs) trade like stocks, while actively managed hedge funds aim to generate returns using pooled investor capital. Crypto investment funds are similar to these traditional products, but they invest mostly — or exclusively — in blockchain companies or digital assets. Most importantly, they enable indirect investment in the digital asset class, facilitating institutional participation. Alongside the growth of crypto venture capital (VC) funds, institutional investment is crucial to bridging the worlds of conventional and digital finance.

What Are Crypto Investment Funds?

No matter what kind of asset you’re investing in, building a diversified portfolio can help protect against market volatility. If the value of one asset depreciates, the appreciation of another can help offset that loss. While many traders pursue this strategy through direct investment, others choose to gain access to a broad selection of assets through investment funds. Because investment funds usually furnish built-in diversification, investors don’t need to execute as many trades as they would if they only traded stocks. This structure can significantly lower fees and opportunity costs. In addition, fund investors don’t need to create a portfolio from scratch. Instead, they can rely on the expertise of fund managers.

Like these traditional investment funds, crypto investment funds streamline the process of participating in a new asset class. However, instead of gaining exposure to conventional assets, crypto fund investors gain exposure to digital assets without directly purchasing or trading them. This dynamic is crucial to attracting regulated institutional investors seeking more extensive portfolio management options.

With momentum building behind such institutional investment, the emergence of crypto funds is well underway. Investors now have access to crypto index funds, exchange-traded funds (ETFs) composed of crypto assets, hedge funds that focus on crypto, and venture capital (VC) funds that continue to spur new project development across the crypto industry.

Crypto Index Funds

In conventional markets, index funds track an established market index like the Dow Jones Industrial Average, S&P 500, or Nasdaq Composite. If an index fund tracks the Nasdaq Composite, for example, it will contain fractional shares of every company listed on that market and track its performance. Thus, through index funds, investors can buy into a diversified market without purchasing shares of each company in that market. Crypto index funds function much in the same way, except they track specific crypto assets instead of companies. The following are examples of crypto index funds:

  • CRYPTO10 Hedged (C10): Invictus Capital launched the CRYPTO10 Hedged Index Fund in March 2019. The smart index fund tracks 10 crypto assets; each capped at 15% of the total index value. The fund limits losses through the use of algorithmic cash hedging mechanisms — i.e., it transitions into interest-bearing cash holdings during bear markets and pivots back into crypto once a bull market returns, avoiding drawdowns.

  • CRYPTO20 (C20): Also from Invictus Capital, CRYPTO20 (C20) is marketed as the first tokenized crypto market index fund. The fund tracks a basket of 20 crypto assets that rebalances every week based on market capitalization. To further mitigate risk, no crypto asset can exceed 10% of the total index value. Unlike index funds that issue securities, the CRYPTO20 fund issues a native ERC-20 token called C20, representing the original investment. As a blockchain-based fund, all transactions are part of an immutable record.

Crypto ETFs

Although similar, conventional index funds and exchange-traded funds have a few key differences. Unlike index funds, which trade only once a day after markets close, ETFs trade like stocks throughout the trading day. However, the most significant difference is that index funds usually track a specific market, while ETFs often consist of several assets like securities, commodities, and even real estate.

With that being said, in the realm of digital assets, these distinctions are less apparent. In general, crypto ETFs often represent investments in blockchain companies or digital assets. The following funds invest in blockchain companies:

  • Amplify Transformational Data Sharing ETF (BLOK)

  • Siren Nasdaq NexGen Economy ETF (BLCN)

  • First Trust Indxx Innovative Transaction & Process ETF (LEGR)

  • Bitwise Crypto Industry Innovators ETF (BITQ)

  • VanEck Vectors Digital Transformation ETF

  • Capital Link NextGen Protocol ETF

  • Global X Blockchain ETF

In comparison, the following funds invest in digital assets:

  • Grayscale Digital Large Cap Fund (GDLC)

  • Purpose Bitcoin ETF (BTCC)

  • Purpose Ether ETF (ETHH.TO)

  • Ether ETF (TSX: ETHR)

  • CI Galaxy Ethereum ETF (TSX: ETHX)

  • 3 iQ CoinShares Bitcoin ETF (TSX: BTSQ)

ETFs that invest in digital assets usually track a single cryptocurrency, primarily ether (ETH) or bitcoin (BTC) — a key distinction from traditional ETFs, which are known for their diversification. Ultimately, as the crypto market matures, there will likely be opportunities to create more diverse ETFs with positions in tokenized real estate, commodities, stocks, and bonds.

