Interest in Bitcoin, cryptocurrencies and financial products that reflect or invest in them continues to grow. In many places, on the other hand, the voices for regulation and consumer protection regarding cryptocurrencies are becoming increasingly louder. Regulated crypto funds can certainly lower the entry barrier for newcomers.
Status quo of the crypto funds
However, if you take a look behind the scenes, you will find that these funds are far from being suitable for the masses:
Minimum investment unattainable for retail investors
The Postera Fund — Crypto 1 has the lowest entry barrier with a minimum investment of 50,000 euros. 50,000 euros may not sound like a considerable sum at first glance. However, considering the fact that an investment portfolio should always have sufficient risk diversification, then it is no longer about a small investment capital, which should hold a potential investor. Based on the minimum deposit, these regulated crypto funds are therefore primarily aimed at institutional investors.
Low competition — high fees
The market is only responding to the demand for regulated crypto funds. As a result, too few currently exist and there is no competition. Accordingly, there is little to no competition and the companies can approve high management fees and termination fees. If you take a closer look at the Postera Fund — Crypto 1, a sales charge of three percent compared to stock funds does not cause much of a stir. Also, a management fee of 1.1 percent is not yet hard to book. But what scares them is a performance fee of 20 percent. Here, the company actually branches off even one-fifth of the profits. Whether you want to accept that as an investor is more than questionable.
The existing crypto-funds are still far from being of interest to a private investor due to cost considerations and high minimum investment.
Let us return to the in-depth question about crypto-funds, which should protect the consumer through existing regulation. Basically here is to clarify how one can produce consumer protection at all.
Consumer protection — how are you?
Many regulations want to prevent the consumer from losing money through speculative transactions. However, looking at the big picture, one has to realize that returns are created by taking on risk or volatility. Consumer protection does not mean protecting investors from returns. In order to be able to generate returns on the financial or crypto markets for asset accumulation, one must practice practicing taking some risk. This can only be learned by acquiring and growing corresponding products.
How can you protect the consumer? In my opinion, three essential steps are needed here:
In the first step, a clear and differentiated education or general economic education must be provided. Regulators should refrain from stupidly blocking the blockchain or cryptocurrency or warning consumers about it and avoiding it. Rather, they should provide sound sources of knowledge — this can also happen in the form of links to reputable and audited sources. Another possibility is to provide knowledge in a simple language, such as. B. the Bundesbank does on various topics. In addition, this would help avoid or reduce information asymmetries that are being complained about anyway. Thus one can facilitate the entrance into a topic field. Consumers can better judge
Availability of entry-level products
If a potential investor has opted for an investment, then in a second step products should be available that are suitable for beginners. These products must meet a number of conditions: on the one hand, regulation should create a legal framework in which an investor moves. He is also aware of this in the best case by the previous Enlightenment. Furthermore, it is important that you can invest even smaller sums. It makes no sense for a career starter, who is currently working on the subject of “crypto as an investment”, to invest at least € 10,000 to test this asset class. Here, much smaller amounts must be made possible. In principle, the ratio of risk level and investment maturity must be clear in advance,
Learning by doing
With products of this kind, investors can test their risk-bearing capacity and their investment knowledge in the last step without having to put too much budget on the line.
One possible solution: Crypto-ETF?
An asset class that already exists offers many of the benefits outlined above and is very well suited for retail investors: we are talking about exchange-traded funds (ETFs), in German: exchange-traded index funds.
ETFs consist of a fund that tracks an index. For example, this index could consist of the top 20/50/100 cryptocurrencies by market cap. Covering several large cryptocurrencies already provides better diversification than investing in four to five arbitrary coins or, if in doubt, a single cryptocurrency.
Due to the replication of an index, ETFs are a passive management. No fund manager determines the composition of the fund. The ETF always tracks an index. As a result, the costs can be kept low and it is transparent to see what components of the ETF consists.
Lower risk thanks to special assets
A significant advantage of ETFs is the fact that they are special assets. This means that the investor’s money does not belong to the operating assets of the ETF provider. If there is an insolvency of the ETF provider, the ETF investment does not fall to the bankruptcy estate. This results in an important safety benefit.
At the moment, Exchange Traded Notes (ETNs) already exist, ie exchange-traded bonds on Bitcoin or Ethereum. However, these do not accrue to the Investment Fund and thus there is a higher risk in terms of the stability of the issuing bank.
There have already been efforts to allow crypto-ETFs. For example, last year the Winklevoss brothers submitted an application for approval for a crypto-ETF to the US Securities and Exchange Commission. This was not approved. If a regulator were to allow a crypto-ETF, then one would presume a proper, accompanying capital inflow. How this affects the scalability, is not yet foreseeable.
Finally, it should be noted that the design of the products can already create a high level of consumer protection. Unflexible long-term OTC products will never be accessible to the private investor. Therefore, it is up to the government and regulators to educate the consumer and allow the corresponding products.