About 420 million people globally now own cryptocurrency.
Crypto has gained a lot of popularity since Bitcoin was launched in 2009. The last few years, especially, have seen exceptional growth, with more people investing daily.
For those that are new to crypto, however, things can seem incredibly complicated. There’s a lot to learn, and it can be difficult to know how you should be investing. Crypto hedge fund services are available, and they can help you build a portfolio that aligns with your goals.
So what are crypto hedge fund services? Keep reading to find out.
What Are Hedge Funds?
A hedge fund is a pool of money made up of multiple individuals for the specific purpose of investment. Traditionally, this means investment in assets such as stocks, bonds, foreign currencies, commodities, etc. The goal is to invest strategically and maximize the ROI (return on investment).
A hedge fund service is managed by experienced professional fund managers. These individuals have the expertise and experience to make well-informed choices, so the odds of making good returns are higher. For someone with less experience, investing money can be far more risky, and the chances of making profits are significantly lower.
Hedge funds were originally developed with the idea of hedging against market risks. With time, however, hedge funds have become more aggressive on the whole. As such, many have adopted more high-risk/high-reward strategies.
Hedge funds are often compared to index funds and mutual funds. While they have a similar overall purpose, hedge funds are now considered to have a higher level of risk, but with more potential for higher profits.
What Is a Cryptocurrency Hedge Fund?
A cryptocurrency is a type of digital asset that people can buy, sell, and trade online. The first digital currency launched was Bitcoin, and it was initially met with a lot of skepticism. Over the years, more individuals and organizations have come to see the potential of Bitcoin and other cryptocurrencies.
These days, cryptos are widely considered valuable assets, which has led to the development of cryptocurrency hedge funds. These work in the same way as traditional hedge funds, but the investments they make are focused on cryptocurrencies and other crypto-based products.
Different funds may invest in different ways. Some will only invest in specific cryptos, while others will combine these with other types of assets such as stocks and bonds. Diversification using other assets helps to reduce risk exposure, but can also reduce the potential for profits.
Many traditional crypto funds are still reluctant to invest in cryptocurrencies, but more are choosing to do so with time. In 2022, 29% of hedge fund managers who hadn’t already invested in crypto said they were in the late stages of planning to make the move.
How Do Cypro Hedge Funds Work?
Anyone can set up an account on a crypto exchange and start investing. Many people don’t know much about making investments, however, and wouldn’t know what strategies to use.
Crypto hedge funds invest strategically in a variety of digital assets with the goal of maximizing returns. They do this by creating a plan that details how they want to balance their investment.
As an example, a crypto hedge fund might choose to balance its investment evenly between:
- Well-established cryptocurrencies such as Bitcoin, Ethereum, and Polkadot
- Innovative new tokens that have the potential to grow massively in value
- Venture equity in promising projects such as Alchemy and Balancer
This is just one way that a crypto hedge fund could choose to invest, but it’s down to the investment managers to determine what the best strategy would be.
If you want to invest through a crypto hedge fund, you can expect to pay somewhere between 1% and 3% of your investment for management fees. Most crypto hedge funds also charge a performance fee which will be a percentage of the profits that come from your investment. Depending on the particular fund and how much profit you make, this can be anywhere between 10% and 40%.
For example, let’s say you invested $100,000 into a cryptocurrency fund with a performance fee of 20%. After a year, your fund might have grown to $150,000, meaning your return would be $50,000. The performance fee would be $10,000 (20% of the $50,000 return).
Most crypto hedge funds require a sizable initial investment. As such, they’re not accessible to everyone. At the lower end, this is typically about $100,000, but for some funds, the minimum investment can be as high as $1 million.
Crypto Hedge Fund Regulations
One of the major concerns that many people have with crypto is the lack of regulations. This makes a lot of people hesitant to invest, even through a hedge fund.
Proper regulation has been in the works in the US as well as in many other countries. The situation with Three Arrows Capital highlighted the need for regulation, so many governments are working to get things in order as quickly as possible.
As it stands, cryptocurrencies aren’t recognized as securities. As such, crypto hedge funds don’t need to register with the SEC (Securities and Exchange Commission).
The SEC has made it clear that they intend to classify various cryptos as securities. This means that the regulatory situation of crypto could change in the future, and it may happen quite suddenly.
It’s worth noting that things can be different for hedge funds which include crypto and other assets such as stocks and bonds. They’re often required to register with the SEC and abide by their regulations. Funds that manage less than $150 million can be exempt from this.
Pros of Crypto Hedge Funds
Some people choose to invest in cryptocurrencies through hedge funds, and others choose to do it alone. Those that do it through hedge funds do so due to the various benefits they bring.
Experience Asset Managers
This is perhaps the main benefit of investing with a crypto hedge fund. Anyone who doesn’t know what they’re doing will likely make numerous mistakes. This can quickly lead to losses, and this could easily put you off from investing for good.
The asset managers that work for crypto hedge funds have the knowledge and experience to make reliable decisions. Not only can they make the best investments, but they’re also far less likely to fall for scams or rug pulls which have become a huge problem in the crypto industry.
High Potential Returns
Cryptocurrencies are more volatile than other assets, so their value can go up and down very quickly. With the right investments, this can result in very high returns.
Diversification
A diverse portfolio is always a good thing as it reduces your risk. Making use of crypto hedge funds alongside traditional hedge funds rather than just relying on one type is a good way to diversify your portfolio.
Cons of Crypto Hedge Funds
Investing is one of the best ways to generate wealth, but things don’t always go perfectly. There are some drawbacks that can come with crypto hedge funds that you should be aware of.
Potentially High Fees
These vary, but fees can sometimes be much higher than would be ideal. It’s worth noting that you’ll only experience high fees if you’re making good profits, so you’ll still come out in the green.
Limited Access
Crypto hedge funds have minimum investment levels. This is something that you’ll only be able to do if you already have a high net worth. For those that don’t have enough capital, you’ll have to look at different options.
Degree of Risk
There is always a degree of risk when investing in anything. Crypto is a volatile asset, and while it may not be as risky as it used to be, it still has more risk than other assets like stocks and bonds.
Note that the expertise of hedge fund managers means there’s typically less risk than if you were to invest on your own. Determine the level of risk you want to expose yourself to alongside the potential rewards for investing.
Should You Use Crypto Hedge Fund Services?
Before you decide whether or not to invest in crypto hedge fund services, think about your goals and how you can achieve them. If you specifically want to invest in crypto, but don’t have the right expertise, a crypto hedge fund can be the way to go. As long as you have the capital to invest, you can start making some huge profits.
True Code Capital is a leading cryptocurrency hedge fund that works to help people gain wealth through strategic investing. Contact us today if you want to know about how we can help you.
