Crypto hedge funds are booming. A crypto hedge fund is a managed investment fund that offers investors exposure to digital assets without actually owning the asset directly. But should you invest in a crypto hedge fund when you can just buy crypto? In this article we help you with information so you can weigh up your options. We’ll cover what crypto hedge funds are, things you should know about crypto hedge funds, and the top 5 crypto hedge funds by assets under management.
What is a crypto hedge fund?
A crypto hedge fund is a type of investment where investors pool their funds together to invest in cryptocurrency assets. Crypto hedge funds are usually operated by an experienced crypto trader or group of traders who have years of experience trading crypto. The fund manager(s) will use the capital from the crypto hedge fund to buy crypto assets, such as Bitcoin and Ethereum.
Hedge funds are known to employ more aggressive investment strategies than other types of funds (ETFs), differentiating them as an investment vehicle. There are different types of investment strategies from longing, shorting and arbitrage trading to more fundamentals based strategies like relative value or tech analysis. The chosen strategy will impact that risk profile of the fund.
The word “hedge” is used because these funds historically focused on hedging risk by buying and shorting assets concurrently, in a long-short equity strategy. They’re not called hedge funds because they protect investors from all of crypto’s investing risks however.
On top of these trading strategies, crypto hedge funds will often stake, lend and borrow coins and tokens to increase the IRR of the fund.
Crypto hedge funds don’t just hold crypto assets. They can invest in crypto adjacent assets. For example, there are funds that invest in and trade blockchain stocks. These are stocks of companies that provide Blockchain products and services.
Crypto hedge funds are different from traditional hedge funds in that they focus only on digital assets associated with cryptocurrencies.
Crypto hedge funds are booming
According to PwC, there were 150 to 200 crypto hedge funds at last count. These funds have total assets under management (AuM) in the billions.
The number of funds set up correlate directly to the price of Bitcoin which is no surprise. Because Bitcoin is booming, so is interest in these kind of more aggressive funds.
Who is investing in them, and how much?
The funds, by their structure and the way they’re regulated, target already wealthy investors. Because they are seen as ‘risky’, the US Securities Exchange Commission (SEC) limits access to hedge funds to ‘accredited investors’. Accredited investors have a net worth of more than $1 million, not including the value of their home, or annual individual incomes over $200,000.
Basically, if you’re a US citizen but you’re not already rich you can’t invest in in any kind of hedge fund, including a crypto one (but by all means take your cash to Vegas and blow it all on black…).
It follows that around 50% of crypto hedge fund clients are high net worth individuals followed by family offices and ‘funds of funds’. The average investment in crypto hedge funds is $1.1 million.
Crypto hedge funds are traditional investment vehicles. They’re a known quantity to traditional investors and these are the investor types they will continue to attract.
3 things to know about crypto hedge funds, before investing
Fees – You have to pay them and they’re high. You pay both management fees AND performance fees for the privilege of investing in these funds.
Management fees – average 2.3%
Performance fees – average 22.5%. Often increase with a higher IRR.
Buy-in hurdles – if you don’t have at least $100k you’re NGMI – not gonna make it. You won’t meet the hurdle rate to invest. You also need to be an accredited investor in the US (see below) and prove it, which means paperwork! Meh…
Redemption gates – you can’t take your investment out whenever you want. There are rules about when and how much of your funds you can access at one time. This, they say, it to prevent pricing impacts from large redemptions. So it’s there to ‘protect’ clients, but it just goes against the grain a little.
Buying crypto hedge funds or owning crypto?
The trade offs
Let’s look at the trade offs and benefits of crypto hedge funds, starting with most important part first – cost and performance.
If funds charge a 2.3% management fee on average plus a 20%+ performance fee, what does the average hedge fund performance look like, versus owning cryptocurrency outright?
According to PwC, the median performance of crypto hedge funds in 2020 across all investment strategy types was 184%. Here’s how that breaks down:
source PwC
But don’t forget, you’re handing back 20% to 30% of that in fees.
If you had just bought and held Bitcoin your investment would have returned 305% over the same period.
And that’s Bitcoin – the largest large cap crypto of them all. Had you chosen instead to buy and hold a lower cap altcoin, like the Layer 1 protocol Fantom (FTM), your return over 2020 was 1088%.
Here’s something else to consider when it comes to crypto hedge funds. They will invest conservatively for a bunch of reasons; reputation, performance, regulatory obligations etc. In this way, crypto hedge funds are no different from traditional hedge funds.
A recent PwC survey revealed that crypto hedge funds predominantly trade the large cap ‘less risky’ coins that are slower to move and less likely to moon. 92% of crypto hedge funds traded Bitcoin ‘BTC’, followed by Ethereum ‘ETH’ (67%), Litecoin ‘LTC’ (34%), Chainlink‘LINK’ (30%), Polkadot‘DOT’ (28%) and Aave‘AAVE’ (27%).
The coins crypto hedge funds typically trade. Source PwC
So what are you trading returns for when you invest in a crypto hedge fund? Exactly what do you get out this kind of investment (if you do meet the buy in hurdle that is).
The benefits
Time & effort saved
For the fees you pay them, fund managers will do the research for you. They will also manage the blockchain transactions for you. You don’t need to learn anything about crypto – how to use on and off-ramps from fiat, how transact on the blockchain, where to store to coins, etc. etc.
Seen as less risky than coin picking
Hedge funds use more aggressive investing strategies than other funds, but crypto hedge funds are still seen as less risky than owning crypto itself. Why is this?
Firstly, the fund managers do the due diligence for you. They research the companies, projects and code so you don’t have to worry about putting your money into something that turns out to be a rug pull or some other scam. Fraud, scams and rug pulls are a realised risk in crypto for many investors.
Secondly comes diversification. A hedge fund uses the money in the fund to buy into multiple coins, tokens and projects. The concept being, your money is diversified to help reduce single asset risk exposure and soften market volatility.
While they will help you avoid some of the risks inherent in investing in crypto (check out our article on this here), crypto hedge funds are still exposed to broader crypto market volatility. Although they actively seek to manage the impacts, it’s more to dilute than avoid them.
No asset custody worries
You might sleep better at night knowing that you are not responsible for keeping your crypto safe from cyber hack yourself. That’s because buying into one of these funds, you won’t really own any. No need for cold storage wallets, private keys, seed phrase storage, or any of that palaver.
