Lots of people with an entrepreneurial spirit dream of being their own boss. There is quite the allure to working hard to make your own dreams come true instead of somebody else’s. Likewise, people know that there is a lot of money to be made in managing other people’s money. It’s a win-win which makes it a good fit for somebody with an entrepreneurial spirit but also wants to work with others.
Starting a hedge fund is a good business opportunity as you are taking on investors rather than making a startup and asking them for money for stakes in your company. And with the rise of cryptocurrency being a viable currency, there is a big opening to start your own hedge fund in this area rather than traditional investing.
Many traditional investors were slow to get on board with crypto and left it up to the cypherpunks and underground libertarians to play around with it. Those days are over as they see it as a good investment and want to get in on it and buy Ethereum.
In this article, I will go over what you can do to get started with starting a cryptocurrency hedge fund.
What is a hedge fund?
Simply put, a hedge fund is a collection of investments from a group of people that you will manage for them. Your objective is to find investments in stocks, or in this case cryptocurrency, to make them a profit from their trust in you.
There are different strategies to use to make the money for your clients and yourself. In fact, there are three types called day, swing, and position. Each of those methods has its pros and cons and level of risk. It’s up to you to figure out what your investors are looking for with regards to their risk.
Some will want to have a low-risk and low reward scenario in which they make their money slowly over time. Others are looking for a big payout and like the higher risk option that also pays out a high reward.
Have a strategy
Usually, the way to bring in clients is that you already have some experience with them and they know how you operate and are good at making them money. If you don’t have experience then getting investors may be a tough row to hoe. Although, if you do have some history with making good investments with cryptocurrency then you may actually find some people as they will trust you over a traditional hedge fund manager.
Once you have your clients and sussed out exactly what they are looking to accomplish you need to figure out your strategy.
You can choose to go the long and slow approach by focusing on major coins like Ethereum and Bitcoin and riding the wave. Obviously, you’ll need to be able to read signs of an approaching dip or crash so you can make some moves.
The alternative is to focus on new coins and the Initial Coin Offering (ICO) to get in on the ground floor. The hope is that there are a good backbone and foundation for the coin’s success with a reason for existing. Some coins are out there simply as a way to make a quick profit and then they disappear quickly.
Understand the technology
The key to figuring out the best altcoins to invest in lies in understanding the technology of the blockchain they are on. Many are tokens used for the function of the blockchain. There are many different ways the blockchain can be used, so dive deep into what each purports to do and you may find a diamond in the rough to invest in.
For example, there are blockchains in which a virtual world can be built that is sort of like a Sims game. The tokens are used almost the same way that an in-game currency is in a traditional multi-player game. The difference is that these tokens are an actual currency that can be exchanged for other cryptocurrencies and fiat. In these virtual worlds, the token can be acquired and used to build actual real estate properties and even businesses.
This is simply an example of what can be done with these tokens so look for how the token will be used within the ecosystem of the blockchain and platform and decide if the future looks good enough to make you invest.
Spread your risk
Just as you would do when running a traditional hedge fund, you’ll want to make sure that you don’t keep all of your eggs in one basket. Spread your risk to protect your clients from anything bad happening.
The first thing to do is to use several different exchanges in case one of them gets hacked. This is the weak point on the blockchain and is where most hackers concentrate.
Also, try to make sure that the tokens that you invest in are in different topics or focus. For instance, you don’t want to have too many coins in the gaming sector as a disruption there could wipe out a lot of your assets. Make sure to have some in finance or the Internet of Things and other types of areas so you aren’t vulnerable.
You should also not concentrate on one type of coin. Make sure to have a good balance between established coins with a history with newer and unproven coins. This will give you a cushion in case of a dip. At this point, we all know that Bitcoin and Ethereum are going to bounce back but the smaller coins may not survive.
A lot of the principles are the same whether we are talking about traditional hedge funds or cryptocurrency. But, you do have an added layer of complexity from trading crypto. If you can manage your investors well then you will make a go of it and have success. Just remember to not let your emotions make your decisions and you will be fine.