A new model for tokenized cryptocurrency funds
Pros and cons of investing in funds
Investing via a fund has many advantages over investing in individual companies, cryptocurrencies or ICOs directly, for example:
- Source the best opportunities
- Negotiate the best terms, and
- Do professional due diligence
The disadvantage of investing in a fund, is that an investor loses his investment autonomy. For example, an investor might know that a certain ICO will do great and another flunk, but the investment manager of his fund might see it differently and thus invest in the bad ICO.
With the tokenization of both funds and fund investment a new investment model is possible that gives the investors the advantages of fund investments, while at the same time investment autonomy. To understand this, we first have to see the different kinds of funds and then looks at how a tokenized cryptocurrency fund can transfer the investment directly to the investors and why that might make sense.
Kinds of funds
- Traditional fund
- Cryptocurrency fund
- Tokenized fund, and
- Tokenized cryptocurrency fund
Traditional fund
A traditional fund gets investment by limited partners or other traditional investors (not tokenized) and invests in startups and listed companies (not tokenized), as shown below:
An examples of this is Berkshire Hathaway.
Cryptocurrency fund
A cryptocurrency fund gets investment by traditional investors (not tokenized), and invests in cryptocurrency and ICO tokens (tokenized), as shown below:
An example of this is Blocktrade Investments.
The advantages of cryptocurrency funds over traditional funds, are that investments can be liquidated much easier than traditional startup investments.
Tokenized fund
A tokenized fund invests in startups and listed companies (not tokenized), and gets its investment by issuing tokens, which give participation rights in the fund (tokenized), as shown below:
An example of this is Blockchain Capital and SpiceVC.
The advantage of tokenized funds over regular funds are that the investors can exit their investment in the fund and thus get money much easier and quicker.
Tokenized cryptocurrency fund
A tokenized cryptocurrency fund invests in cryptocurrency and ICO tokens (tokenized), and gets its investment by issuing tokens, which give participation rights in the fund (tokenized), as shown below:
An example of this is BullToken.
A tokenized cryptocurrency fund combines the advantages of all of the above:
Advantages of a fund
- Source the best opportunities
- Negotiate the best terms, and
- Do professional due diligence
Advantages of tokenization
- Easy for fund to liquidate its investments
- Easy for fund investors to liquidate their investments
Indirect & direct investment in cryptocurrency
Investment in a fund is always an indirect investment in the investment portfolio. So, in a tokenized cryptocurrency fund an investors invests in the fund by buying tokens, and the fund invests in ICO tokens. Thus, the investors does not hold the ICO tokens directly but indirectly.
Fund with no assets (buying pool)
If both levels are tokenized a direct attribution of tokens to the end investor is feasible. This is shown below:
Such a model is impossible if one of the two investment levels is not tokenized. But if both levels are tokenized a direct transfer of the invested tokends to the end investor is possible and has advantages.
If the tokens of the ICO are directly transferred to the investor instead of being held by the fund, then the fund is no longer responsible for selling them. The only responsibility of the fund is getting the best deals. This might make sense as the fund will focus 100% on getting the best deals for its investors, instead of having to monitor the performance of those deals.
The biggest advantage is that a large segment of ICO investors that do not want to delegate the whole investment management to a fund can still participate in the best deals. If the acquired ICO token do in fact not stay with the fund, but are directly passed to the investors, then the fund really has no assets, so it is not really a fund but a buying pool.
Extremely short fund lifespan
A less extreme version of this is where the fund lifespan is extremely short, like for example one month. For example, the fund raises investment at the beginning of the month, then invests in ICOs during the month, and at the end of the month the fund is closed and the ICO tokens are distributed to the fund investors. The fund could then be re-launched at the beginning of the next month.
This models would normally be unthinkable due to the high transaction costs. But by having both investment levels tokenized this models is made possible. The advantage for investors is that they keep a lot of investment autonomy but still get the advantages of investing via a fund.
Fund of funds (tokenized cryptofunds)
In the above model of a tokenized cryptofund closing and relaunching every month, a problem could be launching a new token for a new fund every months! This problem could be mitigated by a fund of funds that acts as the intermediary between investors and the funds. This structure is shown below:
The investors invest in a fund of tokenized funds that invests in 3 different tokenized funds that in turn each invest in tokens of ICOs. The individual funds give the fund of the funds a 20% discount on their tokens. The fund of funds has an operation period of let’s say 5 years and invests into the individual funds, which operate for one month only. When the funds close the crypto currency is passed to directly to the investor.
In such a model we can give more investment autonomy for the fund investors as follows:
- The fund of funds raises money via an ICO and runs for 1 year.
- The money raised get allocated right away to stable investment (not ICOs).
- Every month the fund of fund invests 1/12th of the total funds into individual fund managers.
- The fund managers get to explain their monthly ICO buying portfolio to the investors, ie the token holders of the fund of funds.
- The investors can choose to invest their portion of the investment into one of the funds. For example, they can chose to have their investment portion go to fund x in March, to fund y in April, and to fund z in May.
- In any case at the end of the month they receive 1/12th of their investment back, and if they chose to invest in ICOs they receive the token directly.
- At the end of one year the fund has paid out all its invested amount.
In this fund of funds model, investing in short term cryptocurrency funds, the investors get the chance to participate in best cryptocurrency deals without losing his investment autonomy.
