Cryptocurrencies have emerged, under Bitcoin’s leadership, as assets university endowments are investing in and financial institutions are trying to emulate. 2017 was a milestone year for crypto but was followed by the extended 2018 bear market. This year so far has been largely positive for crypto, including additional institutional projects from Fidelity, JP Morgan, Facebook, and more, reaffirming its utility.
If you’re considering investing in Bitcoin, blockchain, or cryptocurrency, this article will serve as an introductory guide on ways you can invest in digital currencies. Let’s begin with some of the common ways to invest in Crypto and the Blockchain:
Open to Everyone:
Buying select tokens or coins, such as Bitcoin: We often point retail investors to get their start on exchanges like Coinbase or Gemini. Crypto exchanges can be categorized as those for which you trade crypto into crypto or those that accept “fiat”, or a government-backed currency like dollars. Coinbase and Gemini both will allow you to buy crypto with dollars. For larger purchases (over $100K USD), investors may choose to contact an OTC desk such as Cumberland, Circle, or an exchange like Kraken’s own OTC desk.
Please note that security with purchasing crypto is paramount, and exchanges often get hacked. Many crypto investors choose to keep their funds in a software or a hardware wallet, instead of on an exchange.
Investment Trusts: Investment trusts also exist, through companies such as Grayscale and their GBTC fund. What is a trust? An investment trust is a company that owns a fixed amount of a given asset (like gold or bitcoin). Investors pool money and buy shares of the trust, owning contracts that represent ownership of the asset held by the trust. So, you’re buying a share or a stock, instead of Bitcoin directly, which comes with both positives and negatives. While these often sell at a premium of about 30-40% more expensive than buying BTC directly, it does have some of the similar advantages as funds below, such as built-in custody and allowing you to purchase through your IRA and through platforms such as TD Ameritrade, instead the of crypto-specific exchanges where you would directly purchase crypto assets.
Whether you are an accredited investor or not, you can purchase any amount of shares (with no holding period restriction) of products such as GBTC, ETCG, or ETHE. Fees charged would be imposed by your broker for purchases and sales. If you’re not an accredited investor, there is no way for you to directly participate in the Investment Trust’s direct private placement offerings.
Blockchain Equity ETFs: ETFs already exist that put together companies that are doing something with blockchain, such as IBM, but this is a few steps removed from actual investment in blockchain or crypto and is generally a small portion of what those companies do. The SEC is currently reviewing proposals for Bitcoin ETFs, but they do not yet exist, and it could be months to years until they do.
Crypto index funds: Buying a market-cap weighted position in, say, the top 10 crypto assets, and holding. We find the industry-standard management fee for this quite high, at 2.5%. Note that index funds in crypto are currently structured as accredited-investor-only funds, meaning that investors must attest that they meet the minimum income, assets, or net worth.
Accredited Investors and/or Qualified Purchasers Only:
Equity investments: If you’re a fan of angel investing or venture capital, you can also seek direct, private equity investments in blockchain and crypto projects. This is typically what people mean when they talk about investing in blockchain companies, as no pure-play blockchain companies are publicly listed yet. Investors in BitBull, for example, include angel investors from groups like Sand Hill Angels, Keiretsu, and even Venture Capitalists. Our investors receive a regular “Opportunistic Deal” memo with some notable investments that our funds make that have additional room for equity allocation. To see blockchain equity deals that have been opened to a more general angel investor audience, you can visit AngelList’s venture, CoinList.
Crypto Hedge and Venture Funds:
Crypto funds are actively managed by professional asset managers, and attempt to get maximum balance through utilizing various strategies and in light of market conditions. Examples of funds include:
- Crypto Hedge Funds
- Blockchain Venture Funds
- Blockchain/Crypto Funds of Funds
Part of the allure of an actively-managed fund is that it tries to trade around crypto’s volatility, which is a major characteristic of this asset class. It’s in the world of crypto hedge and venture funds that you’ll find strategies like arbitrage, market making, ICO/STO/IEO investing, and equity investments.
