Are Crypto Investment Funds a Sensible Alternative?

DateJuly 28, 2021
Reading Time12 min
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Mathieu Hardy
Chief Development Officer
Crypto funds are not entirely new, but they are still very limited in what they offer.
Introduction

Because you want to take part in the blockchain technology, Web 3, and Metaverse revolution, but how can you?

The fast-moving cryptocurrency space has certainly captured the imagination of a huge portion of the global population, however, the amount of interest is not proportionate to the amount of investment seen.

Luckily, that is all changing, and there are a few good reasons for that.

Let's take a look at actively managed investment funds, also known as hedge funds, through the lens of cryptocurrency.


OSOM is the all-in-one Crypto Wealth Manager. With wallets, exchange, Crypto Roboadvisor, DeFi Earn to lend stablecoins in DeFi, and Crypto Strategie, we offer all you might want in a Crypto Asset Manager.

Let’s explore the pros and cons of, crypto hedge funds, crypto mutual fund, crypto exchange traded fund (ETF), or other crypto investment strategy where you delegate the digital asset management and strategy to someone else.

Our computers do the heavy lifting for you with a long-term perspective. From crypto on-and-off ramps to passive income and diversified portfolios, OSOM has you covered.

If you are wondering how the Autopilot Works, read this. The live performance is here If you want to know why you might want to use DeFi Earn, read this.

The guide to getting started is here.


Crypto Investment Solutions Overview

Crypto Investment Solutions Overview

In the last four years or so, investing in Bitcoin has moved on from simply signing up to an exchange, buying, and then 'hodling' an investment portfolio.

Coming out of 2019 with renewed interest

Coming out of 2019 with renewed interest

An influx of major cryptocurrency, institutional and traditional investors has shaped the space into one that has much bigger potential and opportunity for investing.

In the US, a lot of the institutional investment in Bitcoin has gone through the Grayscale bitcoin trust - approved by the Securities and Exchange Commission - and, more recently, Bitcoin futures contracts - approved by the Commodity Futures Trading Commission.

In Europe a lot of Crypto Exchange traded Products (ETPs) have been issued making institutional access easier as they look like bitcoin ETFs, or altcoin ETFs. Some ETPs even offer ETPs with multiple underlying asset, usually built through an indexing strategy and looking like index fund. But many of those are still limited to access by accredited investors; meaning rich people and finance professionals.

This change in access around cryptocurrency investing is actually being driven by the services on offer with cryptocurrency investment funds being an ever-maturing option for all kinds of crypto investors.

However, the current funds and solutions are far from well established, far from the norm, and, while excellent vehicles for institutions, far from ideal for the average investor looking to diversify some of their portfolios with Crypto.

A number of barriers to entry still exist for investors wanting to be part of a crypto fund, such as high minimum investments, high fees, poor diversification, complex market infrastructure, complicated user experience, and volatility.

This disparity between mainstream crypto interest and unsatisfactory offerings from the current crop of funds is being tackled by OSOM and the Crypto Autopilot.

Looking to lower the barriers to entry, offer diversification at a low cost, and provide better returns than simple Bitcoin 'hodling' is what makes Autopilot a sensible alternative to traditional avenues for investing in high-growth tech start-ups, and even funds we see today.

Understanding the Crypto Fund Hype

Understanding the Crypto Fund Hype

They are not entirely new, but they are still pretty nascent in what they offer. Their shortcomings have also been highlighted more recently as a new wave of users and investors has come in, looking for better security, user experience and, let's face it, sometimes a desire to gamble and get-rich quick with little understanding of the underlying digital assets.

The GameStop and WallStreetBets saga highlighted the desire of young investors to seek opportunities that offered better returns, more freedom, as well as the ideals that crypto holds inherently.

"Come for the money, stay for the revolution." has almost become the tagline of this new crop of investors.

So, the money is there - but the current offerings for crypto investment solutions has not got the feel of a financial revolution: unnecessary premiums on fund, index fund, and other indexes in your brokerage account; short-sighted rebalancer funds; convoluted social trading platforms and poorly constructed bot traders.

What is available as investment fund or alternative?

What is available as investment fund or alternative?

GBTC

Arguably one of the most widely known crypto fund is Grayscale Bitcoin Trust (GBTC) which emerged as an institutional investors entry point to Bitcoin, but its appeal has quickly waned as people look to realize there are more sensible and diversified crypto funds out there.

GrayscaleLogo_Logo.jpg

It is not too surprising given the wave of more sensible alternatives out there, and also considering the GBTC premium was upward of 30% at the beginning of 2021.

Furthermore, as a product meant to put investors at ease, the fund failed there too as Daniel Martins, founder of independent research firm DM Martins Research, highlighted Grayscale reported 500% higher annualized returns than Nasdaq, but its correction was also worse than the 2008's recession - 82% vs. Nasdaq's 17%.

