Cryptocurrencies have been making waves in the investment world over the past few years. While some people are still skeptical, others are starting to see the potential in this new crypto market. In fact, crypto hedge funds are beginning to take notice and invest in these crypto assets. In this blog post, we will explore why hedge funds are warming up to crypto and what you need to know before you invest.
What is a Crypto Hedge Fund?
A crypto hedge fund is a type of investment fund that deals exclusively in cryptocurrencies and digital assets. The term “crypto” refers to digital currencies such as Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), and Ripple (XRP). These digital currencies are also called tokens or coins. A crypto hedge fund is similar to a traditional hedge fund. It has a hedge fund manager who makes investments on behalf of investors. However, instead of investing in stocks, bonds, commodities, and other financial instruments, these managers invest in cryptocurrencies.
A cryptocurrency hedge fund can be either institutional or retail-focused. Institutional crypto hedge funds are typically run by large banks, brokerages, asset management firms, and other institutions. Retail crypto hedge funds, however, are usually run by individuals. They may be family offices, private wealth managers, or even individual traders. There are currently more than 1,000 crypto hedge funds operating around the globe.
How Traditional Hedge Funds See It
Traditional hedge funds view cryptocurrency as an emerging asset class. This means they believe it has the potential to become a mainstream asset class like stocks, bonds, and real estate. As a result, many traditional hedge funds are interested in investing in crypto. For example, according to data from Bloomberg, there was approximately $1 billion worth of crypto investments made by traditional hedge funds in 2018 alone.
However, not all traditional hedge funds are bullish about cryptocurrencies. Some argue that cryptocurrencies are too risky for them because of their volatility. Others claim that cryptocurrencies lack liquidity and are illiquid. Still, others say that cryptocurrencies are simply too complicated for them to understand.
What to Know Before You Invest
Before investing in a crypto hedge fund, you should do your research. Make sure that you understand how the fund works and what it invests in. Also, be sure to ask about the fund’s performance and investment strategy. Here are some other things to should consider:
Hedge Funds vs. Brokerage Firms
The first thing you should know when looking into a cryptocurrency hedge fund is that they are different from brokerage firms. A brokerage firm is a company that buys and sells securities for its clients. They charge fees for doing so. On the other hand, crypto hedge funds do not buy and sell securities for their clients. Instead, they make investments on their own behalf. Therefore, they don’t incur any trading costs.
Liquidity
Another important consideration when deciding whether or not to invest with a crypto hedge fund is liquidity. Liquidity refers to how easy it is to trade one asset against another. If you want to buy shares of Apple Inc. (NASDAQ:AAPL) but have trouble finding buyers, your options will likely be limited. In contrast, if you want to buy BTC but find it difficult to get sellers, then you’ll have more options available to you. Crypto hedge funds tend to focus on liquid markets. That means they look for opportunities to buy and sell cryptocurrencies quickly.
Fees
Another factor to consider is fees. Cryptocurrency hedge funds often charge higher fees than traditional hedge funds. However, this isn’t always the case. Many crypto hedge funds offer lower fees than traditional hedge funds because they use digital assets instead of physical ones.
Investment Strategy
Finally, you should also consider the investment strategy used by a crypto hedge fund. Most crypto hedge funds follow a long/short strategy. This means they take both long positions — which involve buying a security — and short positions — which involve selling a security. The goal is to profit from the difference between the price at which a security trades and its intrinsic value.
How does a crypto hedge fund work?
A cryptocurrency hedge fund is typically set up as limited partnerships or private equity firms. They can invest in a variety of crypto assets, including Bitcoin, Ethereum, and Litecoin. Then, they hope to profit from the rise and fall of these currencies. When a currency rises in value, the hedge fund makes money. Conversely, when a currency falls in value, the hedge funds loses money.
However, there are risks involved with crypto hedge funds. One risk is that the market may crash before the hedge fund can realize profits. Another risk is that the fund could fail to deliver returns as promised.
How do you start a crypto hedge fund?
If you’re interested in starting a crypto hedge fund, here are three steps you need to take:
- Find an experienced partner. You’ll probably need someone who has experience running a hedge fund. Look for someone who has worked with cryptocurrency before.
- Select a good crypto exchange. There are many exchanges out there. But you’ll want to choose one that’s well-known and trusted.
- Choose your investment strategy. You’ll need to decide what type of crypto hedge fund you’d like to run. Are you going to go long or short? Do you plan to invest in individual coins or tokens? Or maybe you want to invest in stablecoins.
The Bottom Line
If you’re interested in investing in cryptocurrency, then a crypto hedge fund might be an option for you. But before you decide to invest with a crypto fund, you need to perform thorough due diligence. Consider all of the factors discussed above and determine if a crypto hedge fund is right for you. To continue learning, try reading Benchmarking Hedge Fund Algorithms.