Tax advantaged
This is a weird one. We’ve always had trouble with the concept of picking investments specifically for the tax advantages, but it can be a nice by-product. If you’re a US Citizen, hedge funds can qualify to be held in IRA and Roth IRA accounts.
Crypto hedge fund list
With over 150 crypto hedge funds in the market, it’s difficult to nail down exactly which one might be right for you. This is precisely why there’s a whole industry of brokers available to refer you to their crypto hedge fund of choice (for a commission or trailing fee of course!). To help out, here’s a list of crypto hedge funds but by no means is it exhaustive. Some of the better known and large fund managers not on the list include:
It seems like everyone in crypto has a war story they like to tell about the time they lost a bunch of coins because of some rookie investment move. But I think the one about UK IT Engineer James Howells who dumped 7500 Bitcoin on a hard drive back in 2013 takes the cake. He lost a measly $361 million at today’s Bitcoin price. The moral of the story for the crypto uninitiated? Losing your coins is just one of the many crypto investing risks for new investors. So before you invest your hard earned into the space, we’re here to help you get informed on what it takes to invest successfully in crypto and get to financial freedom.
Hopefully you come out the other side of this article with the know how to bag a fat stack of coins and to keep them.
What do we mean by cryptocurrency investing?
As a new crypto investor, it’s likely you’ll start off with more straight forward types of crypto assets so we’ll focus on those. By crypto investing, we mean investing in cryptocurrency projects that have associated coins and tokens.
We also mean investing in Decentralised Finance products and services to earn interest on your cryptocurrency assets.
We are not talking about complex crypto day trading, margin trading, futures trading or options trading.
Is crypto risky?
Yes it is. It’s new technology and the market is largely unregulated. Crypto assets are also non-custodial. These features can heighten crypto investing risks for new investors if you don’t understand the investing landscape.
However, we would argue it’s also risky NOT to invest in crypto!
Cryptocurrency, in its decentralised and non custodial design, aims to be an alternative to the awful global monetary and financial policy we’ve suffered since the GFC. Crypto is also about more than the coins themselves. It’s about disruptive technology that is here to stay and that we think will shake out some large industries, with finance being just one.
The point we’re making in this post is that you can still invest and manage risk. That’s why we’re sharing everything we’ve learned and do to identify and manage our crypto investment risk exposure.
Know before you invest in crypto that you are in control and that’s the way the ecosystem is designed! No-one is responsible for actively managing your assets and your investing risks but you.
Is the risk worth it? It has been for us because it’s still early stages and we argue the technology development curve is yet to hit exponential growth. But you make up your own mind, hopefully after considering the risks and how to manage them.
Why do you need to know how to manage crypto investing risks?
Because cryptocurrency is non-custodial and decentralised. There are no middle men to transact for your or look after your assets. You need to do this yourself and if you don’t understand how to manage the risk of being custodian of your own money, then it’s likely you’ll fail at that important task.
Besides, there is little to no regulation to fall back on if something happens to your coins. There are no government bank guarantees and very few consumer protections in crypto. And that’s the way the industry likes it. It’s an asset class designed around non-intervention of governments and middle men. All of this means you have to know how to take care of your assets yourself. The way it should be!
If you are a first time cryptocurrency investor, you’re probably new to crypto market idiosyncrasies. Have a read of this post aboutwhat makes cryptocurrency prices rise and fall. If the concepts are new to you then it’s super important that you learn how to manage risks because your risk profile is high as a newbie investor.
Risk comes from not knowing what you’re doing.
Warren Buffet
You also need to know how to manage crypto investing risks because as an asset class crypto is potentially one of the greatest asymmetric investment opportunities out there right now. Asymmetric investments are when you risk a small amount of capital for the opportunity to earn much larger returns. This is entirely possible in crypto – we’ve seen it ourselves.
13 crypto investing risks for new investors and how to manage them
Here are our top 13 crypto investing risks for new investors and how to manage them:
Price volatility – price swings in the double digits daily
Illiquidity – you buy in to an asset but can’t sell it when you need to because trading is too thin
User complexity – technical complexity of blockchain transactions for new users
Crypto exchange crashes – platforms go down with your crypto on them
Project collapse – and the associated coin and token goes with it
Hard Forks – a project splits and so does the value of the coin or token
Smart contract failure or hack – hacks are rife and often unrecoverable (or at least uninsured)
Regulatory risk – risk of non-regulation and new regulation
Human error – goes with the technical complexity of crypto
Market manipulation – whales throwing their weight around causing prices to pump or dump
Theft or hack – physical or cyber, how do you protect yourself?
Scams – mostly online and completely insidious, millions have been lost this year alone
Rug pulls – DeFi fly by night operators absconding with your treasured coins
Now read on to learn about each risk and how you can protect your crypto assets….
1. Price volatility
The price volatility of crypto is enough to put hairs on your chest. But what is price volatility anyway?Investopedia sums it up as the range of price change a security experiences over a given period of time. Now check out this epic chart from the guys at Trading View showing Bitcoin volatility over two historic market periods – 2017 and 2021. Price corrections of between 20% and 50% are run of the mill for BTC.
It’s worth understanding in context that Bitcoin is less volatile than other small cap coins. So you get the picture – volatility is real in crypto with coins capable of moving hundreds of percent in a day. If you can’t take the heat stay outta the kitchen.
But what are the actual risks of price volatility for an investor? Good question right! The price may move up or down dramatically, but this can be as beneficial to investors as it is risky. It all depends on your entry and exit as well as your investment horizon. If you buy the dip, then price volatility can be totally fly. But if you buy the top it can crush you.
Here’s how to manage your risk
Learn how to read a price chart and charting indicators. Understand from the chart what part of the market cycle you are investing in. If you have a clear view of this, short term volatility is less draining emotionally. For example, if you’re riding a mark down phase (which would be dumb, but it happens) you’re going to be more worried about price volatility (compounding losses) than you would if you’re in a mark-up phase.
Traditional market cycle – knowing what phase you’re in can help you manage short term price volatility.
Set an investment plan before you invest. What is your aim and your timeframe? What is your break point?
Use trading tools like stop losses to avoid price crashes if you’re not investing for the long term.
