The popular cryptocurrencies like Bitcoin, Ethereum, and Dogecoin have made headlines this year for their tremendous growth over the past year. However, many cryptocurrency investors want even more returns than the ones offered by Bitcoin, Ethereum, Dogecoin, and other cryptocurrencies and have looked to hedge funds that offer cryptocurrency plans as an alternative.
Yes, there are crypto hedge funds, and we will cover some of the more popular ones in this article. That said, a crypto hedge fund does have some problems that cryptocurrency was meant to solve, which makes it counterintuitive to invest in a cryptocurrency hedge fund.
The Risks With Crypto Hedge Funds
As we mentioned earlier, crypto hedge funds have a few risks to them compared to other hedge funds and simply investing in cryptocurrency. This section will cover some of those risks.
You Lose Money
The first problem with a crypto hedge fund, and any investment, is that it is entirely possible that you lose all your money. Of course, it is obviously possible to lose all your money with any investment, but the odds of that happening are much more likely with an actively managed hedge fund than simply holding a bunch of Bitcoin and Ethereum on your own hardware wallet.
Not Your Keys; Not Your Coins
Another problem with a crypto hedge fund is that you do not control the keys to the wallet that the cryptocurrency is stored on. This comes back to the popular saying in cryptocurrency – not your keys; not your coins.
Basically, the hedge fund could lose the keys to the wallet and you would be out your money. This is why it is strongly recommended to hold the wallet keys of all wallets that you store your cryptocurrency on.
The tax liability of investing in a hedge fund varies by your jurisdiction. That said, it is always much more complicated than simply buying cryptocurrency and holding it for over a year, which would simply result in paying long term capital gains tax when you close out the position.
Hedge funds almost always require hiring an accountant to do the taxes. That is much more complicated than investing in cryptocurrency on your own accord.
Management fees are not really a risk of crypto hedge funds, but they are an aggravating part of investing in a hedge fund. The average hedge fund has a 2 and 20 fee structure.
That means the fund charges a 2% fee on all funds under management and 20% of all profits.
20% of all profits is an insanely high fee that has basically become the norm for hedge funds. The same applies for the hedge fund charging a 2% management fee whether they are profitable or not.
This is one of the problems with centralized finance that decentralized finance will eventually solve. But the scope of that goes far beyond this article.
Normal Hedge Fund Problems
Finally, hedge funds can have their own problems that are almost exclusive to them. The biggest problem with them is that hedge fund managers have turned their hedge fund into a ponzi scheme in the past.
The most infamous example of this is Bernie Madoff’s hedge fund that was revealed to be a massive ponzi scheme. Unfortunately, Bernie Madoff was not the first hedge fund manager to create a ponzi scheme and he certainly was not the last.
Admittedly, the risk of a hedge fund being a ponzi scheme is relatively small, but it is a risk that you must take when you place your money into a hedge fund. This is not a risk you have with buying a cryptocurrency.
Crypto Hedge Funds
If you are still interested in investing in a crypto hedge fund, then this section will cover some hedge funds that might interest you. It’s important to note that these hedge funds have a relatively high minimum investment, so it is only recommended for very high net worth individuals or institutions.
Pantera Capital is the oldest cryptocurrency hedge fund – it was established back in 2013. And it has grown from only a couple hundred million in assets under management to over 3 billion in assets under management at the time of writing.
The public information about Pantera Capital is rather limited, but it does have five different cryptocurrency funds available as investments.
The requirements for Pantera Capital are pretty high – investors must be accredited investors and a minimum investment of $100,000 is required.
CoinCapital is a more individual oriented hedge fund than Pantera Capital. And just like Pantera, there is almost no publicly available information about CoinCapital.
With that in mind, it is still a well respected hedge fund. But it does have an institutional investor requirement and a somewhat high minimum investment of $250,000.
Other Hedge Funds
There are more crypto hedge funds than CoinCapital and Pantera Capital. However, those are the two most well-known hedge funds that dabble in cryptocurrency. They are also the two most popular hedge funds.
Cryptocurrency has begun gaining popularity over the past year, so it is reasonable to assume that more hedge funds that focus on crypto will open. Big investment banks like Goldman Sachs will begin opening trading desks that focus on DeFi and other cryptocurrencies.
Is Investing In A Crypto Hedge Fund Worth It?
In our opinion, investing in a crypto hedge fund is not really worth it. The risks are higher than simply holding the cryptocurrency on your own and the investment returns are usually going to be less.
The best option for getting exposure to cryptocurrency is to simply buy and hold your own cryptocurrency. If it is a large amount, then you can use a custodial option like the one offered by Gemini.
This is the best way to invest in cryptocurrency based on the previous 10 years. The reason is simple, too.
The best cryptocurrency investment strategy over the past decade has simply been to buy and hold. All attempts at trading cryptocurrency either result in losses or gains that would have been bigger if the investor simply held the cryptocurrency. And the bonus about holding crypto in your own wall is that there are not any taxes until you sell for a profit nor are there any management fees.
Well, that covers it for crypto hedge funds. They are an alright option for those that meet the rather high minimum requirements and are not interested in learning about cryptocurrency.
However, crypto hedge funds have a large amount of risk combined with high management fees, which makes them a pretty bad option as an investment.
Investing in cryptocurrency on your own is simple, has very low fees, and usually performs better, so that makes it a much better option than a hedge fund in our opinion. That said, there are plenty of hedge funds charging a 2 and 20 fee if you really want to invest in a crypto hedge fund.