That made Grayscale's Bitcoin investment product an "ultra-leveraged bet," accompanied by an inferior risk-adjusted performance. The analyst added: "GBTC's volatility has been nearly nine times as high as the Nasdaq's: 145% vs. 17%."

Alternatives do exist, but a lot of them are cutting corners or wrongly applying cookie-cutter solutions from other markets to crypto, with offerings that hardly encompass the feeling of a 'crypto revolution.

Rebalancers on exchanges

Rebalancers, such as Shrimpy, which also offers bot trading are not sophisticated enough in a market where the "edge risk" (the risk that an asset's price suddenly drops to near zero) is much more present than in traditional markets.

Index funds

Index funds, a great idea in established markets, are often slow to rebalance and only cover a few cryptocurrencies in an ecosystem that has hundreds of strong projects with good gains. An index fund also tend to use a market-cap weighted average formula for deciding how much to invest in any one particular digital asset and often don't try to screen assets for quality criteria. indexing strategies are therefore very heavy on Bitcoin and very light in every other promising asset. Additionally, as the largest assets in the space are highly correlated in their price movement, they offer very little actual diversification. One last criticism that can be levered against index funds is that you can only compose an index of something after a specific space has emerged. This is why you can, today, invest in Decentralized Finance (DeFi) indices, but you couldn't have done so in July 2020 when the DeFi summer was in full bloom. An indexing strategy for crypto assets management usually means you are the last to arrive to the party. So while Indexing is a perfectly appropriate methodology for traditional markets and mature companies, it's a very dumb way of investing in high-growth tech start-ups.

Social Trading

Social trading on crypto exchanges - the best know for that is eToro - often has a feeling of 'too little, too late.' or is just plain inconsistent. Just think what happens if the social trader you follow gets run over by a bus: you likely won't know before weeks and you'll be left without a strategy.

etoro-logo.png

Crypto ETFs

There has also been a lot of talk about exchange traded funds (ETF) for crypto and more Wall Street-like cryptocurrency options being offered. The idea behind this is to once again court the traditional investors and those who prowl Wall Street.

Why You Don't Need a Wall Street Wrapper

Why You Don't Need a Wall Street Wrapper

However, it is quickly visible that for the people looking at crypto because they appreciate the values of the space - decentralisation, freedom, simplicity, inclusivity etc - that those can't be found on Wall Street.

wall-street.jpg

It's fractionable so you don't need to pay the fees

A quick look at how fractionable crypto assets are should also make you think twice about paying the fees to wrap it in a fund. Indeed, whereas it makes sense to put shares of companies in a fund to make diversification accessible to many (because you can't buy 1/2 a Tesla share), most crypto assets are highly fractionable.

1 Satoshi - the smallest denomination of a Bitcoin - is currently worth 0.0004€. and most crypto assets can be fractioned at 6, 12, or 18 decimals. Which means you can build a diversified exposure to digital assets starting from pretty low amounts. You don't really need someone to wrap it in an fund - and add a layer of technical complexity - for you. That lowers the minimum investment significantly.

satoshi-converter.jpg

It can be traded 24/7, elsewhere

There are other downsides, besides the costs, to taking crypto assets under management to Wall street: a Bitcoin ETF, for example, would make investing in the asset only available in traditional trading hours, not the global, always on position it currently holds. Additionally, cryptocurrency is a revolution that puts people in charge of their money, and an ETF is a way to be in crypto, without actually holding and being in control of your crypto.

It's like buying real estate wrapped in a fund: you get the exposure, but you can't exactly enjoy all of its intrinsic properties, like the fact that you can't live in there.

Get true crypto: it's cheaper and easier

Private investors deserve more than a Wall Street wrapper around cryptocurrency. Investors deserve true access and exposure to crypto whenever crypto markets are open. And there is no reason to pay anyone 3.5% in Total Expense Ratio for just hodling some Bitcoin, or most other cryptos, for you. This leaves many asking what the sensible alternative is, today.

And this is where OSOM comes in with Crypto Autopilot.

Why OSOM Crypto Autopilot Makes Sense

Why OSOM Crypto Autopilot Makes Sense

The Crypto Autopilot, by OSOM, is not like anything else that is on the market today.

Instead of pursuing the "old way" and setting up crypto funds, a lot of time and effort has gone into thinking from first-principles, from the ground-up, and creating an avenue for a greater range of crypto investors to pick up, profit from, and enjoy using crypto.

So you can start investing with low a minimum investment and a high degree of diversification, while having to do nothing and never once having to look at crypto prices.

A Long-Term vision

A Long-Term vision

Autopilot looks at several months of past price data to build a portfolio for the medium to long term (2.5 to 5 years) with the objective of achieving stable growth - which means avoiding drawdowns. It optimises for a 4th generation risk measure - iVaR - which can roughly be described as the time it takes to recover any losses.