If you’re an anxious investor, set your stop losses and don’t check your coins every other day! In crypto there’s ‘weak hands’ – investors that don’t have the conviction of their investment plan and sell out with price weakness, which is inevitably selling at the wrong time. There’s also ‘diamond hands’ – investors who are undeterred by large swings in price.
Which one are you?
2. Illiquidity
Crypto has a low barrier to entry which means that new projects, with their own coins and tokens, are popping up all the time. Some crypto assets, particularly the new projects with micro or small market capitalisation, are traded very thinly. If you’re looking to invest in these projects there’s not a lot of volume. This all means it can be hard to find a buyer or someone to trade with if you want to sell or swap your investment. Particularly if you’re selling at a volatile time.
Here’s how to manage your risk
When you buy a crypto asset, ask yourself “Will i be able to sell when the time comes”? “What is my exit strategy?”
Buy assets that are well traded on exchanges with large volume. This may prevent you from buying some micro caps that are only available on smaller centralised or decentralised exchanges. But that’s the risk mitigation bit in force. If you do buy thinly traded crypto you should understand how to time your exit and sell in small amounts, such as by using bots, to offload your investment. This is also good practice if you have a bag full of the asset and you don’t want to tank the price as you sell down your holdings.
3. User complexity
Crypto is still an early adopter asset. The technology is nascent. This means it’s not necessarily user-friendly to transact with. I remember the first time I sent some crypto through cyberspace I was freaked out. I only sent $100 worth because I wasn’t sure I’d done it right and didn’t trust the technology. But the crypto arrived and the rest was history.
Seriously though, if you ask any crypto investor the first time they put money into a new product, service or protocol there is always that nervousness about how to make it work. Seeing your money disappear into cyberspace when you’re not completely sure it’s going to reappear where you want it to can be heart stopping.
The thing to understand is that crypto transacting is different to bank transacting. It uses different processes and technology and you have to get used to that. Banks have had years to perfect the simplicity of their services (and many still haven’t got it right). Crypto on the other hand has been around for a couple of decades and until 2020 has been the bastion of super brainy IT nerds and tech savvy gamers. There’s been no driver until now to make it user friendly and that means in most cases it’s still involves a learning curve.
Here’s how to manage your risk
The best way to overcome user complexity is by learning the technical and market basics.
Read up on the information we have posted about how to make money with cryptocurrency hereandhere. Follow these tips on managing risk as you learn the ecosystem:
Crypto investing – Use the financial service providers you do know – like Paypal – to start investing in larger cap crypto assets like Bitcoin. Paypal provides an ‘on-ramp’ to crypto that many people will recognise and be able to use easily on first attempt. If you do use these conventional on ramps to start your investing just know that you will be paying a premium on the exchange rate from fiat currency into crypto. Think of it as the price of convenience but once you learn how to navigate the ecosystem there cheaper ways to transact.
Making money with DeFi – start with Stablecoin interest earning products. These are simple to understand as they’re just like bank interest. The least complex way to do this to sign up for a Celsius account and download the app on your mobile phone. If you’re worried about where to buy Stablecoins like USDC and USDT, Celsius will let you buy them directly via credit card. They will charge 3.5% fee on the transaction, which is high in crypto terms. But they do offer 8.8% interest on your USDC and USDT once you have it.
Earning interest on Stablecoins means you’re not subject to the same price volatility as other crypto because these coins are pegged to the dollar. It’s just an easy to manage way to dip your toe in the water of crypto investing, but it’s not where the real money is made.
4. Crypto exchange crashes
Exchange crashes are rare but we’ve seen them happen at the most inopportune times. One very large crypto exchange went down right in the middle of a gigantic market dump in 2020 and all anyone could do was sit back and watch. Technical issues took them a couple of hours to fix but by the time the platform was up again the market meltdown had eased. It meant at the time that we were able to buy the dip on that exchange. Luckily we had other exchange accounts with some crypto in them that we could use to transact.
Here’s how to manage your risk
Keep your crypto hodl bag (the crypto you plan on holding for the long term) in a hardware wallet. If your assets are secure in your hardware wallet it means you have full control of them at all times. You can load them onto different exchanges at any time as you need to sell or swap.
Also, set up accounts on at least three different exchanges. Pick ones that are not all based in the same country (helps to manage regulatory risk). That way you have back up accounts to transact from when one exchange goes down.
We recommend that you set up separate accounts with Binance (largest volume, loads of coins), CoinsSpot (starter exchange for Australians), and Kucoin (micro and small cap coins).
5. Project collapse
When you invest on cryptocurrency you are investing in technology projects, run by teams of talented developers, cryptographers, programmers, and so on. Just like any project, crypto projects can collapse if teams implode or important personnel leave the project. Or maybe the project was based on a dumb idea, poor tokenomics or flawed code. This article from the Fool indicates more than 2000 cryptocurrencies have failed. If a project collapses, that’s usually the end of the associated coin or token.
Here’s how you manage your risk
This is a tough one to manage. You can of course keep your investments to well known projects with substantial funding and strong tokenomics. If you do want to invest in some true speculators then your risk management options are all about early exit. Keep your ear to the ground on Twitter. Follow the project and the crypto news. You’re aiming to get any adverse news about the project before it hits mainstream and tanks the price.
6. Hard forks
Many decentralised crypto projects use consensus models to govern project development. Coin or token holders can vote on key project decisions and consensus is sought. Hard forks can occur when there is no consensus on an important project decision.and the project literally forks in two different directions. Depending on their nature, hard forks can erode the value and adoption of a project’s coin or token, causing the coin’s price to decline.
Here’s how to manage your risk
Stay up to date with project developments on the project website. Understand any upcoming forks and their timing (they can take some time to play out) and make a conscious decision about whether you will divest, and when.
7. Smart contract failure or hack
Smart contracts are automated ways to handle value exchange between two parties, without involving a middleman, such as a bank. Because they are bits of code that execute in a decentralised way, they can be buggy and suffer from vulnerabilities like any other code.
According tothis articlefrom popular crypto exchange Coinbase, smart contract are susceptible to operational risk, implementation risk and even design risk.Poorly constructed smart contracts are also susceptible to theft by hacking.
One feature of the crypto ecosystem is that project teams offer bug bounties or rewards for tech savvy internet nomads to identify bugs within smart contracts so they can be fixed. Smart contracts can also be audited independently to try to identify vulnerabilities.
