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What Are Investment Funds? Cryptocurrency Investment Funds - Binaryx

What Are Investment Funds? Cryptocurrency Investment Funds

Few years ago, the main source of cryptocurrency capitalization was retail direct investment – when users simply bought coins and kept them in their purse. But the industry is growing, and now top currencies like bitcoin and etherium have become full-fledged stock market assets with all available instruments like derivatives and investment funds. How are investment funds working and why are cryptocurrency investment funds different?

What is an investment fund?

An investment fund is defined as an organization or entity whose purpose is collective investment. Investment funds bring together funds of numerous small investors and invest them in projects and assets that can yield returns in the future. 

Investment funds are designed to accumulate the funds of small retail investors and it is the main investment instrument for ordinary citizens who find it difficult to access the stock market directly and manage assets. 

An investment fund may exist in various forms, with different structures and investment policies. The main varieties are:

  • Exchange Fund (ETF);
  • Corporate stock;
  • Private investment funds (venture capital, hedge, etc.). 

Although the fund accumulates funds from many investors (so it is still called mutual), one managing company is responsible for the future of these deposits and for the operation of the fund. The company develops investment policy, pays dividends, hires traders, market analysts and other professionals. For its services, the company charges a certain percentage of the revenue generated, which may vary significantly depending on the type of fund. 

The fund can be open – accepting the contribution of anyone, regardless of qualifications and experience, and closed – with requirements for members (for example, to accept only qualified investors) and a minimum entry threshold. The modus operandi and varieties of funds are governed by national securities laws and may vary from country to country. 

How investment funds make money?

An investment fund accumulates funds from a few investors and reinvests them in securities or projects (more often securities) that generate profits. Typically, an investment fund is established for investment in a particular industry, group of enterprises or technical projects. The risk and return on investment depends on the type of fund. The income of the fund comes from two main sources:

  • Difference in value – that is, when the securities have gone up in price and can be sold at a higher price than they were bought at the time of purchase;
  • A security reward – may be dividends on held shares, interest on bond repayments and other forms of reward.

If translated into the cryptocurrency industry, a typical crypto fund could make a profit in exchange-traded currencies and in farming or stake reward. 

Fund’s earnings, except for a commission for asset management, are distributed to all the depositors based on their share of the total amount of investments involved. The right to a share of the income is usually evidenced by a corporate stock certificate, share or contract with a fixed amount of investment.  

Investment fund strengths

Investment funds originated in Europe and reached their peak in the US as a simple tool to attract massive investment from unskilled investors. The main benefits of collective investment funds for the depositors are:

  • Affordability – investment funds usually have a low entry threshold and investor requirements, so even middle-income individuals with no education can invest. 
  • Regulation – certain types of funds are restricted by law. Limitations may relate both to permitted purchases and to the assessment of risk. That is, the investor receives certain security guarantees. 
  • Relatively low risks – a high-capital fund has access to derivatives and other risk-hedging instruments that reduce the risk of losing capital and going negative. 
  • High yields – at least relative to banks, many of which now offer near-zero or even negative deposit rates. 

Investment funds also have a positive impact on the economy as a whole by providing the necessary capital for further development and expansion of production. By accumulating the funds of many thousands (and sometimes millions) of investors, open investment funds are more capable than even large private investment projects.

Cryptocurrency investment funds

Cryptocurrency investment funds have been filling the information space for several months now, cose it started to purchase huge quantities of bitcoins, ether and other top coins. However, the first investment funds dedicated to cryptocurrency and blockchain technology work about 10 years. 

At first, it were small venture capital or hedge funds, offering investments in ICO and unknowing but rapidly growing cryptocurrencies. As of 2021, according to Crypto Fund research, there are 823 official investment funds in the world dedicated to cryptocurrency or related technologies:

Among the most popular are Chinese Fenbushi Capital, American Digital Currency Group, BlockTower Capital, Galaxy Digital Assets Fund, Pantera Capital, and a number of other foundations from New York City to Singapore and Swiss Zug.

Types of investment cryptocurrency funds

The development of cryptocurrency investment funds is evidenced not only by their abundance but also by the fact that they exist in different organizational forms. The most common are: 

Mutual crypto funds

Let’s start with this type to close the book right away – cryptocurrency Corporate stock don’t exist. The Unit Investment Fund is a form of organized collective investment that is characteristic primarily of the Russian Federation. However, the legal regulation of cryptocurrency in Russia prohibits any transactions in relation to digital assets not issued in the territory of Russia. 