Crypto hedge funds typically focus on liquid investments, such as publicly-listed tokens like Bitcoin, while Venture Funds typically focus on equity investments. But, as we’ve learned through BitBull Fund — through which we’re investors in 10 such funds — many crypto hedge funds also invest in equity, and many crypto venture funds also hold tokens at certain times. One investment we’re proud of through our funds, for example, is equity in the crypto exchange Coinbase.
Terms of the funds, then, are important to understand thoroughly. For example, usually you can withdraw (or redeem) your capital from a crypto hedge fund monthly or quarterly, and you may have a one-year lockup for that capital, but for blockchain venture funds, you may not be able to get back your money until the investment has come to an exit; there is typically about a 5 of 7 year horizon until your money is returned. You will also get returns from hedge funds monthly, while venture fund returns are often estimated annually. For more on this, please see our article on how to diligence crypto funds.
Crypto fund returns will differ vastly depending on the strategies they use. Is the benchmark of that fund, for example, USD, or a crypto index? “Market-neutral” investment strategies like arbitrage and market-making are commonly benchmarked against the US dollar–they should go up regardless of the direction of the underlying crypto assets like Bitcoin, because they are trading on market inefficiencies rather than the direction in which crypto is going — while “Directional” strategies such as early-stage crypto assets, including ICOs and IEOs when appropriate, and equity, may be best benchmarked against a crypto index.
Venture funds are longer-term investors in blockchain companies, aiming to profit from future appreciation, but often going down when the market goes down, while hedge funds with trading strategies may be shorter-term and (sometimes buying and selling many times in a single day), focused on immediate profits based on market volatility and risk management. To do this, hedge funds often engage in-depth information, on both technical and fundamental aspects of the market, as well as active risk management to limit the downside.
Crypto fund of funds
A fund of funds is multi-manager investment, where you invest in a fund whose portfolio consists of investments in other funds. These funds strategies are varied and can include market-neutral strategies like arbitrage and market-making, as well as directional strategies such as ICO investing and equity investments in blockchain companies (as demonstrated in the pie chart above). Investing in a fund of funds has several advantages, especially because a fund of funds pools investments to enter into larger, more exclusive funds, which typically get early access deals into lucrative projects.
At BitBull Capital, we’re invested in 10 funds that we believe in, of the now over 600 crypto and blockchain funds. Our extensive diligence process led us to choose our particular basket of funds, and we rebalance our holdings monthly to add or remove a fund, and to ensure the right weight of allocations is made in accordance with our outlook on the market and those funds. (For more tips on diligencing crypto hedge funds, please see our whitepaper here)
Our fund of funds has exposure to several top projects from the space, including Cosmos, Tezos, and Basic Attention Token, at early valuations, via the multiple funds we are invested in.
The chart below shows how we employ diversified active management strategies in our Fund of Funds:
Crypto hedge funds and blockchain venture funds
Rather than the Fund of Funds model of a basket of funds, you can also invest directly in one Crypto Hedge Fund or one Blockchain Venture Fund. While Venture Funds are focused on long-term, directional investments, and typically have closed-ended funds where investment is required by a certain date, and then locked up for several years, crypto hedge funds typically invest in liquid crypto assets, while often also doing a smaller portion of equity investments. Crypto hedge funds usually report returns monthly, while venture funds often report them annually or when there is another funding round or exit of a portfolio company.
As opposed to venture funds, crypto hedge funds often typically utilize market-neutral strategies. An example of a direct crypto fund is our BitBull Opportunistic Fund, which leverages strategies around crypto’s volatility, including arbitrage and market making, and aims to generate optimum alpha.
Advantages of investing in crypto via funds
Investing in cryptocurrencies via funds such as ours has several advantages, including secure custody and compliance. Moreover, since funds are actively managed, the downside risk aims to be less than a passive buy and hold strategy. Funds may also, via private deals, get you exposure to projects not available to small, retail investors.
In order to get started with crypto investing, you can either create an account on a reputable crypto exchange or reach out to a crypto fund for more information. You can connect with BitBull today by scheduling a phone call via this link.
There are several different ways to invest in blockchain and crypto depending on what type of investor you are. You can also schedule a call with one of our advisors to discuss the strategies and results from our funds, and read much more research, at www.bitbullcapital.com