The real problem occurs when vulnerabilities are not identified and smart contracts with millions of dollars invested fail or are hacked.
Here’s how to manage your risk
Smart contract risk is an all or nothing deal, so the first rule is don’t put in what you can’t afford to lose. Be as safe as possible with your investment and due your own due diligence. Only put your money into smart contracts that have been audited and where the audit results have been made public. You can also get on reddit.com and see what other developers and programmers are saying about a particular protocol or smart contract. Some projects offer insurance on their smart contracts as a way to attract new investors, although insurance products like these are new to crypto and have not been put to the test.
8. Regulatory risk
Let’s face it, regulatory risk exists with every money making venture. You never quite know which direction government policy makers will pivot to next. But in crypto regulators are a quantum leap behind the 8 ball. In the US for example, government still hasn’t ruled on some of the most fundamental matters, such as whether crypto is a security or some other type of asset. This means the regulatory risk exposure is akin to highly speculative financial products. And it’s not just in the US. Around the globe there are crypto friendly governments, and some not so friendly. So how does all this present risk for your investments?
Firstly, rumours of regulatory action can cause FUD in crypto markets – Fear, Uncertainty and Doubt. FUD is market sentiment that can move the price action of a particular asset, mostly in a downward direction.
Real regulatory action can also move the market. Sometimes regulation moves the market up (if it’s crypto friendly) because having regulation in place provides certainty for investors. Sometimes regulation can cause a sell-off and move prices down if it’s perceived as punitive or as hampering development of the space
Here’s how to manage your risk
Keep up to date on crypto regulatory news from the US (as primary market) and from your home country in particular. If there is major regulatory change afoot you will hear about it on Twitter. Follow some crypto projects and personalities like Cameron Winklevoss, Michael Saylor or Mike Novogratz. Once you know about a potential regulatory change you can make your own mind up. Will it support crypto or will it hamper growth? This knowledge will help determine what you do with your investment.
9. Human error
This one goes hand in hand with the non-custodial nature of cryptocurrency. If you lose the private key you need to transact your crypto assets, you will need to have your recovery seed phrase at hand. If you have a particularly human moment and lose your seed recovery phrase, you’re done. That’s it. Drop the mic – your crypto is gone.
Here’s how to manage your risk
This one’s simple – do not lose your seed phrase!. Here’s how to go about it…
Get a metal crypto wallet for the recovery phrase that backs up your hardware wallet.
If you don’t have a hardware wallet or metal seed storage wallet then you’re exposing yourself to cyber hack. We recommend this site – cryptowalletreviewer.com to find the best hardware and metal crypto wallet. We personally have the Ledger Nano X and the Billfodl metal wallet to keep our crypto safe.
Treat both your hardware wallet and your metal seed phrase wallet as though they are little bars of pure gold. Store them securely in different locations (never together).
10. Market manipulation
Ever heard of crypto whales? Whales are large holders of particular assets, for example Bitcoin whales or Chainlink whales. Whales can and routinely do use their large holdings to manipulate price action in crypto markets. So how do they go about it?
Whales can place very large sell orders at a price below other sell positions in the market creating volatility following which prices can fall. The falling price can then cause a chain reaction as stop losses set by other traders are triggered.
That’s just one example of how whales might use their coin bags to manipulate price in the crypto market.
Here’s how to manage your risk
Cryptocurrency blockchains are publicly viewable which means if you know how to read the data you can work out whether ownership of the coin is concentrated in the hands of the few. Coins with concentrated ownership are ripe for the picking by manipulative whales.If you don’t want to go through the laborious task of doing this analysis yourself or are not technically inclined, you can use Glassnode or CryptoQuant – blockchain analytics services.
Or you can do absolutely nothing – accept this risk as a part of crypto price volatility and move on. That’s what we do, along with not putting too much of our money into a single crypto asset.
Diversification in crypto is a foundational risk management approach – use it! Diversify across assets, across DeFi protocols, across exchanges, and platforms. Divvy up your investments into smaller bags that you could afford to lose if something goes wrong.
11. Theft or hack
There are two types of theft you need to manage risk for in crypto
Cyber theft or hack – just as it sounds, this is the theft of your crypto on the internet. It can happen to your directly – where coins are stolen from your online wallet – or through a third party like a crypto exchange or DeFi protocol. Exchanges and protocols are hacked regularly, with the latest being a $600 million white hat hack of PolyNetwork.
Physical theft – you might be wondering how physical theft can occur in crypto if your coins are non-physical objects. Ever heard of the “$5 wrench attack”? It’s basically where someone steals your hardware wallet and with it the private keys to your cryptocurrency.
Here’s how to manage your risk
Good cyber hygiene –
keep your apps and operating systems up to date always.
Use a password service like LastPass to manage your passwords.
Make sure you have unique passwords on your home WiFi and modum.
Use 2 factor authentication on websites and apps associated with crypto.
Use hardware wallets and metal crypto wallets – you don’t have full control over your coins if they are on an exchange. The best way to avoid theft via an exchange or protocol is to transfer your coins to a hardware wallet. If anything happens to your hardware wallet you can recover your coins with the wallet’s recovery seed phrase. This is why you also need a metal crypto wallet as well as a hardware wallet. A metal crypto wallet is an indestructible and secure place to store the recovery phrase for your hardware wallet in case you need to restore your crypto nest egg.
Proper physical custodianship of your hardware wallet and metal crypto wallet – keep them secure and apart. If one is stolen with the other your coins are gone and unrecoverable.
12. Scams
Scams in crypto are rife and understandably this is very off-putting to new investors. According to the US Federal Trade Commission, the most common crypto scams are:
Giveaway scams – members of particular online crypto communities get free coins if by send their coins to a posted wallet address
Bogus websites – with scam investment opportunities offering block buster returns using fake testimonials
Impersonators – Elon Musk impersonators have duped unsuspecting coin holders out of $2 million collectively
Online dating apps – used to lure people into cryptocurrency investments (yeah I know I can’t believe it either…)
Here’s how to manage your risk
Scams are a problem that you can overcome by knowing what you’re investing in and by doing your own due diligence. If you come into crypto understanding that it’s designed to be decentralised and non-custodial, you’ll appreciate that you alone are responsible for the security of your assets. If you get this, you’ll do your own due diligence and only invest in crypto with demonstrated real world use cases. You’ll accept that investing in anything else is either highly speculative or you’re at risk of being scammed.