Crypto Hedge Funds

Conventional hedge funds invest across diverse asset classes and market segments, and professional hedge fund managers aim to generate returns regardless of underlying market conditions. Similarly, crypto hedge funds require active management and aim to generate returns amid market volatility. To optimize returns, conventional and crypto hedge funds employ sophisticated portfolio weighting strategies and risk management techniques to protect against potential losses.

However, in contrast to conventional products, crypto hedge funds pool capital from individual and institutional investors to purchase digital assets. And as global interest in cryptocurrency has grown, so has the amount of assets under management (AUM) at crypto hedge funds. According to industry reports, the total AUM of crypto hedge funds grew to around $3.8 billion USD in 2020, up from $2 billion in 2019, and $1 billion in 2018. In addition, the percentage of hedge funds with AUM over $20 million grew from 35% to 46% in 2020. The following are examples of crypto hedge funds:

  • Polychain Capital: The Polychain Capital fund is one of the most significant global cryptocurrency funds, managing over $1 billion in assets since launching in 2018. Beyond investing in cryptocurrencies, Polychain also invests in early-stage startups across the blockchain and crypto industries.

  • Digital Currency Group: The Digital Currency Group (DCG) is a well-established crypto fund, having made over 130 investments in various projects and cryptocurrencies. Founded in 2015, DCG has provided funding to several startups like Coinbase, Bitpay, and Ripple. Its subsidiary, Grayscale, invests solely in cryptocurrencies and has amassed over $2.7 billion in AUM as of 2019.

  • Pantera Capital: Marketed as the first US institutional asset manager to focus exclusively on blockchain companies, Pantera Capital has invested in digital assets and blockchain companies since 2013. Through its numerous actively managed crypto funds, Pantera Capital provides investors with diverse exposure to the digital asset class. As of August 2021, investors can invest in its Blockchain Fund, Liquid Token Fund, Early Stage Token Fund, Bitcoin Fund, and Venture Fund.

Crypto Venture Capital (VC) Funds

Crypto venture funds make direct investments in cryptocurrency or blockchain-related companies. Although many crypto VC funds invest in early-stage startups, some adopt a multi-stage hybrid approach when selecting projects. As of August 2021, several high-profile crypto venture capital funds were investing in companies across the digital asset ecosystem. The following are examples of crypto VC funds:

  • Blockchain Capital: Launched in 2013, Blockchain Capital is a long-standing crypto venture capital firm. The company is credited with engineering the first tokenized crypto fund in the world, as well as the first security token. Blockchain Capital has equity in various cryptocurrency and blockchain projects and has provided financing to over 100 companies since its inception.

  • Gemini Frontier Fund: Gemini’s venture fund invests in early-stage crypto projects and startups.

  • Alameda Research: The Alameda Research investment firm was established in 2017 and held over $1 billion in AUM as of 2021. Although the asset manager does invest in early-stage startups, it also trades $1 to $10 billion in value per day across thousands of products, including cryptocurrencies and derivatives.

  • Coinbase Ventures: The VC arm of Coinbase, known as Coinbase Ventures, invests in early-stage companies across the crypto ecosystem.

  • A16z: Andreessen Horowitz, or A16z, is an investment venture capital firm based in Silicon Valley with over $10 billion in AUM across multiple funds that invest in various asset classes and growth stages. The VC firm has a dedicated cryptocurrency fund with over $350 million in AUM as of 2021. Further, it has confirmed crypto VC investments in over 27 blockchain and cryptocurrency projects.

What’s Next for Crypto Investment Funds?

As cryptocurrency achieves more widespread adoption, investment funds are slated to serve an increasingly important role in bridging the gap between conventional and digital asset markets. Crypto funds are already encouraging more institutional investment in the digital asset class via compliant financial instruments. Further, in bypassing the need for direct digital asset ownership, crypto index funds, crypto ETFs, and crypto hedge funds can encourage market participation among individual and institutional investors alike.

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