Investors are becoming eager to invest in the next technological revolution.
I’ve heard countless stories from friends in wealth management that are getting pressured from large individual clients to move money into crypto. Even though their hands are tied.
Advisors at a traditional retail firms are getting questions from their clients daily about Blockchain Technology, Bitcoin & Cryptocurrencies. Their clients want to invest. The problem is, that their hands are tied.
Stock brokers can bring their clients some very basic ETF’s, commodity broker’s clients have Bitcoin Futures and not a whole lot else for exposure in the arena.
It’s still largely unregulated, and they can’t charge a commission on it.
So, the traditional retail broker’s response to clients is typically to “avoid them for now.”
Cryptocurrency and blockchain technology have become incredibly popular amongst individual and institutional investors across the globe. Many have been leaning more towards investing in hedge funds relating to the cryptocurrency industry instead of the individual cryptocurrencies.
After the financial crisis of 2008, many financial firms and their clients recognized the importance of asset allocation and the need to diversify client portfolios. This led to an increase in the use of alternative investments into client asset allocation models.
Retail firms like Morgan Stanley and Merrill Lynch have recommended allocation models for clients with alternatives near or above 20% of a portfolio. Of course, every client is different and allocations will vary for each client, but it’s safe to say that a current discussion with your financial adviser will probably include the topic of alternative investments in your portfolio.
For those who are not familiar with them, alternative investments are defined as “noncorrelated assets”, that is their performance doesn’t follow that of more traditional asset classes such as stocks and bonds. They are considered an effective way to balance risk in a portfolio and to provide a “cushion” in the case of a stock or bond meltdown and are appropriate in a small portion of your overall portfolio.
Even if you look at your portfolio and don’t directly see something that you recognize as an alternative investment, they may be there as ETFs or funds, as well as many large institutional funds such as pensions and even retirement fund offerings, that have alternative investments in them.
See JP Morgan: Crypto Could Help Diversify Portfolios
Most people associate a hedge fund as the most common alternative investment and for many investors, that’s true.
Should Alternative Investments Be in My Portfolio?
Some hedge funds are already including cryptocurrencies into their portfolios. There are already hedge funds that already have Bitcoin and Blockchain startups that may one day be public traded companies in their portfolios. If a hedge fund is considered an alternative investment and they’re already using bitcoin, then why can’t firms and the media finally declare bitcoin as an alternative investment?
You may even want to look at other cryptocurrencies. Bitcoin is not the only digital currency. In fact, there are exchanges that buy and sell each day many of these different cryptocurrencies, including ETH (Ethereum) or XRP which is from Ripple Labs and is being used in blockchain projects involving existing banks. Several other cryptocurrencies in the Top 20 by market cap have a utility value that many see doing very well with the widespread adoption of blockchain technology.
We’re not aware of any products available from traditional or online brokers that will easily allow you to invest in cryptocurrencies, outside of doing so on your own with an account with one of the exchanges that buy and sell them, such as one of the online exchanges.
Even with all of this current and future activity, we don’t see any firm, any advisor or any publication explicitly classifying cryptocurrencies as alternative investments. But there’s little doubt that they’re non-correlated to stocks and bonds. Some say they could even be considered a currency (in fact, cryptocurrencies were the best-performing currency in 2015 and by far the best performing asset class of 2017.
For investors who held cryptocurrency in their portfolio last year, many saw stratospheric returns — 82,000% for Ethereum, 56,000% for IOTA and 44,000% for Stratis.
The point here is not to convince you to invest in Bitcoin or cryptocurrencies, but to let you know why so many others are doing it. As with any investment, some are making money doing it and some are losing money doing it.
It’s important that you recognize that these investments are not for the faint of heart, but it’s growing and yes, they present a very real investment opportunity.
If you think Blockchain technology (the underlying infrastructure of Bitcoin) is of little value, then why are finance companies like Bank of America, Merrill Lynch, Citi, Credit Suisse and JPMorgan, John Hancock and the DTCC running tests with it to improve their current processes?
Consider Alternative Investments as Part of a Portfolio
We believe that the time has come for investors and financial firms to classify investing in Bitcoin, cryptocurrencies and blockchain based technologies as alternative investments, and thus having a place in a properly allocated investment portfolio. Over the next few years, it’s clear there will be more and more opportunities to invest in them. As these investment opportunities open up, they need to be classified appropriately in order to be placed in investor portfolios using proper asset allocation models.
Most people will dismiss them, including probably your advisor. But we venture to say that with the progress (and profits) being made, over the next year or two, we won’t be the only person telling you about how they may fit the alternative investment sleeve of your portfolio.
Cryptocurrency Investment Vehicles
Only a handful of ETFs and other exchange traded products have significant exposure to Bitcoin or other cryptos. One is Grayscale’s Bitcoin Investment Trust ( GBTC ). It’s attracted $1.4 billion in assets and is up more than 680% this year.
One of the main reasons that these institutional investors have refused to put their money into the individual currencies lies in the fact that they are relatively unstable. This is where the idea of cryptocurrency hedge funds come in.
Actively managed hedge funds are able to give investors a broader and more secure way to invest in cryptocurrency, without being subject to as high degree of risk. Granted that you are dealing with a reputable group and manager with experience.
Institutional money is expected to flow into cryptocurrencies this year as the number of new Blockchain technology and cryptocurrency hedge funds is expected to triple in 2018. With so many rushing into the space, do your due diligence before making an investment decision.
Many Hedge Funds Rushed Into the Space in 2017, While Seasoned Managers Waited Patiently.. And most likely bought the dip..