Here are some tips to avoid getting scammed if you’re new to crypto investing:
NEVER send your crypto to wallet addresses sent to you in unsolicited emails, social media, group chat apps like Telegram and WhatsApp.
If you come across an ‘investment opportunity’ that seems too good to be true then it just is.
Don’t respond to unsolicited offers. If someone reaches out to you to join a crypto community or promote a killer crypto investment opportunity over social media, via email, in Youtube comments or in any message group forums it is likely a scam.
Make sure you have the genuine website or app. Fake websites, apps, groups or project profiles are a big issue in crypto. Type the web address in every time and don’t use autofill. Link to the project app directly from the developers website and don’t search it on Google Play or The App Store.
13. Rug pulls
A ‘rug pull’ is a phenomenon specific to decentralised finance (DeFi). A DeFi rug pull is when a team of developers disappear with all of the liquidity added byusers to a particular DeFi Protocol liquidity pool. If you want to know more about DeFi lending and liquidity pools (and how to make money from them) check out our How to Invest in DeFi post.
Rug pulls and other types of DeFi exit scams are on the rise as more capital flows into the DeFi space with a reported $240M lost in just the first 5 months of 2021.
How to manage your risk
Avoid new DeFi projects – early projects is where the serious money is made, but it’s also where authenticity and legitimacy are questionable. At a minimum avoid low initial liquidity projects. Just like in the fiat world, scammers find it tough to raise large bags of initial capital for new projects.
Make sure there is a project whitepaper and read it. Compare it to other legitimate white papers.
Watch out for social media campaigns on tokens with claims of benefits that are too good to be true. Fake hype on Telegram and Twitter is a telltale sign.
Research the project – is the developer team transparent and known in the crypto community? If not, do you really want to trust them with your assets?
Get on to Reddit and research the token and the project and any red flags raised by other developers.
Check that there is an audit of the protocol by an independent know auditor. Audits are expensive and having one helps legitimise the project.
If you are more technically savvy, check the smart contract history on Etherscan or Polygonscan.
Watch the token price. If the price starts to tank, get your coins out immediately. Offload the scam token and get your valuable tokens back in to your hardware wallet!
When my first transaction completed on the blockchain in early 2020 I had no idea whether I’d make money with cryptocurrency.
I just new that the world had changed overnight, and I wanted a hedge. So I bought some Bitcoin at $7800 and some Ethereum at $222.
I’d wager a bet that there are many crypto curious investors out there today that want to make this same leap but haven’t. You might be one of them.
You’re worried about the volatility of crypto assets. Perhaps you’re concerned that the market has topped. Maybe you’re torn so you’re sitting on the sidelines waiting for some kind of sign that it’s safe to invest…
In this post we’ll try to help answer the one question that you and other new investors want to know before jumping in:
Can you really make money with cryptocurrency?
Spoiler alert! The answer is Yes but it’s not guaranteed of course….. Now let’s find out why.
7 legit reasons you can make money with cryptocurrency
The macro investing environment is increasingly accepting crypto as a new investment class. Are you picking up the signs? Check these 7 legit reasons you can make money investing in crypto:
You’re investing in disruptive technology not cryptocurrency
Institutional, corporate and venture capital investors are getting in now
The technology is still early on in its adoption
Monetary and fiscal policy may not help you any time soon
Surveys show record numbers of retail investors plan on jumping in
Profits have been strong for many early investors
The barriers to investing can be overcome with good risk management
1. You’re investing in disruptive tech not cryptocurrency
Cryptographic currency really started as a way of incentivising and enabling the operation of online ledgers so that two parties could exchange value without middlemen like banks. It’s technology that automates the decentralised exchange of value. Because of this, crypto is more about the tech than it is about the coins and the tokens. It’s important to understand this if you’re searching for greater assurance about investing in crypto.
The ability to automate and decentralise the process of exchanging value will disrupt and transform multiple industries and create new ones.
Ark Invest, one of the world’s top innovation investment funds managers, sees cryptocurrencies as enabling a new paradigm for monetary systems and mechanisms to store and transfer value. Think banking, finance, money markets, logistics, gaming, health, food, and the list goes on. There are real use cases for blockchain technology in most of these industries today.
The upshot? Blockchain tech and crypto are not going anywhere.
2. Institutional, corporate and venture capital investors are getting in now
One of the reasons we raised back then was the money flowing into cryptocurrency from corporations, venture capitalists and more speculative institutional investors. As an indicator of this, investments in Grayscale’s Bitcoin fund jumped 18X from $500 million to $6 billion in 2020. Mainstream institutional investors are not even invested yet due to a lack of regulatory clarityaccording to this Forbes article.
Since when have you had the chance to get in on the ground floor and front run mainstream institutional investors?
Add to that recent reports from Bloomberg that venture capital funds have made a $17 billion bet on cryptocurrency and blockchain.
Our point is, if you follow the money flows at some point you’ll end up in crypto.
3. The tech is still early on in its adoption
How many people do you think own cryptocurrency today?
It’s a simple question, but one that’s difficult to answer because the holdings and data is decentralised by design. You’ll find different answers to the question of how many people own crypto depending on where you look.
One NYDIG survey of cryptocurrency investors estimates that 46 million Americans now own Bitcoin. And that’s just one cryptocurrency (albeit the most ubiquitous one).
For Australia, that number is roughly one in six adults or 17%.
And the thing about crypto is that it’s borderless. It’s literally global, which makes for a huge potential market for use and adoption.
What this all means is, we’re still early! If you’re familiar with innovation adoption S-curves, here’s a graph that demonstrates how early we are when compared to other disruptive tech adoption throughout recent history:
If surveys indicate adoption rates at below 20% for retail investors, this means we’re still right at the beginning of the S-curve. That doesn’t mean all blockchain projects will make you money. But if you get it right the risk to reward ratio can be asymmetrical for early investors (small risk, large reward).
4. Monetary and fiscal policy may not help you any time soon
Governments have been printing money and kicking the fiscal and monetary policy can down the road since the GFC in 2008. It’s gotten worse since 2020. The purchasing power of retail investors is being systemically eroded on a global scale across major economies. Some estimate to the tune of 15% a year. People are literally watching their hard earned wealth erode in front of their eyes.
But did you know that Bitcoin was borne from the GFC to remedy this very scenario?
