How to Set Up a Cryptocurrency Fund
The cryptocurrency world was in the news throughout 2017, mainly because of the sharp appreciation in the value of Bitcoin and the growing popularity of new coins, such as NEM and Ardor. The year also introduced investors to the massive volatility that can occur in the crypto market, besides evincing the interest of mainstream banks and institutional investors.
The growing popularity of cryptos was also evident in the announcements by CME, CBOE and NASDAQ to list futures contracts in Bitcoin. The more than 1,500% increase in the prices of the cryptocurrencies in 2017 has led to the demand for investment of real new money and the establishment of crypto-specific hedge funds. The number of hedge funds focusing on cryptos has surged from a just a handful in 2016 to nearly 120 in 2017.
By now, you might be wondering how to become a part of this digital revolution. One can choose to deal cryptocurrency by holding or mining or trading them. But, the growing complexities of the mining algorithms has made it difficult for newcomers to mine cryptos which has led them to look towards setting up cryptocurrency funds.
What is a Cryptocurrency Fund?
A crypto fund is the managed capital of digital money available for replication that brings together the people willing to invest their cryptos and those who wish to trade in it. Such funds can be started by anyone by introducing a new cryptocurrency with the aim of satiating the appetite of investors and traders interested in multiplying their digital assets. Now, these funds can be publicly traded, private funds or hedge funds.
Such funds are very useful, since they provide investors exposure to the cryptocurrency segment, besides providing investment money to new ventures who wish to use blockchain technology for new products or to update existing methods of establishing, recording and validating transactions.
Considerations Involved in Setting up a Cryptocurrency Fund
If you are thinking of establishing your own cryptocurrency fund, certain factors need to be looked into:
- The first and foremost aspect of setting up a cryptocurrency fund is whether you can find or reach out to investors who would choose to participate in your fund.
- The next consideration is the ability to identify suitable investments for your fund and the strategy to use for investing.
- Take proper legal advice about the set up of your fund and the agreements that need to be put in place with various investors.
- You need to comply with the growing regulatory requirements related to the fund’s operation. The IRS, CFTC and SEC are continuously developing laws to regulate the crypto asset class and it is essential for a fund owner to be aware of them. Also, these regulations may vary from country to country.
- Keep costs under check while developing the infrastructure for operating the fund.
- You also need to understand the tax ramifications of trading cryptos under such a fund. Tax laws in countries like Switzerland and Luxembourg favour the establishment of cryptocurrency funds.
- Finding ways to manage the risk and volatility involved in the trading of cryptocurrencies is also needed. This could include trading in futures.
So, before starting a cryptocurrency fund, it is imperative that one understands the risks and liabilities involved. The legal and compliance aspects also need to be understood clearly, besides ensuring that there is adequate accounting and performance infrastructure in place. And, most importantly, you need to understand the regulatory requirements.
It is, therefore, advisable to get in touch with expert agencies who can provide guidance about the various aspects of setting up a cryptocurrency fund while adhering to the various applicable regulations and tax laws.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.