Crypto funds largely determine the situation on the global market of digital assets. They have extensive analytical data, invest large sums of money, and their movements influence the general development vector of the entire industry.

Traders and investors are guided by their portfolios when choosing their own strategy, leading analysts make forecasts for individual cryptocurrencies and the market as a whole on the basis of their reports.

In this article we will consider the basic principles of crypto funds, their place in the current situation and prospects for the future.

Working principles of cryptocurrency funds

Cryptocurrency investment funds differ from traditional ones only by the fact that the portfolios of assets they manage inсlude cryptocurrencies. A crypto fund’s portfolio may consist solely of digital assets or a combination of traditional financial instruments with cryptocurrencies or their derivatives. 

In other words, a crypto fund is a collective investment vehicle that accumulates and sells various assets on its balance sheet depending on its strategy and risk profile. In the case of cryptocurrency funds, investments are made in projects based on blockchain technologies. 

The pool of collected assets is managed by a management company. Crypto fund managers receive a commission expressed as a percentage of the profit or the amount of assets under management (AUM).

The majority of crypto funds are represented by relatively small teams of top professionals. According to Crypto Fund Research, about 50% of crypto funds have no more than five employees, and only 7% of them have more than 25 employees.

The main goal of crypto funds is to effectively manage assets in order to maximize returns and minimize risks.

The basic functions of cryptocurrency funds are:

• Analyzing assets and identifying the most promising ones;
• Creation of an investment portfolio;
• Determining the crypto asset management strategy;
• Risk assessment. 

Large funds have a high entry threshold and are designed for institutional investors in cryptocurrencies. They act as necessary intermediaries for large, fully legalized public companies (in most countries, such companies cannot directly invest in crypto projects). 

More democratic funds target retail investors who want to invest in cryptocurrencies but don’t know how. 

Interaction with investment funds saves retail investors from the need to study cryptocurrency indexes, analyze blockchain data and delve into the specifics of the market. It is enough for them to monitor crypto funds, study their reports and make their choice.

Types of cryptocurrency funds

There are many classifications of cryptocurrency funds. Let’s consider the main ones.

By availability

According to this parameter, crypto funds are divided into two types:

• Closed. These inсlude funds with maximum entry thresholds and a limited number of shares. They accumulate billions of assets and are only available to qualified investors. 
• Open-end (or public). This type of fund is available to a wide range of investors. Public cryptocurrency funds can be either regulated (with the right to trade on exchanges) or unregulated.

By investment direction

The main mass of crypto funds is divided into two categories:

• Venture capital funds. Venture capital funds aim to invest in crypto startups with obvious growth potential. Such organizations prefer to invest in a large number of projects with minimum-optimal amounts. Since the risks of early-stage investments are high, if one project fails, the losses are offset by the success of another. Investment funds of this type operate on the principle of long-term investment, since projects need time to be fully implemented. 
• Hedge funds. They are characterized by short and medium-term investments. Hedge funds invest in digital assets, using complex and often aggressive strategies to increase returns and reduce (hedge) risk. They require a high degree of trust from investors, as they rarely operate transparently and use trading instruments that are beyond the understanding of capital owners. It can also be said that the risks and returns of such crypto funds are directly proportional. Commissions in such funds are the highest, as their management requires specialists of the highest qualification. 

Currently, according to the analytical company Crypto Fund Research, there are 874 cryptocurrency funds in the world, of which 421 are venture capital funds and 399 are hedge funds. About 40% of them manage assets of less than $10 million, while the largest ones manage over $100 million (there are 60 such funds on the market, including Pantera Capital, Grayscale, a16z, Polychain Capital, Galaxy Digital Assets, Bitwise). 

There are also hybrid crypto funds that are categorized by a single characteristic. For example, they can be characterized as:

• Index-based, whose function is to passively track indices and compare the assets in the portfolio to them. Such organizations are suitable for slow-moving investors who want predictable returns, do not suffer from the volatility of the cryptocurrency market and do not want to pay excessive commissions. 
• Thematic, which are thematically focused on a specific area: artificial intelligence, NFT, tokenization of real-world assets (RWA), zero-knowledge-proof concept (ZKP), anonymous digital assets, GameFi, etc. Such crypto funds are designed for investors who are passionate about a topic and are confident that assets in their chosen niche will only increase in value. 