We think that cash is trash and we chose to need to have our wealth in other value vehicles. As monetary policy continues to play out, our view is that more people may see crypto as a hedge against monetary policy – just as we did in 2020.
5. Survey’s show record numbers of retail investors plan on jumping in
It’s no coincidence with the flow on effects of rubbish fiscal policy that a number of surveys now show retail investors continuing to buy in to crypto in record numbers in the coming 12 months.
This Gemini survey of 3000 people estimates another 50 million Americans plan buy cryptocurrency in 2021. The Australian reports that 13% of Australians are planning on investing in the next year.
So why are they planning on investing?
The Gemini Study found that 69% of crypto investors today see it as a long term investment strategy and 36% of investors trade crypto to make a profit.
For early investors, continued retail interest in crypto assets means rising demand for coins and strong network effects for key blockchain networks.
6. Profits have been strong for many early investors
How does that old caveat go? Historic returns are not an indication of future performance. But we always look at it anyway because none of us have a crystal ball right? So let’s look at the performance stats for some core cryptocurrencies.
According to blockchain analytics firm intotheblock, in late 2020 at the peak of the market, 97% percent of all Bitcoin wallets and 88% of all Ethereum wallets were in profit. Here’s the data:
Large price corrections in crypto in May 2021 will have dampened these numbers. And keep in mind, what goes up can always come down. Markets are cyclical and prices move accordingly. The overwhelming long term trend of large market cap crypto like BTC and ETH has continued on an upward trajectory since their inception around 13 years ago.
7. The barriers to cryptocurrency investing can be overcome with risk management
Here are 5 common barriers to cryptocurrency investing raised in surveys and in the mainstream media, as well as ideas for how to overcome them:
Volatility – It’s true that crypto is a volatile asset. Prices for large cap coins can move 20% in a single day. It seems that this volatility is the single biggest deterrent from new investors getting into the crypto asset class. Volatility can be managed like volatility in other stocks. How? These are the methods we’ve researched on the internet 1) Dollar cost average in to your investment. 2) Don’t bet the ranch all on crypto – only invest what you can afford to lose. 3) Don’t short term trade unless you know what you’re doing – the graph below indicates returns as high as 300% annualised for those that have held their Bitcoin for 5 years.
It’s complex – crypto is still early stages so it’s not user friendly to transact with. When you’re sending your wealth around in cyberspace it can be downright scary for some people. But there are ways to overcome this by learning the technical basics. Start with the information we have posted about how to make money with cryptocurrency here and here. Start with more ubiquitous assets like Bitcoin which is easy to buy through Paypal, and start with interest earning Stablecoin products.
Fear of buying the top – cryptocurrency prices have retraced from their historic highs of May 2021. Some investors are fearful that May was the top for crypto. Investors that bought crypto between early February and early May 2021 and in late 2021 are likely underwater. But the counterfactual is that if you bought at the top of the last crypto bull run in 2018, you’d be ahead today by almost 30%. Check out the graph of Bitcoin annualised returns over 5 years below from New York Digital Investors Group.
Its a bubble – you’ll hear commentators in the news: cryptocurrency is a huge bubble just like the dot com era. Crypto is hugely overvalued and all bubbles burst. Ask yourself though, overvalued compared to what? If it’s fiat currency we are comparing with then everything’s a bubble – the stockmarket, commodites, real estate. Start comparing assets ratios with reserve bank holdings and you’ll get a different picture. This kind of commentary is a great headline grabber and is bound to create fear in many crypto curious. We think it’s worthwhile doing two things before falling for this old chestnut – 1) take a look at the vested interests of the commentators and whether they heavily tied to existing financial systems and assets; and 2) take a look at what respected investors do not what they say. Then make up your own mind.
It’s full of scams – there are loads of scams in crypto and understandably this is very off-putting to new investors. But it’s a problem that you can overcome with mindset and by doing your own due diligence. If you come into crypto understanding that its designed to be decentralised and non-custodial, you’ll get that you alone are responsible for the security of your assets. If you get this, you’ll do your own due diligence and only invest in crypto with demonstrated real world use cases. You’ll accept that investing in anything else is purely speculative and could even be a downright scam.
Annualised 5 year returns of Bitcoin versus a group of other common asset classes
The final word – is it time to rationalise your fears?
We’re not here to convince you to buy cryptocurrency. We’re here to share different information than you might hear or read in the mainstream media, so you can make up your own mind. We’ve made the case that you can make money with cryptocurrency and offered up 6 reasons why. We’ve shown how you can overcome 5 common barriers to investing in crypto. Our plan is to make money with cryptocurrency by focusing on real world use cases and investing for the longer term.
None of this is financial advice peeps – in fact if you asked a financial advisor they’d probably tell you to stay the hell away from cryptocurrency! 🙂 But here at the LLP we’re huge fans of taking control of our own finances and making our own decisions. No-one cares as much about your wealth as you do after all!
If you want to know more about crypto markets, here’s a super useful post about understanding crypto market structure. Please read it before jumping in if you decide to do so!
If you do purchase crypto assets you’ll need to safely secure them. We recommend using this site to get your hands on the best cryptocurrency hardware and seed phrase storage wallets. You’ll need these to protect your assets from theft and cyber attack. They’ve even got some useful FAQs to explain what all that means!
If you’re an intrepid investor but missed the crypto train in early 2021, you may just be taking a second look at the market.
Crypto assets have experienced an epic dip since May. Most assets have retraced 50% to 80% of their YTD peaks. A opportunity maybe to ‘buy the dip’?
If you are thinking of investing in crypto this post will help you learn the crypto market fundamentals before you take that leap. If you don’t know the market basics, you may be taking more investment risk than you’re aware of. You’re also investing uninformed, which in our humble experience never ends well. So read on wannabe crypto investors, and make sure you get to the end to find out the next steps you should take to invest successfully in crypto.
‘Coins’ versus ‘tokens’
Before we get into the crypto asset ecosystem, let’s talk about the difference between coins and tokens. This can confuse people when they’re first starting out. In short, coins are assets on their native blockchain. For example Bitcoin on the Bitcoin blockchain and Ether on the Ethereum blockchain. Tokens are assets foreign to the blockchain they live on. Examples are Tether which is a second-layer token on multiple blockchains.
In this article we’ll refer to all crypto assets as coins, but in some cases the use might be interchangeable with tokens.