This algorithm does not purport to be a magic bullet to ensure always-on gains or magical ways to beat the market. It sets out to optimize investing in the cryptocurrency market by looking at many assets (from 30 in September 2019 to 73 in April 2022), building a portfolio for the long term and reconsidering its position multiple times a day.

All that by trading directly on your own account without requiring the pooling of assets under management and administration that a fund requires.

Excellent Diversification

Excellent Diversification

It therefore offers a large exposure similar to large index funds, with the watchful eye of an artificial intelligence to try to avoid the edge risks, provide diversification, and the reactivity of an algorithm that never sleeps.

A Zoom on Performance in Troubled Times

A look at the performance of Autopilot from 1 Feb 2020 to 30 April 2020 shows how it behaved during the Covid-19 related crash:

crypto-during-covid.png

Autopilot "dropped" less than either the C20 or Bitcoin. Then, by April 8 the Autopilot had recovered to its value from 1 February, when C20 & Bitcoins were still suffering 20% losses.

Managing a portfolio so it does not lose value

Autopilot is an algorithm optimized for minimizing risk, as in "optimizing to minimize the volatility downward". There is no guarantee that it will manage to do so and it has faced several challenges in its 2-years history, but that is what it optimizes for.

It does not care about possible gains, and only tries to minimize losses.

This may sound counter intuitive in the volatile cryptocurrency market, but doing this leads to ongoing and solid gains compared with trying to optimize for maximum gains.

Academic validation of this approach

This strategy has been put to the test as academic literature downside volatility-managed portfolios and a high degree of diversification are linked to outperformance.

Below is a graph that shows the algorithm being back-tested on the EUROSTOXX 50 over 16 years, its outperformance is hard to miss.

eurostoxx-50-total-return-index.png

A Curated Universe of Investible Assets

A Curated Universe of Investible Assets

Even the manner in which the assets are chosen to be a part of the Autopilot portfolio stem from solid foundations in cryptocurrency investing. Autopilot currently tracks over 200 cryptos and is actively monitoring to see what to whitelist & blacklist. The criteria for in/ex-clusions are the following:

  • High relative market cap: a relative sign of quality
  • High relative liquidity: because we want to be able to sell your position if we need to, and illiquid coins would see too much slippage
  • No privacy coins (Dash, Monero): because the regulators really don't like them and there is a serious risk they will be increasingly delisted from exchanges
  • No joke/meme coins (Dogecoin): they are undoubtedly fun, but we want to invest in projects with a real future
  • Mostly no forks (Bitcoin Cash, Ethereum Classic): most of the forks don't appear to really have a future and don't have a lot of developer backing, so they don't make for very good investments. Their lack of popularity also makes them more vulnerable to attacks.
  • No stablecoins (Tether, USDC, EUT, EURS): the idea is to help you access the value of true crypto projects with ground-breaking possibilities. Not to have you hold digital cash.
  • No commodity-backed coins: the idea is to help you access the value of true crypto projects with ground-breaking possibilities. Not to have you hold gold or silver.
  • No derivatives or synthetic products: we like the simplicity - and relative safety - of investing directly in the real thing.
A New World of Crypto Funds - Not funds!

A New World of Crypto Funds - Not funds!

The investor of today is very different from those of 10 or 20 years ago. And the crypto market is not the traditional market. Crypto hedge fund, crypto mutual funds, bitcoin futures contracts, bitcoin etf, cryptocurrency etfs, etc... are all very traditional instruments that are useful for institutional investors and fund managers but that don't really make sense for the individuals. They are too expensive, too late, and too slow.

In fact, both investors in crypto and the crypto markets are also quite different from those of three or four years ago. Today's investor is not satisfied with buying and holding Bitcoin, and the markets offer so many opportunities that there is no reason why they should.

Investors are looking to invest in crypto, but those providing investing services for crypto need to start meeting demands of simplicity, safety, diversification and excellent returns in an easy to use and understandable packages..

Today, OSOM and Crypto Autopilot are the only ones that offer that. And there is no need for a traditional "fund-like" infrastructure as all crypto are extremely fractionable (you can buy 1/100th of a Bitcoin, but you can't buy 1/100th of an amazon share).

The OSOM Crypto Autopilot is a unique option built for Crypto, not a recycled idea from traditional equity and forex markets.

OSOM has crypto values at its core with the objective to get as many people to enjoy it as possible, solid returns that beat the market based on minimizing risk, and a brilliant user experience. With this the Crypto Autopilot becomes the most sensible option.

Autopilot Live Charts.png Since 26 September 2019, that’s a 1012.11% performance in € and 103.85% in BTC. That’s 160.86% and 32.78% annualised, respectively.

Are there risks?

Are there risks?

Of course, investing involves risk and none of this is financial advice. Do make sure you understand how this fits in your investment objectives and your risk tolerance by talking to licensed professionals. Crypto prices are volatile, and past performance is not promise of future returns. Make sure to read the extensive risk disclaimer in the app at app.osom.finance.

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Mathieu Hardy
Chief Development Officer

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