Sunday, June 16, 2024

Crypto Funds: Are They Your Best Bet Against Bitcoin and Altcoin Risks?

Crypto Funds

Bitcoin’s market cap slumped from $229 billion on January 1, 2018, to $66.7 billion on December 29, 2018. Who, what, where, and why? Many questions arise on a weekly basis on the drastic change. Yet, few consider that there could be alternative ways of investing that reduce the stress of short-term losses.

Mutual funds don’t require an introduction. Cryptocurrency mutual funds, on the other hand, are something new, fresh, and potentially dangerous. Crypto mutual funds, as the name suggests, deal in cryptocurrencies. They present a simpler way for entrance into the cryptosphere. The investor provides their money and the mutual fund trades in assets which the investor may not have much understanding of.

Stating the obvious, an advantage of a crypto mutual fund is investors have more free time to themselves. Choosing a basket of investments based on different risk metrics takes significant amounts of research.


Reducing Volatility of Cryptocurrencies

Some believe that with time, if more investments are made into crypto mutual funds, the volatility typically experienced in the markets could reduce as more emotionally charged investors who skew the markets would be less active in the markets. That is assuming such emotionally charged investors were to invest in crypto mutual funds instead of investing directly into the markets. These investors have a name for skewing markets to greater boom/bust cycles. More experienced traders in the markets could, in theory, equate to less volatility.

The ubiquity of cryptocurrency investment gateways coupled with relatively slow regulatory changes could mean that for the most part, direct investments into cryptocurrencies remain the norm, thereby reducing whatever impact mutual funds may have.

There are, however far more gateways and people in countries where the regulatory infrastructure for mutual funds lags behind the evolution of cryptocurrency channels.

Flaws of Crypto Funds

Unfortunately, an often overlooked flaw of many crypto funds is their lack of diversification. This may be because a lot of them prioritize liquidity and investments in top market cap cryptocurrencies. In many cases, this disproportionately exposes funds to risks of asset classes. 100% exposure is a recipe for disaster. Especially when you consider the complications of crypto-insurance.

Many funds found themselves 80-95% down and inevitably had to downsize or close operations. Aggressive strategies made with ridiculously dangerous exposures are to blame.

Further, a slightly obsessive flirtation with market cap didn’t help many funds. Focus on market cap driven strategies alone may be an indication of a poorly directed research division. It does not tell the story of the small crypto project that happens to be solving real-world issues on a small but increasingly impactful scale. Investors may not want to hear that but it is that close proximity to the heartbeat of the markets and businesses within those markets that can set apart a fund. If a fund doesn’t see beyond the numbers into the business practices of crypto-projects, is it really doing its job as well as it should? Or is it just collecting fees while its investors feel everything is okay?

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  1. Well…doesn’t that depend on the underly economic fundamentals of the cryptocurrency in question? Some are actually important parts of blockchain management, right? Or am I wrong.


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