Investing in cryptocurrency – market fundamentals
Fiat currency (USD etc) flows into cryptocurrency according to the market capitalization of different crypto assets. This is because investors typically enter a new asset class looking for the lowest risk assets in the class. Investors will generally also equate highest market cap with lowest risk asset.
Then, when the investor becomes more knowledgeable or informed about and comfortable with the investment space, they branch out. By understand how the crypto market structure impacts the flow of money into and out of crypto, you can make more informed investment decisions when you’re first starting out.
#1 Crypto price trends start with Bitcoin
Bitcoin is the highest market cap and lowest risk crypto asset (barring stablecoins). This is because it is the most well-known and has the greatest ‘trust’ or ‘authority’ score. Bitcoin dominates the total cryptocurrency market capitalisation by a long way and it leads price trends in the market. Because Bitcoin is the headline crypto asset – some say the reserve currency of the crypto asset ecosystem – money generally flows into crypto assets from the fiat money system starting with Bitcoin.
Money flowing into and out of Bitcoin can have a massive impact on price movements in other coins.
#2 Money flows from Bitcoin into large cap Altcoins
Next, as Bitcoin investors become more informed about other crypto assets, they tend to diversify. The money starts to flow from Bitcoin into large cap Altcoins (alternative coins to Bitcoin are called ‘Altcoins’). Large cap Altcoins are the top altcoins by market cap, led by Ethereum (ETH). As the money flows into these coins from Bitcoin, the price of this bag of coins can often move AFTER a Bitcoin move, with a lagging effect.
Bitcoin plus top 10 large cap Altcoins . On a macro level, fiat flows down the list by market cap.
Large cap altcoins are more volatile than Bitcoin and can even include some ‘shitcoins’ among them – meme coins like DOGE coin with little real utility or project value. This is a characteristic of crypto and something to be aware of as an investor. Crypto is not like other investment markets. Market cap is not necessarily an indicator of strength, or value, or lower risk. It can equally be an indicator of sentiment and the kind of ‘social trading’ popular in crypto culture.
#3 The wild, wild west of small cap Altcoins
Finally, there are the small cap Altcoins. Money can often flow from large cap to small cap altcoins. These are the riskiest and most volatile crypto assets by far. They also bring the promise of the greatest investment gains. No risk, no reward hey peeps!
#4 Money also flows by crypto asset class
The other way that money can flow in crypto is in and out of different asset classes. The asset classes are generally grouped by crypto use cases. For example, the Stablecoins such as USDC and USDT that provide a peg to the USD as a safehaven from crypto market volatility. Non-fungible tokens (NFTs), Decentralised Finance (DeFI) and Oracles are well known asset classes. You can think of these classes as similar to the different industries you see in the stock market. Typically money flows in and out of assets by class in either a cyclical or ad hoc manner, meaning ‘like coins’ in the same class can move together. It’s common to have leading coins in each class (by market cap) and instances where pairs of coins with similar use cases move together.
Investing in cryptocurrency – how to track the money flows
If you’re investing in cryptocurrency you need to know about some critical ‘tickers’ or trading indexes, to help track the flow of money by market cap and use case. Keep an eye on these indexes and understand what each represents. They can help you understand what part of the investment cycle crypto assets are in, and therefore the near, medium and longer-term prospects for particular investments.
TOTAL
TOTAL is the ticker that measures total market capitalisation and the very first index to take a look at if you’re considering investing in crypto. This ticker will show you whether the total investment in cryptocurrencies is in an upward trend. If ‘the trend is your friend’ in investing, then this chart matters. It will help you understand both bullish and bearish macro views of crypto, based on what you see on the chart.
Here it looks to be forming a possible falling wedge on the daily chart, and could also be on the verge of setting a higher low after the February 2021 low. Or it could be in a major downtrend lasting for some time. I don’t have a crystal ball y’all – it’s more about making informed decisions.
Bitcoin Dominance (BTC.D)
Probably the most important index to understand and follow is Bitcoin Dominance (ticker BTC.D). BTC.D measures Bitcoin’s share of the total market cap of the cryptocurrency market. It’s a good idea to understand the relationships in movements between Bitcoin Dominance, the Bitcoin price and Altcoin prices. For example, when people are buying Bitcoin but the total crypto market cap is not growing, then Bitcoin’s share of that total market cap increases and the BTC.D chart goes up. This is bad for Altcoins in general because it signals that Bitcoin is outperforming them.
BTC.D moves the market
When people are buying Bitcoin (the trading pair BTC/USD is rising) but BTC.D is trending downward, this is generally because the total crypto market cap (TOTAL) is also rising. A rising tide floats all boats. This trend is good for ALT/USD trading pairs but less good for ALT/BTC trading pairs because Bitcoin is rising.
The movements of BTC.D fundamentally define movements and trends across the crypto market for different coins on all timescales. I personally wouldn’t invest in any cryptocurrency without first checking this chart.
TOTAL2
The next is TOTAL2. TOTAL2 measures the total market cap of all coins except Bitcoin. It’s a measure of the money flow into and out of Altcoins. TOTAL2 trending higher when BTC.D is trending lower is an indicator of what’s commonly referred to as ‘Altcoin season’. This is a time in the market cycle where you can expect Altcoins to outperform Bitcoin.
DEFIPERP
This is an index made up of a bag of the largest Decentralised Finance crypto assets. It uses a weighted average of the prices of DeFi crypto assets including KNC, MKR, ZRX, REN, REP, SNX, COMP, TOMO, RUNE, CRV, DOT, LINK, MTA, SOL, CREAM, BAND, SRM, SUSHI, SWRV, AVAX, YFI, UNI, WNXM, AAVE, BAL. It tracks the movement of money into DeFi as a proportion of the total market capitalisation.
TOTAL, BTC.D, TOTAL2 & DEFIPERP – understand and use all of them to make informed investment decisions
The final word – crypto is an ecosystem so take it one step at a time
There is a lot to learn about the crypto asset ecosystem. We’ll do our best here to spread the love with information we wish we had before we started investing. These basics will give you a shot at:
working out, based on how much risk you want to take, whether large or small caps are your cup of tea
what coin categories you might be interested in investing in
when is a good time to buy crypto based on how the money flows.
If you want to take the next step and start making money with crypto, then get yourself along to this entirely online Rich Dad Summit.
