Cryptocurrencies ("crypto") like Bitcoin, Litecoin, Ethereum, and other altcoins like Dogecoin keep making the headlines. These digital tokens continue to attract new fans. Still, some people believe that crypto is a very high-risk and speculative type of asset. Critics cite that crypto is still in its infancy (it's not even out of its second decade yet) and isn't backed or regulated by governments like a fiat currency is.
But that doesn’t mean you can’t make a lot of money with crypto. Many people have, which makes it attractive to hedge fund investors. Hedge funds are partnerships (usually limited liability companies) that pool money from investors and use risky strategies to create high returns. Before you invest in a cryptocurrency hedge fund, there are some things that you should know.
- A cryptocurrency hedge fund is a partnership that uses cryptocurrency to try and make large short-term profits.
- Cryptocurrency is very volatile, making a hedge fund based on it even more volatile than hedge funds based on other investment types.
- If you choose to invest in these hedge funds, be sure to only risk money you can afford to lose.
What to Know Before You Invest
All investments carry risk, but both hedge funds and crypto carry more than average risk. When the two are combined, the amount of risk taken on nearly doubles. This means that while you can earn a lot of money very quickly in crypto hedge funds, you can also lose all of your money just as quickly.
Investing in crypto is currently more on the very aggressive side than putting money into the broader stock market through a fund. That doesn’t mean you shouldn’t use it, but rather that you need to be aware of the risks that you are taking.
The average crypto fund returned more than 128% in 2020, compared to 30% in 2019.
Moreover, not all crypto is created equal. Due to novelty and lack of regulation, new crypto tokens are always popping up. They are all unique, so you should be aware of their differences.
It also helps to know who the founders are and how the market has reacted to new crypto before you invest. This means that you should wait until the rest of the market figures out whether a new token is a good investment or not before risking your money.
Bitcoin remains the standard, followed by Ethereum in terms of market establishment and utility. Dogecoin is an outlier that has a special fan base driving its growth and volatility. Any other crypto needs case-by-case due diligence.
The value of crypto can go up as quickly as it can go down. There is also a lot of hype and media attention around it. Unfortunately, hyping can lead people to become too excited about an investment, which can lead to bubbles and market crashes. However, some funds have stood the test of time and might be worth looking into. Here are three popular crypto hedge funds and what makes them unique.
Cryptocurrency Hedge Funds
Currently, Pantera Capital has $4.7 billion assets under management across eight cryptocurrency funds in three different venture funds. You must have over $100,000 available to be eligible to invest. That makes this fund best for institutional investors or persons with very high net worth. This firm has been around since 2013, so it's relatively old for a cryptocurrency hedge fund.
Four out of five (81%) crypto hedge funds were launched between 2017 and 2020, demonstrating how new the concept is.
You’ll find that returns in this fund are all over the place, but if you have the money to invest (and potentially lose), it may be worth your time to check it out.
Coin Capital is more suited to people with smaller wallets than Pantera Capital. This hedge fund invests in a variety of crypto, blockchain startups, and single coin offerings. It manages over 40 different cryptocurrencies, including Ethereum, Litecoin, Bitcoin, Ripple, and Dash.
Bitcoin Reserve runs a crypto hedge fund called an "arbitrage fund." This fund trades across different crypto exchanges at the same time to try and “correct market inefficiencies.”
This is an interesting strategy because many cryptocurrencies follow different prices across different crypto exchanges. An arbitrage fund seeks to gain profits and reduce risk by expanding on these price differentials.
The median cryptocurrency hedge fund had $15 million assets under management (AuM), six payrolled employees, and about $300,000 in revenues. At this rate, the average fund will not be able to fund operations for very long unless they charge very high management fees or find other funding—that means funds with lower AuM will have additional risk and costs over larger funds.
Bitcoin Reserve is not the easiest fund for average investors to access unless you have a lot of spare capital. You'll still need to have more than $59,000 available to gain entry to the fund.
The Bottom Line
There are many crypto hedge funds you can invest in, but it pays to keep in mind that hedge funds are high-risk by nature. This is because they are looking for fast short-term gains instead of long-term, slower growth.
If you decide to invest in crypto hedge funds, make sure you invest money you can afford to lose. Learn more about the risks so that you understand the amount you are taking on. Crypto is an exciting way to invest, but it’s still too early to tell whether it will have the staying power of fiat currency or collapse after a bunch of hype.
The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.