Michael Novogratz, the former macro manager who’s turned into one of the biggest champions of bitcoin, shelved plans to start a $500 million dollar cryptocurrency hedge fund and predicted that the digital money may extend its plunge to $8,000. Novogratz isn’t giving up on them and said he still believes they’ll be a disruptive force in finance. He had said this month that bitcoin could reach $50,000 by the end of next year — upping his previous estimate of $40,000.
Matt Siebenthal, former macro Advisor and professional trader, shared similar sentiment back in December when Bitcoin was near $20,000. Siebenthal expressed concern for valuations while many carelessly entered the space. The founder of BlockWealth Capital postponed plans to launch a crypto hedge fund- citing a possible correction to 7500 or lower before the cryptocurrency market- led by Bitcoin resumes it’s uptrend, anticipating a bull run similar to 2017.
Novogratz, William Mougayar and Siebenthal’s notorious commentary were initially met with criticism back in December as the price of Bitcoin was approaching $20,000 and Bitcoin euphoria was in full force. As more than 40 hedge funds rushed to market in the 3rd and 4th quarter of 2017, the price of Bitcoin shed more than 60%, briefly dipping below $6000. Bitcoin has recovered significantly from year’s low of $5,920 in early February. Bitcoin has surged nearly 100 percent to just above $10,000.
The market is evolving, and money that’s been made in blockchain and crypto is being invested back into the sector, leading to increased competition and the creation of new coins and service providers, one hedge fund expert said.
Those who can identify the future leaders can make a lot of money.
Security & Regulation
The biggest challenges hedge funds are facing relate to security and regulation. With security/custodian solutions still being developed by third party companies, and some large banks not yet providing custodial services.
As to regulation, the top cryptocurrency hedge funds usually partner with top law firms and regulatory experts to ensure that they stay abreast of new regulation and have an eye on the horizon for future decisions by the SEC and other regulatory bodies.
Cryptocurrency Hedge Fund’s Explosive Growth
According to the new index launched by Hedge Fund Research, investors have a huge interest in cryptocurrency hedge funds. There was “explosive growth” in crypto hedge fund interest by investors over the course of the last year.
Below Are Some Hedge Funds to Keep An Eye On.. These are some of the best public and private hedge funds with seasoned advisors and experience in asset management or you can request access to the top performing hedge funds here.
Grayscale needs no introduction, as its legacy was cemented quite some time ago. This company currently runs three investment trusts focusing on Bitcoin, Ethereum Classic, and ZCash, respectively. It will be interesting to see whether Grayscale decides to add additional cryptocurrencies to its portfolio, as there are a lot of promising candidates out there right now. At the time of writing, the company controlled over US$1.12 billion in funding.
Founded in 2016, this US-based hedge fund with about $102.2 million in investments (according to CrunchBase data), manages a portfolio of blockchain assets including different cryptocurrencies, assets, and digital tokens. Being a private fund, there is little information available on the fund.
Pantera Capital, founded by Tiger Management alum Dan Morehead, launched the first U.S. digital asset fund in 2013, the Pantera Bitcoin Fund. A few weeks ago, it announced what the firm believes is the first initial coin offering fund. Closing July 31, the fund will purchase tokens via pre-sales through SAFTs (simple agreement for future tokens) and during token sales; it launches with $100 million.
The Logos Fund, is the world’s first “bitcoin mining fund.” The German Investment Fund specializes in cryptocurrency mining. It is a private fund that offers a blend of bitcoin mining and buy-and-hold investing. The fund is dedicated to investing in a range of Bitcoin-related businesses.
The fund was created by Marco Streng, founder of hosted cloud mining company Genesis Mining, and has around $100 million in estimated funding. Genesis Mining is an initial partner to the fund.
BlockWealth Capital actively manages a portfolio of blockchain assets including different cryptocurrencies, assets, and digital tokens providing access to unique projects with active development teams, strong leadership, sound fundamentals and real world application (adoption).
The Founder of BlockWealth Capital, Matt Siebenthal, halted plans to launch in the 4th quarter of 2017 as many hedge funds rushed into the space, notoriously citing valuation concerns and a potential correction in Bitcoin to 7500 or lower. Siebenthal plans a soft launch in March 2018 with some personal money. Other investors include high-net-worth individuals and family offices.
Although the name of this cryptocurrency-related hedge fund may not ring a bell for most people, it is quickly making a name for itself. The company started out with an estimated US$100 million in funding and is typically labeled a USA-based hedge fund. Its algorithmic trading of cryptocurrencies has attracted a fair bit of attention since the fund’s launch in April of this year. It’s definitely an entity worth keeping an eye on.
After a soft launch in March with some personal money, Brian Kelly, a money manager, CNBC Fast Money commentator and author of The Bitcoin Big Bang, officially opened his crypto-asset hedge fund on July 1 with the goal of reaching $50 million in AUM.
The BKCM Digital Asset Fund will employ a three-pronged strategy: buy-and-hold for about 50% of the tokens, ICOs for 20% and actively managed for the remaining. Investments consist of foundational protocol tokens such as Bitcoin and Ethereum, currencies such as Litecoin, XRP, Zcash and Stellar, plus tokens such as Golem Network Tokens (GNT), Augur’s REP and Siacoin.
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The price of Bitcoin and other cryptocurrencies are highly volatile. It is common for prices to increase or decrease by over 20–100% in some coins in a single day. Although this could mean potential huge profits, this also could mean potential huge losses. DO NOT INVEST ALL YOUR MONEY IN CRYPTOCURRENCIES. Only invest money which you are willing to lose.
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