You’ll get 2 days worth of great investment content including successful entrepreneur and investor Robert Kiyosaki covering topics how to invest in Bitcoin and how to easily get around some of the beginner challenges with buying and owning crypto.
The cryptocurrency market is the wild west of investing so if your risk appetite is not up to investing in cryptocurrency then head over and take a look at some of our other traditional financial freedom investing ideas.
Until next post – have fun, be happy and do good!
Oh, and if you get value from our content please share the love!
Just in case you’ve been orbiting earth from the International Space Station and hadn’t heard, Bitcoin recently rocketed to $60,000 per coin in just a few short months.
Bitcoin is one of thousands of cryptocurrencies that appear to have sprouted from nowhere and are now being bought, sold, held or traded around the globe. Cryptocurrency at its simplest is just a form a digital currency that is secured by cryptography. If you’ve seen the news about crypto but don’t really understand what it means for you and your financial independence journey, read on. In this post we’ll give you a simple introduction to investing in Bitcoin, as the king of cryptocurrencies. Believe me financial freedom seekers, if you don’t know about this stuff it’s time to get educated.
The Bitcoin difference
Bitcoin – the king of crypto
Bitcoin started as an electronic cash system in 2008. It was in the midst of the GFC when Satoshi Nakamura (pseudonym for person(s) unknown) went live on the internet with an alternative to fiat currency (think US dollar) designed to solve some of the major problems of the global money system.
In short, Nakamura opposed the de-pegging of the US Dollar from gold enabling unbridled money printing by central banks and nation states to do things like ‘save the world from the Global Financial Crisis’. Sound familiar? Fast forward to 2020 and it should….
The idea was to create cash for the internet that did not require central authorities (banks or governments) to supply or control it. To do this, Nakamura dreamt up some key design differences between bitcoin and fiat currency – the Bitcoin difference.
How does Bitcoin work?
Bitcoin is created and exchanged on the internet via technology called blockchain, which acts as a secure digital accounting ledger. But…instead of having banks control the ledger, this is performed by a network of independent and decentralised ‘miners’ who contribute their supercomputing resources into the network. Transactions on the network are secured via cryptography. Miners gather up these transactions into ‘blocks’ and solve math problems to verify each block and add it to the chain of past blocks (blockchain). Miners are rewarded in Bitcoin for this role. This validation process replaces the role of trust (in banks and governments) that underpins the fiat money system.
Now this all sounds a bit like a parallel universe of virtual BS, but at its core it’s just a technology and a system to execute ‘trustless’ money transactions that don’t require a central ‘authority’ to verify them.
What drives the Bitcoin price?
Another key characteristic of Bitcoin is that its supply is limited in the blockchain code. Unlike the limitless printing of fiat that is devaluing the dollars in our pockets, only 21 million Bitcoin will ever be issued. The rate of issuing halves every 4 years (called ‘Bitcoin halvening’). The last halvening was 2020, smack bang in the middle of the largest round of central bank quantitative easing the world has ever seen. This feature is about supply, demand and pricing. If you look at Bitcoin’s price history there’s a strong and repetitive correlation between the Bitcoin price and these Bitcoin halvening events. The governance is set in code so that supply goes down, and if demand goes up then so does price. In a period of inflationary monetary policy, Bitcoins deflationary design has driven new demand for the coin.
What are ‘satoshis’?
It doesn’t sound like much when you think of the $USD9 trillion that rolled off the printing press in 2020 alone, but one Bitcoin can be broken down into 100,000,000 ‘satoshis’ (like cents or pennies) and this is how Bitcoin is traded – in satoshis. So there is plenty of scope to denominate and scale, but new supply of Bitcoin will halve every 4 years until it runs out completely in the year 2140.
Other cryptocurrencies that are like Bitcoin are built around these same principles as well.
Is investing in Bitcoin worth it?
With all this tech mumbo jumbo I bet you’re asking – Why should I care about any of this? Here are seven powerful reasons Bitcoin should be on your radar if you’re a financial freedom seeker:
Inflation or even hyperinflation. Money printing is killing our purchasing power peeps! The cost of food, housing and other essentials is going up and will become more unaffordable as wages stagnate (as these tend to be more fixed or static). Bitcoin has a deflationary and controlled money supply and is in growing demand as a hedge strategy.
Listed companies have begun to add Bitcoin to their balance sheets. Most famously Tesla. Some are taking advantage of cheap debt rates or stimulus money to buy Bitcoin.
Mainstream adoption is happening. Bitcoin and crypto’s use as a means of exchange in a more digitally-oriented global economy is growing. Paypal just launched a crypto check-out service for all of its 29 million merchants, coming in the next few months.
Institutional money has begun to ‘follow the crowd’. Goldman Sachs and Morgan Stanley have both entered the crypto space. Canada has approved the world’s first Bitcoin Exchange Traded Fund. Van Eck and Grayscale are both looking to launch in the US. ETFs could bring ‘old money’ into crypto and light a fire under demand for larger coins such as Bitcoin, Ethereum and Litecoin. We’ll explain the crypto market and how money moves between Bitcoin and large and small cap ‘altcoins’ in an upcoming post.
Trust and legitimacy are growing as more recognised brands and institutions buy in, leading to a ‘FOMO’ effect on demand. Trust matters in the money system. After all, isn’t fiat currency just our trust in a government IOU?
The Bitcoin price has 20x-ed in 12 months. Without doubt it’s among the best performing assets of 2020 and so far in 2021. Will this continue? If I had a crystal ball I probably wouldn’t be posting on the internet about it…
It’s still early. In terms of adoption and distribution that is. Retail money has not yet entered the market. Less than 2% of the global population is thought to own Bitcoin which means there’s stacks of growth potential.
These are notable changes in the cryptocurrency world, but be warned: it’s not for the feint hearted. The space is largely unregulated and this goes in keeping with the ethos of decentralised money and individuals controlling their own finances rather than banks controlling them for us. Just like any investment it’s important to know the risks before you dip your toe in the water (if you do) so keep an eye out for our upcoming post about the risks of investing in cryptocurrency.
The final word
None of this is financial advice peeps! Investing in cryptocurrency is like the wild west. The whole point here is to broaden your horizons, get educated about opportunities. But the great thing about financial independence is you get to make your choices yourself. Huzzah to that!
