Crypto funds are the best way to get invested in the cryptocurrency and blockchain market without having to deal with the hassle of making trades yourself. Projects such as Pentafund, Token-as-a-Service, and Crypto20 make tapping into the cryptocurrency market as easy as buying a single token. But which one should you choose?
There are countless philosophies and techniques on how to profit from the emerging blockchain sector, and each one has its own balance of risk and returns. Some have similarities to traditional investing, but take on a whole new form when applied to the unrestrained crypto market.
Here are some head-to-head comparisons of the core strategies that will give you an idea of how they work, how different crypto funds use them, and which ones suit your investment profile.
Manual trading vs Algorithmic trading
Crypto funds make returns by making profitable trades. For example, buying Bitcoin in 2015 and selling it in 2017 would have been a profitable trade. To do this consistently and effectively, a fund needs a good process. Two of the core approaches are manual trading and algorithmic trading.
Manual trading is at one end of the spectrum and means doing things hands-on. Here, a fund manager uses a combination of personal strategies, knowledge, experience, and intuition to decide which cryptocurrency trades to make: buying up coins that have a strong outlook, while avoiding or short selling the weaker ones.
At the other end of the spectrum is algorithmic trading. Also called automatic trading. Here, a trader defines the rules in the form of a computer program. That software then executes the rules automatically when the conditions are met using real-time market data. A rule could be something like “buy Bitcoin when the price drops below $X.”
You can think of algorithmic trading like the trading bots that now make up 90% of trades on the stock market, buying and selling much faster than humanly possible. Manual trading on the other hand is more like Warren Buffett carefully selecting the world’s best stocks for long-term returns.Algorithmic trading is like the trading bots, while manual trading is like Warren Buffett carefully selecting the world’s best stocks for long-term returns Click To Tweet
Both have their strengths and weaknesses, and the best approach is typically a combination of the two. Pentafund is a crypto investment fund that uses both manual and algorithmic trading to benefit from both. At the core of the investment team is blockchain experts selecting solid crypto investments to cash in on the long-term growth of the industry (more on how to do this below). The team supplements this with algorithmic techniques to perfectly time trades and react to market changes at fiber optic speed. Another example is Token-as-a-Service that uses this hybrid approach by “diversifying in strategically important assets, as well as taking swing positions on exchanges,” as stated on their website.
Manual trading works well if you can pick the right currencies. Algorithmic trading works well if you can find the right patterns. But what analysis techniques can you use to find these things?
Technical vs Fundamental Analysis
Technical and fundamental analysis are the two most common ways of figuring out if the price of a cryptocurrency might go up or down.
A technical analysis looks for patterns in the price and volume graphs for a given cryptocurrency while ignoring everything else. A fundamental analysis only considers the intrinsic value of a cryptocurrency or asset to predict its long-term outlook and see if it’s currently over or undervalued. Technical analysis focuses on the “What” and fundamental analysis focuses on “Why.”
Typically, algorithmic trading uses technical analysis. The idea is that we, as humans, act in predictable ways; a reason why history repeats itself so often. If you can spot this predictable market behaviour, you can profit from that insight. Once you know the patterns, you can build software that monitors the graphs for those patterns and make the trades for you. Some key terms in technical analysis include:Technical analysis looks for patterns in the price and volume graphs, while fundamental analysis only considers the intrinsic value of a cryptocurrency Click To Tweet
A Fractal Token is an example of a fund that uses a suite of their own technical analysis techniques like scalping, intraday, swing, trend, and counter-trend styles to deliver returns to its investors. They’ve made their suite open source in order to encourage others to use and improve them.
A fundamental analysis of cryptocurrencies and blockchain projects involves indicators like conference announcements, forks, as well as new coin listings, technology patents, user base, size of network, and token utility. An investment fund would weigh these factors and estimate what price the cryptocurrency should really be. This can then be compared to the current market price and bought or sold if there is a difference. If they got the fundamental analysis right, long-term profits will come.
Pentafund plans to use both fundamentals and technicals. For fundamentals, investing in emerging blockchain technologies, using stringent criteria to identify strong candidates from trustworthy, well-managed businesses. They complement this with technical, algorithmic, and trend analyses to maximize profit.
The point of these techniques is to determine how risky different investments are. Once you know that, you can decide how you want to spread out your risk.
Venture-style vs Index funds
Venture-style investing is about reading the future, and picking the future unicorn companies in an emerging market for blockbuster returns. Think about Peter Thiel investing in the early days of Facebook, long before the company even knew how it was going to turn a profit.
Doing this is much easier said than done. The depth of knowledge required is only exceeded by the connections you need when trying to find these early opportunities. One ex-Goldman Sachs executive, Matthew Goetz, believes that he can pull it off and has co-founded BlockTower Capital to do so.