Investment strategies of crypto funds

The investment strategy of a crypto fund is a set of measures designed to achieve the set financial goals through effective asset management, taking into account risk tolerance and investment time horizon. 

Investment and trading strategies of crypto funds differ depending on the type of fund, market volatility, technologies used and other parameters. 

Examples of applied strategies:

• Active (aggressive). It implies high trading activity on stock exchanges and short-term investments using all crypto trading tools.
• Passive. Buy&Hold strategy. It represents the creation of a crypto portfolio and long-term investment with the expectation of profit in the future.
• Fixed. The fund clearly operates within a certain strategy, the details of which are known to investors. On the one hand, it creates trust, on the other hand, the high level of transparency increases the risk of copying or using the chosen strategy for dishonest purposes.
• Flexible. The fund is in a constant process of strategy review/adjustment and portfolio rebalancing. Public data of crypto funds of this type contain a minimum of information. Such opacity may alarm investors, who only need to study the financial reports of crypto funds and record profits.  However, the main motivation of the asset management company is to prevent the copying of intellectual property. After all, huge human, technological and financial resources are spent on this.

Advantages and disadvantages of cryptocurrency funds for investors

Advantages 

1. Competent portfolio diversification. Thanks to interaction with professional market participants, the investor gains access to a wide range of cryptocurrencies, tokens and projects. From these, specialized specialists build a crypto portfolio using the most accurate fundamental and technical analysis data for forecasting.
2. A team of top specialists. An investor investing directly in cryptocurrencies can hardly possess the full range of knowledge and skills inherent in the group of professionals that make up the management of a crypto fund. 
3. Time saving and no technical inconvenience. The investor is relieved of the burden of dealing with operational issues related to transactions, storage and security of digital assets.
4. Increased liquidity. Funds have access to multiple markets and liquidity providers and can trade large volumes to optimize returns.

Disadvantages

1. Volatility. As such, crypto funds are at risk of increased volatility, which has a significant impact on the cryptocurrency market.
2. High commissions. These can measurably affect investment returns, especially over the long term.
3. Security risks. Hacking or technical failures can result in the loss of fund assets.
4. Regulatory uncertainty. As global digital asset legislation evolves, crypto funds are in a state of limbo regarding licensing, taxation and reporting requirements.
5. Lack of transparency. Analysis of crypto fund portfolios may be hampered by a lack of public information about their activities. This increases counterparty risk and can lead to financial losses.

Current market conditions and forecasts for crypto funds

According to a recent report by analysts at Crypto Insights Group, mutual fund managers are “showing some of the highest levels of crypto optimism despite political risks and mixed macroeconomic signals. The majority of professional market participants (over 55%) are not concerned about the outcome of the upcoming U.S. presidential election. The optimistic mood was also boosted by the increased probability of the long-awaited Fed rate cut as early as November: it is estimated at 95% after the release of the October jobs report, which indicates the stability of the U.S. economy. Thus, in September-October, after a relatively quiet summer, analysts have already noted an increase in capital inflows and positive movements in crypto funds.

Another positive news this fall was the finalization of recommendations for the launch of tokenized money market fund shares. These have already been submitted to the CFTC and are expected to be approved by the end of the year. These prospects have definitely cheered up the big players in the cryptocurrency market, such as BlackRock and Franklin Templeton, among others. Its adoption will allow them to use tokenized shares of their funds as collateral. According to analysts at McKinsey & Company, the market capitalization of tokenized shares will reach $2 trillion by 2030. And the main growth factor will be the influence of institutional investors, for whom tokenized instruments are of particular interest.

If we talk about the segment as a whole, according to the Bernstein report, by the middle of 2025, the volume of funds under management of crypto funds will reach $190 billion. According to them, “the crypto market is on the verge of unprecedented institutionalization”. For comparison, the AUM of crypto funds at the end of 2023 reached a figure of $51.04 billion, which is 108% more than in 2022. So, experts predict that the positive momentum will continue.

Thank you for your attention. Focus on leading crypto funds and invest profitably!

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