This means that neither mutual funds or any other investment funds in the Russian Federation can invest in cryptocurrency and pay their investors returns. Bitcoin-Corporate stock, Etherium-Corporate stock and any other mutual funds operating with cryptography, its semi-legal structures (that is, their investors are not protected) or just scam. 

Also the opening of Corporate stock, which could serve as analogues for venture capital funds, is ill-suited to investing in cryptocurrencies, because they have limits on the risk of transactions in which a volatile cryptophone clearly does not fit. 

Cryptocurrency hedge funds

Currently, hedge funds are one of the dominant forms of crypto funds in the United States, second only to venture capital funds. A hedge fund differs from a mutual or any other open fund by a less stringent legislative regulation of the structure and risk of transactions. 

The main purpose of a hedge fund is to generate income in any way. Therefore, hedge funds typically employ experienced managers who use active management strategies, including short-term trading and lending. As a result, hedge funds typically yield higher returns than ETF or mutual. But it can only be dealt with qualified investors, and the threshold of entry usually starts at several hundred thousand dollars. 

ETF (Exchange Traded Funds)

ETF (an exchange-traded fund) is an investment fund that attracts funds through its stock exchange. An exchange fund is usually linked to a certain stock index and its profitability (like price of shares) is directly related to the movement of the index. 

The ETF format remains the most sought after among unqualified investors, as by buying just one share, the holder actually invests in the entire basket of securities. In addition, ETF are passive funds with low management fees, which also attract small investors. 

At the moment, ETF is the golden dream of the entire cryptographic market. In February 2021, the first Bitcoin-ETF – Purpose Bitcoin, was launched in Canada, raising $264 million in the first nine days. But a truly powerful stream of retail investment will only flow into the crypto market when similar ETFs appear on US exchanges. SEC has not yet approved any ETF registration applications since 2017. 

ETN (Exchange Traded Notes)

ETN (an exchange note) is a tool that allows you to invest in cryptocurrency and seems similar with ETF. However, a note is a kind of bond under which the issuer assumes the obligation to pay the value of that note + percent on the growth of the index of the asset to which the note is tied. The issuer may not own the asset.

How Bitcoin-ETF differs from Bitcoin-ETN

The key difference is that Bitcoin-ETN is an unsecured debt liability with the value of a note linked to a bitcoin index, while Bitcoin-ETF shares confirm ownership of a certain share of the Bitcoin fund. It is easier to explain the difference by example:

  • If you invest in Bitcoin by buying an ETF share, you are entitled to a share of Bitcoin that the foundation actually owns. When an asset grows, your income cose your legally the owner of the asset;
  • If you invest in Bitcoin via ETN, you will be entitled to demand that the issuer buy the note at the purchase amount plus a percentage increase in the value of Bitcoin itself. However, the issuer of ETN does not own the asset, that is, assures repayment of the liabilities with any capital at its disposal

That is, in the second case you do not have ownership of the asset, but only the right to make claims against the issuer (debtor). Therefore, when working with ETN an additional risk factor is added – the solvency of the issuer of the note. What good is 200% growth of bitcoin if ETN debtor can’t pay you that percentage?

The main advantage of a note is that typically issuers promise to repay ETN with a percentage of income multiplied by a credit shoulder, such as the x5. That is, if the bitcoin increases by 15%, then the note must be bought at the purchase price+75%. Currently, there is only one Bitcoin-based exchange note on the market provided by the Swedish company XBT Provider and traded by NASDAQ Nordic.

Conclusions

Investment funds accumulate fonds from numerous retail investors and allow them to be invested in large projects in order to obtain and further distribute profits among all participants. It is a convenient investment tool for small investors, cose has a low entry threshold, does not require ownership of the asset and does not require qualification of the investor. 

Like traditional cryptocurrency investment funds, they exist in different formats and differ in structure and investment policy. Hedge and venture capital funds remain the most common. Cryptocurrency Corporate stock does not exist due to the rigid regulation of the industry in the Russian Federation.

The most convenient form of investment in cryptocurrency for unskilled investors is ETF, but so far only one Bitcoin-ETF has been launched in Canada. The Bitcoin-ETN is a high-risk investment instrument that is only available in Sweden.

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