Right now, world-changing technologies are being developed, but Matthew Goetz points out that making the right bet at the right time is also difficult. “Remember, one time you had Yahoo and then this thing called Google came along.”
If this type of fund seems a bit too risky, the opposite to this way of thinking is index funds. These are very low-risk investments. Instead of trying to pick the winners from the losers, a crypto fund simply invests in many currencies. Some individual cryptocurrencies might perform poorly, but a rise in all the others will cover the losses. You can think of an index fund as an average of several cryptocurrencies.Venture-style investing is about picking the future unicorn companies, while index fund investing acts as a low-risk average of several cryptocurrencies Click To Tweet
Crypto20 is a cryptocurrency index fund that maintains a portfolio of the top 20 cryptocurrencies by market capitalization. The portfolio periodically rebalances as the market cap of each currency grows and contracts. Bitwise is another example that indexes just the top 10 cryptocurrencies, lowering the risk even more. The ease of maintaining an index fund means that fees can be as low as 0.5%.
All of the techniques so far have been about trading on the open market. However, that’s not the only way crypto funds can get their hands on cryptocurrencies.
Mining vs ICO investing
Often, the best place to get an asset is directly from the source. If we’re talking about oil, that means pumping it out of the ground, and for cryptocurrencies, that means mining and ICOs.
Mining is one of the key ways that new cryptocurrency comes into the market. It’s the core way that cryptocurrencies are distributed and secured, and it’s a multibillion dollar opportunity for investors. However, profitable mining depends on access to technical knowledge, dirt cheap electricity, and capital to buy specialist mining equipment. Not many individuals have all these things.
Logos Fund is a crypto mining fund that pools teams the miners together with investors so that everyone can profit. Logos Fund uses investor funds to invest in the infrastructure and technology behind cryptocurrency mining; warehouses, power sources, and computers. This is used to efficiently mine cryptocurrencies like Bitcoin and Dash for a profit. The mining profits are shared with investors.
Cryptocurrencies are also created during Initial Coin Offerings (ICOs). Ethereum held the world’s first ICO, and it was a huge success, raising $2.3 million in its first 12 hours and generating a ridiculous 100,000% return for investors. This proof of concept has lifted the ICO to become the most popular way to raise funds for blockchain projects with billions raised so far.
ICO investing is so profitable because projects are in their earliest stage and haven’t proven themselves yet. This means projects still have a relatively high chance of failure. A lack of regulation can also make things dangerous. These factors mean that massive opportunity is there, but you really have to know what you’re doing.Mining is one of the key ways that new cryptocurrency comes into the market, while the ICO is the event during which cryptocurrencies are created Click To Tweet
Pentafund plans to include ICO investing as part of its investment strategy, but point out that the increase in ICOs makes it hard to separate the genuine opportunities from the fraudsters. Their approach is to independently analyze and verify each one with strict criteria in order to filter out the bad ones. Choosing a fund like this means that you don’t have to analyze hundreds of business plans yourself to stay safe.
These techniques all balance risk and return in different ways, butut is there a way of trading with no risk at all?
Buy-and-hold vs Arbitrage
Buy-and-hold is a fairly straightforward strategy. Simply buy a cryptocurrency and hold onto it for long-term profits. The risk you take is that the value might go down. This simple strategy has proven to be an excellent one in the crypto world.
Arbitrage is a fundamentally different approach. Arbitrageurs aim to hold onto their cryptocurrency for as little time as possible. Ideally, no time at all. This is possible by buying a currency on one exchange while simultaneously selling it on another. If there is a price difference between the exchanges, they receive an instant profit with essentially no risk.
Since the stock and foreign exchange markets are so efficient, arbitrage opportunities are rare, but in the world of the blockchain things are a little different. The cryptocurrency market is young, inefficient, and distributed. These factors combined lead to the constant creation of arbitrage opportunities. Sometimes price differences between exchanges can be up to 43%. Those with the right knowledge and trading infrastructure are in a great position to take advantage.
Pentafund takes another approach by using both buy-and-hold and arbitrage as key tools in their portfolio. This will allow the fund to profit from holding valuable cryptocurrencies as the blockchain industry grows, as well as from the arbitrage opportunities that come from volatility and market contraction. In times of uncertainty and doubt, more market participants act irrationally, meaning more profits for the professionals.
Choose your Exposure
The blockchain industry is truly unique. There are so many ways to profit from this burgeoning industry, and crypto funds give investors an incredible tool to start accessing them. All of these strategies have their advantages, and the plethora of available funds such as Pentafund, Token-as-a-Service, Virgil Capital, Logos Fund, Crypto20, Bitwise, BlockTower Capital and Fractal Token means that you get to pick and choose the ones that are right for you.