Cryptocurrencies like Bitcoin, Litecoin, and Ethereum (and other altcoins like Dogecoin) continue to make headlines. These digital tokens are also increasingly endorsed by high-profile people and attract inflows of new investments. Still, some consider cryptocurrencies to be high-risk and speculative assets. Critics cite the fact that cryptocurrency is still in its infancy (just over a decade old at this point), and not backed by governments like fiat currency is. This leaves the space wanting for greater regulation.
But that doesn’t mean you can’t make a lot of money with cryptocurrency. Many people do, and the potential to make a lot of money quickly is attracting hedge fund investors.
According to dictionary.com, hedge funds are “a mutual fund organized in a limited partnership using high risk, speculative methods to obtain large profits.” All investments carry risk, but both hedge funds and cryptocurrency carry more than average risk. Before you invest in a cryptocurrency hedge fund, there are some things that you should know.
What to Know Before You Invest in a Cryptocurrency Hedge Fund
While it is possible to earn a lot of money very quickly in cryptocurrency hedge funds, it’s also possible that you can lose every bit of capital that you invest, as again, these are very volatile, risky, and speculative investments.
Cryptocurrencies are currently more on the highly aggressive side than a traditional investment strategy of putting money into the broader stock market. That doesn’t mean you shouldn’t investigate them, just that you need to be aware of the risks that you are taking. Moreover, not all cryptocurrencies are created equal. Due to novelty and lack of regulation, new crypto tokens are constantly popping up, and you should be aware of their differences, the founders behind them, and the market reaction to them before you invest in them. Bitcoin remains the gold standard as of now, followed by Ethereum in terms of market establishment and/or utility. Dogecoin is an outlier that has a special fan base driving its growth and volatility, and the rest of these currencies need a case-by-case due diligence.
The value of cryptocurrency can go up as quickly as it can go down. There is a lot of hype around cryptocurrency now, and it can lead to bubbles and crashes. Let’s look at three of the cryptocurrency hedge funds are out there and what makes them unique.
Cryptocurrency Hedge Funds
Currently Pantera Capital is managing over $700 million across five cryptocurrency funds in two different venture funds. You must have over $100,000 to invest in order to be eligible to invest in this fund. That makes this fund best for institutional investors or investors with very high net worth. This firm has been around since 2013, so it's relatively old for a cryptocurrency hedge fund.
You’ll find that returns in this fund are all over the place, with the fund taking major drops this year. But if you have the money to invest (and potentially lose), it may be worth your time to check it out.
CoinCapital is more suited to individual investors than Pantera Capital, although it is still looking for people with a net worth of over $2.1 million. This hedge fund invests in a variety of cryptocurrencies, blockchain startups, and individual coin offerings. It manages over 40 different cryptocurrencies, including many popular ones like Ethereum, Litecoin, Bitcoin, Ripple, and Dash.
BitcoinsReserve runs a unique cryptocurrency hedge fund called the Arbitrage fund. This fund automatically trades across different cryptocurrency exchanges in order to “correct market inefficiencies.”
This is an interesting strategy, because many cryptocurrencies will follow different prices across different cryptocurrency exchanges. By taking advantage of these price differentials, the arbitrage fund seeks to gain profits. BitcoinsReserve is the most accessible fund for the average investor. One of the other unique things about this fund is that its website is much less gated. You can find out exactly what the fund does and who manages it, without having to fill out long forms.
There are many crypto hedge funds available to invest in, but it pays to keep in mind that hedge funds are high-risk by nature, because they are looking for significant, short-term gains instead of long-term, slower growth. When you combine that risk profile with the inherent riskiness of the cryptocurrency market, you can get a lot of volatility and lose a lot of money very quickly.
If you decide to invest in cryptocurrency hedge funds, then make sure you are investing money that you can afford to lose, and understand the risks you are taking. Cryptocurrency is an exciting development, but it’s too early to tell whether it will have staying power or collapse after a bunch of hype.