Research about the rapid rise of ‘crypto funds’, briefly talk about its history, current trend and future outlook. Fouse on what kind of portfolio strategy they are using? are they using any hedging strategy to reduce the risk of the portfolio while still achieve high return? see if it outperforms equities portfolio. Style of paper: should be an editorial style opinion piece.
The Rise of Digital Assets Funds and Its Portfolio Strategy
The market of crypto currency in which digital based coins are traded looks mysterious, scary and exciting regarding its behavior for a casual observer. The pioneer of crypto currency, i.e., Bitcoin surged in value and then dropped dramatically afterward picking back up in the recent few months. The rate of emerging initial coin offerings is meanwhile considered amazingly fast. Even though many analysts and financial advisors are still skeptical of its potential, the massive capital that has been invested in it cannot be ignored. The analysts foresee it to stay in the future. They are predicting that the cryptocurrencies are expected to replace the national currencies by 20% by the year 2030. With the immense popularity that it has gained, it was inevitable that some of the conventional financial world elements would bleed over. The ETFs, futures, and regulations have entered into the crypto markets, and index funds are one of the various ways. By 2017, a large number of crypto hedge funds also emerged. Index funds are the mutual funds which are developed to follow the returns of the index. In the crypto index fund, individual tokens are used for serving this same function. Index funds provide the freedom of not having to learn investment strategies for Cryptocurrency or to worry about the custody or storage of the tokens. It offers a comparatively easy auto-rebalancing and diversified way of investment.
The performance of the digital funds can be assessed to evaluate the potential of crypto funds and assets in the future. The close-ended tokenized digital asset fund of TaaS has a Return on Investment of 61% in the first quarter and about 72% in the 2nd quarter. The investment managers of TaaS had traded more than seventy cryptocurrencies and had invested in more than a dozen token revenues. On the other hand, the Digital Asset arrays on the Iconomi Digital Asset Platform have yielded various returns. Like, the Crypto Crush Core has a return of 240% and the GEM (Greychain Emerging Markets) fund has generated a 109 % return. Bitcoin, on the other hand, has yielded a 75 % return in the same period and clearly, these funds have outperformed it.
The Crypto Hedge funds have generated an impressive 1641% of return on investment. The annualized return of the HFR’s Cryptocurrency Index fund has been 292% since 2015. The Grayscale’s Bitcoin Investment Research has yielded an ROI of 7900% since its foundation in 2013. The ZCash Investment Trust has yielded 110% of return, and the popular Ethereum trust has performed on 650% return since their inception in 2017. Overall, these crypto funds show the future trend of mediating the aggressive nature of the cryptocurrencies by indexing them.
Bittwenty is one of the index funds which were the first ones to be launched in the market. This index fund takes into account the top 20 cryptocurrencies performance; therefore, it can be said that it functions in the same way as the S&P 500 index. The Bit20 enjoys the same level of security as the other block-chain based applications. Then there are also coinbase index funds which recently announced its passively managed index fund, its allocation is based on 65% in Bitcoin, and about 22% in Ethereum while remaining in Litecoin and Bitcoin cash. Bitwise Asset Management is another latecomer who has introduced its Hold10 index.
One might think that hedge fund is not a right idea for the Cryptocurrency. However, a recent study showed 10% gross return on $100,000 invested in the crypto hedge fund yielding a $78 per each $1000 of the hedge investment. A riskier alternative would be the index funds. Like, the Bitwise Asset Management fund is a passively managed fund from the top 10 cryptocurrencies. It only charges 2-3% of management fees and does not tax the investors. Critics, however, dread that crypto hedge funds can spill risks in the mainstream financial system as well.
One might want to compare the returns of equity and crypto portfolio. While the third richest person in the world consider Crypto as a falsely projected phenomenon and claims to foresee its bad ending, some of its die-heart fans believe otherwise. Looking at the comparison of both funds, one can certainly conclude that crypto being volatile can outperform equity portfolios by a large margin if it can be diversified better, and its beta is adjusted. The index fund is the answer clearly as it diversifies and adjusts the beta.
Gradually, with the passage of time, more and more uses of the Cryptocurrency are being identified and developed. It has shown that more money has been flowing in the Cryptocurrency system. It enabled the market capitalization of all the cryptocurrencies to rise to about $300 billion. Banks like Citibank, Barclays, Deutsche BNP are researching adopting the Cryptocurrency, and it’s potential. On the other hand, the technology behind this Cryptocurrency, i.e., block chain has revolutionized the fine tech industry. Whatever the analysts and critics might think of its vulnerabilities, it is certain that Cryptocurrency is here to stay. The future of Cryptocurrency is witnessed as replacing the government-centric money system with a decentralized market-controlled alternative.
The Initial Coin offerings mechanism has also absorbed billions of dollars. The critics consider this market as a bubble which is going to burst while another believes that the value is going to rise. Whatever the future might hold for cryptocurrency, it is certain that it is still very dangerous and volatile. In days, prices can drop and then rise by thousands. Being new provided it the vulnerability of having obscure regulations, and confusing laws which also often leads to scams.
Summing up, it can be said that as the crypto funds are by nature aggressively volatile, for portfolio strategy, it is needed to attempt to adjust the beta value to make it work. The highly speculative part of the investment in Crypto Funds should be limited to not become a burden in the future. As per the volatile nature of this fund, the more appropriate portfolio strategy would be the indexing strategy. This strategy makes use of efficient market theory by creating a portfolio which follows a specific index. It is more of a passive management strategy in which the investment is made on a long-term basis to earn returns.
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