We’ve all gotten advice from our “crypto savvy” neighbors, many of whom have been extremely lucky with their investments. Now they’re starting to invest their gains into crypto hedge funds. It’s a general trend that as a market matures, there’s increased interest around hedge funds in any given asset class. Still, just because they were lucky doesn’t mean they’re cut out to be crypto investment strategists. With all the mixed signals surrounding what crypto hedge funds do and don’t do, it can be especially difficult to discern good advice from the bad. Don’t worry though, that’s where BitBull comes in, sharing key insights backed by proven research.
1. If bitcoin price is going down, you are losing money.
Crypto is not synonymous with bitcoin; in fact, there are around 1600 different crypto assets.
While retail traders focus on single investment routes such as trading bitcoin or investing in pre-ICOs, there are multiple investment opportunities available via a fund. An index fund, for example, takes a passive approach, holding the top cryptocurrencies. A hedge fund on the other hand, uses an active management strategy to profit when the markets are down.
2. Strategies that worked this year will work next year
In the case of crypto, past performance does not necessarily translate into future performance. This year more market-neutral strategies may have worked, but perhaps directional strategies will provide the most gains in the coming years.
3. Diversify your portfolio to hold as many top cryptocurrencies as you can
The point of diversification is to reduce risk and volatility, and in turn hedge against the weaknesses of certain investments. Most experts would agree that diversification is necessary to manage risk. However, this risk mitigation strategy isn’t ideal when it comes to cryptocurrency as the market lacks depth and is extremely speculative. For instance, when the price of Bitcoin plunged earlier this year, it dragged all other crypto prices with it, regardless of their unique fundamentals. Hence, the diversification strategy is not as applicable to the crypto market as it may seem. Instead, what is advisable is to stick with serious and compliant investment hedge funds with a good diversification already built into their portfolios until the industry is more mature.
4. Just HODL
HODL is a term that is used in the crypto community, referring to holding your cryptocurrency assets rather than selling them, even if the market is crashing.
While crypto fund managers will help you invest wisely they will not tell you when to sell. Even though patience is required in a young industry such as crypto, the buying part of the investment (the job of the fund) is only half of the profit equation. The selling strategy is your call because the fund has no incentive in advising you when to do so. You’ll need some minimum expertise to figure out the ideal timing because you do want to sell at some point. If you hold your assets infinitely , you risk missing your opportunity to record fiat profit gains; if the market crashes completely, you could lose everything. Therefore, regardless of asset class, it’s a good risk avoidance strategy to keep selling small tranches over time as a sort of cost averaging of the selling price.
5. Any crypto fund that fulfills the minimum is good
They all invest in the same few assets anyhow… right? Sure, the underlying assets may be very similar, but all funds are not created equal. There are over 340 of them, and selecting the right crypto hedge fund is crucial if you want to reap the benefits of your investments. Aside from fund size and minimums, a very important aspect is the custodial and legal compliance of a fund.
One example is the jurisdiction of the fund. What’s your legal reach if something goes wrong? Fortunately, if you get scammed by a crypto fund in your own country, it’s much easier to take legal action. On the other hand, if you get defrauded by a foreign fund, then it’s virtually impossible to recoup anything. Therefore, there’s more than just the minimum that comes into play when evaluating a crypto fund.
6. Forget managed funds, do index funds instead
Index funds provide only ‘participation’ in the crypto asset class, not actual hedging. This is because an index only tracks how crypto is doing and will follow all the volatility that comes with it. Although index funds may be less complicated and cheaper, they don’t de-risk your investments. Managed funds, although not watertight, are still significantly safer because of their hedging strategies. By definition, they actively try to protect against the wild swings of the volatile crypto market. If anything, index investing is something to do in addition to crypto hedge fund investments.
7. Hedge funds are good short term investment
Funds, whether for traditional assets or crypto, are not designed to be immediately liquid. Often there’s a one year lock-up and thereafter a 90-day sell window. For example: you decided to sell in early January 2018 (market cap over 800 billion) during crypto’s all-time-high. Congratulations, impeccable timing! However, you effectively sold early April, after the 90-day window (market cap just north of 250 billion). During that period the crypto market as a whole was down roughly 70%. If you want to day trade crypto, keep that capital separate from hedge fund investing.
8. The only way to really benefit from crypto is to ‘go all out’
Although it’s not specific to hedge funds, another thing to watch out for is excessive greed. The main factor that makes crypto investing so appealing is the potential to achieve instant wealth. Many people fall victim to the hype, as there is no shortage of people posting pictures of their new “Lambos”.
Conflate instant wealth with FOMO (fear of missing out) and we have a recipe for disaster. It’s very likely that the person will buy in massively at the peak of a crypto coin without fully understanding the risks because their judgment is clouded by greed. With that strategy, you’ll have a high likelihood of putting too much of your net worth in an ultra high-risk asset. Inexperienced crypto investors reluctant to arm themselves with the right knowledge are more prone to getting scammed by fake exchanges, fraudulent ICOs, or simply investing money they can’t afford to lose.
Even with these pointers, you’re still bound to make mistakes. The key here is to learn from them and move forward. It happens to everyone, so don’t let your mistakes discourage you! If you have any additional tips to share or questions to ask, feel free to comment below.
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