The term “cryptocurrency fund” refers to an investment portfolio containing a variety of different digital assets, usually managed by one or a few people.
Investors can buy these funds so that they can share profits as the value of the fund grows. According to Crypto Fund Research, more than half of those funds are venture capital funds, and the rest are mostly hedge funds.
Venture capital funds include a wide variety of investors who pool capital to buy small businesses with high growth potential.
In crypto funds, these ventures are new projects and altcoins. Once assets have grown enough, they are usually sold and investors profit from it.
A hedge fund is an actively managed portfolio designed to minimize market risk, hence the name “hedging”. Hedge funds can be composed of any asset, but long and short strategies often use different assets to diversify the portfolio so that the fund can withstand high volatility and even profit during periods of high volatility.
These funds are usually managed by small teams and are usually only open to high-end investors, with minimum investments ranging from tens of thousands to hundreds of thousands of dollars.
Traditional hedge funds also typically have minimal time limits, so, for example, investors must keep their money in the fund for at least one year. They also tend to charge fairly high fees, around 20% of profits, to incentivize managers to deliver solid performance.
At this point, this requires trust in the team managing the strategy, and there is no guarantee that the fund will eventually pay off. If mismanaged, the market volatility that these funds are supposed to guard against can also be quickly eliminated.
Cryptoasset prices fell sharply in March as the coronavirus market panicked. Unprepared for such a sudden drop, some crypto funds collapsed.