Long gone are the days when cryptocurrencies only attracted the interest of private investors. Although the field of digital assets remains uncharted territory for many institutions, the number of professional actors is nevertheless growing steadily. In this article, we will look at a few of the most prominent regulated crypto funds.
One of the most famous crypto funds in the world hails from the Swiss firm Crypto Finance AG. Crypto Finance AG is a fintech company that provides institutional and professional investors with products and services in the digital asset space. Founded in June 2017, the Zurich-based company has 40 employees and three operationalsubsidiaries including Crypto Fund AG, Crypto Broker AG, and Crypto Storage AG. With just over 50% of the overall Crypto Finance Group business linked to international clients, Crypto Finance is continuing international expansion and product and service development.
Crypto Fund AG offers an active as well as a passive investment approach for crypto assets. The passive approach tracks the performance of the Crypto Market Index 10 (the “CMI10”), which is independently calculated and maintained by the SIX Swiss Exchange. The Index does not include privacy coins like Monero, indexed crypto assets, or pegged crypto assets, such as gold-backed stablecoins. Indexed crypto assets refer to crypto assets which are, for example, based on a basket of other crypto assets such as a “fund token” or similar. These are excluded as they are an indirect representation of other assets, similar to pegged assets. Furthermore, crypto assets which cannot be safely stored in an institutional-grade storage solution are also excluded. This may be an issue when a crypto asset based on a new blockchain would be eligible for an index where storage of that asset is
only possible via exchanges.
The fund employs a strategy involving automated trading algorithms that take long and short positions on Bitcoin. Assets under management in the active strategy are currently at €25 million, and the year to date return is between 33% and 40% — dependent on the share class. The active strategy is deployed with Bitcoin futures only. Crypto asset custody is, therefore, not a necessity. For the passive strategy, crypto assets are stored with the depositary, Bank Frick. The fund does not self-custody any crypto assets. Both funds are alternative investment funds (AIFs) administered by CAIAC Fund Management AG in Liechtenstein.
Domiciled in Liechtenstein, SwissRex AG operates a crypto fund with a British Virgin Islands (BVI) structure and a tracker certificate setup by GenTwo Digital AG and MTCM Investments AG. The main advantage of the certificate is that it can be subscribed without any problems via any bank thanks to its Swiss VALOR number. The VALOR number, which is incorporated in the Swiss ISIN number, is a code which uniquely identifies listed securities and financial instruments in Switzerland. Both products are distributed to qualified investors by Crypto Consulting AG in Switzerland.
Fundamental analysis of crypto tokens forms the basis for the investment decisions of their actively managed crypto fund. The strategy gives the investor access to a diversified basket of Bitcoin and altcoins (alternative coins). The tokens are analyzed on a daily basis, and the positioning is actively managed. The strategy takes care of the timing for the investor. The exposure is determined on the basis of valuation models and the cycle model described below and ranges between -20% and 120%. In February, the allocation was reduced to 50% due to a slight overvaluation and the hype around the Bitcoin halving. It was increased to 100% again during the correction that the Corona crisis caused. In addition, the choice of individual tokens is of great importance. The largest 50 tokens are analyzed, and a fair value is calculated. On this basis, 10 tokens, of which the greatest potential is expected, are purchased and stored safely. The asset allocation mixed with the right choice of altcoins contributed to a fund performance of 120% in 2020 (net in CHF as of July 28, 2020). Bitcoin generated a return of 49% over the same period. The AUM now stands at CHF 8 million.
SwissRex distinguishes four phases in the cycle of crypto tokens: the beginning of a bull market, the outperformance of altcoins, the hype, and the bear market. When investors seek exposure to crypto again after a prolonged downtrend, they typically buy Bitcoin, as it is the most liquid and best known of all tokens. Since Bitcoin is one of the few tokens that are trending up in this first phase, altcoins are sold and the correlation between Bitcoin and altcoins can be negative for a short period of time. Through these shifts, high quality altcoins become bargains and value investors make their first purchases. Individual altcoins show better returns than Bitcoin in this second phase. As soon as Bitcoin reaches a new high, the third phase begins; the masses start buying crypto. Since Bitcoin already seems expensive, purchases are made in the second and third phase.
The most important decision is when to exit the market in order to have as little exposure as possible in the fourth phase, the bear market.
SwissRex differentiates between three categories of tokens: stores of value, currencies, and securities. As there are no cash flows for securities and currencies, the analysis must be based directly on supply and demand. On the supply side, velocity and inflation are important, while on the demand side the adoption rate is estimated using an S curve. The fair value is calculated and multiplied by an individual success rate that weighs factors such as liquidity, trading venues, and the survival chances of the start-up. For tokens with security character, traditional valuation methods such as a dividend discount model are used.
The fund’s assets are held with Crypto Broker AG and Bitcoin Suisse AG on segregated accounts with individual client wallets. They also hold a small part on a few exchanges which passed their due diligence process for trades in tokens and futures that aren’t covered by their storage providers.
Among the terms that are mentioned quite often in connection with cryptocurrencies and digital assets are ETPs and ETFs, but how is their market availability at the moment? Next week, we will look into this in detail in another article!
This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.
