More than a hundred cryptocurrency funds have closed over two last years. Several famous players left at the height of the pandemic, and by early October there were just over eight hundred active members left. However, the closure was followed by the consolidation of investment portfolios.
The vast majority of operating crypto funds are venture or speculative hedge funds. Less than 5% falls on private equity funds, which confirms that there are still high risks in the crypto asset space.
According to Crypto Fund Research, there are 804 active cryptocurrency funds in crypto space (411 venture funds, 357 hedge funds, 35 private equity funds).
The portfolios of the leading high-risk funds, one way or another, consist of blockchain assets. In the assets of one of the most famous venture crypto funds Grayscale, you can find such startups as Circle, Ripple, Bitpay, Chainalysis, Zcash, Everledger.
China’s Fenbushi Capital and California-based Pantera Capital are also among the leaders. Among another are Bakkt, Bitstamp, Circle, Coinbase, Edge, Polkadot, The Block, and Ripple.
Hedge funds invest investors’ funds in cryptocurrency assets and trade them on an exchange. These can be any tokens, but the most common ones are of the greatest interest: Bitcoin, Ethereum, XRP, Litecoin, and Bitcoin Cash.
The most famous cryptocurrency hedge fund in the world is Arrington XRP Capital, founded in 2017 by Michael Arrington, creator of TechCrunch and the venture capital fund CrunchFund. Its main competitors are BlockTower Capital, former top manager of Goldman Sachs Matthew Getsem, Galaxy Digital Assets Fund, owned by well-known investor Mike Novogratz, and Brian Kelly Capital Management that headed by analyst Brian Kelly.
The number of new funds grew most actively in 2017-2018, during the cryptocurrency boom. Then 575 cryptocurrency funds were created at once, which is almost three times more than in the next two years. Following the fall in Bitcoin value, funds began not only to open less often but also to close more often. In total, 127 cryptocurrency funds ceased to exist from April 2019 to June 2020.
In July 2020, Tetras Capital, New York, closed. It managed $ 33 million in the interests of more than 60 investors. A shortage of demand has put the first UK regulated hedge fund firm, Prime Factor Capital, on hold. The Adamant Capital of Tour Demeester with $ 10 million in assets, Neural Capital, Cambrial Capital, and others left.
Most likely, we are talking about clearing the market from companies that tried to build the work of their cryptocurrency funds on the wave of the hype and boom of 2017-2018.
However, despite the departure of a large number of players from the market, the volume of assets under the management of cryptocurrency funds is growing. According to Crypto Fund Research, it has increased almost tenfold over the past three years, reaching $ 21.6 billion by early July 2020.
The consolidation of the main market participants is another trend in the segment. According to PwC data, the share of hedge funds with assets over $ 20 million increased from 18% to 34% during 2019. At the same time, the number of players with small portfolios has significantly decreased.
The stronger positions of major players in this market segment are also influenced by the increased skill level of managers. People with extensive experience in management and asset management come to funds. Managers are trying to build real funds – with administrators, auditors, and independent directors. In addition, they have a large client base accumulated over the years in the industry.
However, in comparison with traditional funds, there are still a few large market participants. According to Crypto Fund Research, only 5.5% of cryptocurrency funds manage assets of more than $ 100 million. For half of the funds, this amount does not exceed $ 10 million.
Relatively inexpensive portfolios and an emphasis on high-risk asset management formats are in harmony with the performance of cryptocurrency funds. They outperform both digital and traditional assets in terms of performance. Crypto Fund Research analysts have calculated the return without fees for 70 crypto funds. In the first eight months of 2020, it amounted to 71%, which is twice as much as at the end of 2019.
In the wake of the cryptocurrency hype, the returns of funds were at an even higher level. For example, at the end of 2017, it amounted to 1094% at once. However, due to the collapse of the exchange rate in 2018, it fell to negative values, amounting to -32.5%.
The value of crypto assets has a decisive impact on the performance of funds. Due to the high volatility in the market, the monthly profitability over the past three years has fluctuated between -17% and + 23%, while the dynamics were directly related to the movement in the cryptocurrency market. This is clearly visible on the fund’s profitability chart in relation to Bitcoin rate.
The dependence of the level of profitability of funds on Bitcoin value can remain quite high as long as BTC remains the main cryptocurrency asset in the world. Investing in different assets allows funds to hedge the risks of volatility in the bitcoin rate. Due to this, the yield curve of crypto funds remains smooth even during market crashes.
Investments in cryptocurrency funds turned out to be more profitable than Bitcoin. In total, from its creation in January 2017 to the end of the first quarter of 2020, the CFR Crypto Fund Index has grown by 1134%. Bitcoin rate has risen by only 814% during the same time.
Cryptocurrency hedge funds also show higher annualized returns compared to the traditional market. According to Eurekahedge, which compares the performance of 15 leading cryptocurrencies and 2,165 traditional hedge funds, the former are subject to very strong fluctuations but are generally at a higher level.
The high profitability of cryptocurrency funds and the “cleansing” of the market leads to the fact that new, more serious investors appear on it.
People who have already tried themselves as investors in other areas – stocks, bonds, mutual funds, in the derivatives market – are beginning to invest in funds.
Thus, institutionalists constitute the smallest, but at the same time the “richest” group of investors in cryptocurrencies and blockchain.
These are professional players – investment funds, portfolio managers. They come to this market not only for profitability, but also for the absence of a high “correlation” with the market for traditional assets: stocks, bonds, real estate.
For institutional investors, the defining issue remains the issue of regulating everything related to the cryptocurrency market and its decentralized nature. The clearer the rules of the game and the fewer questions they raise from regulators, the more willingly such investors enter a new market for themselves.
In a regulatory sense, cryptocurrency funds are lucky. They are not located in either black or gray zones, which allows them to operate completely legally. An important moment for their legalization was the emergence of licensed cryptocurrency depositories that have the right to hold assets of institutional clients.
Since then, the regulatory environment has remained largely unchanged. One of the most important issues remains the possibility of creating exchange-traded investment funds (ETF) tied to the rate of cryptocurrencies, especially bitcoin. This problem has remained unresolved for several years, primarily due to the opposition of the US Securities and Exchange Commission (SEC).
The SEC’s permission would greatly simplify the entry of new investors into the cryptocurrency market, however, cryptocurrency funds feel quite confident even without it. Now everything can be done through private funds that are not intended for retail investors, which are in no way limited in the assets in which they invest. In this sense, investing in cryptocurrency today is practically no different from buying paintings or collecting horses or wines.
The American regulator, who is always expected to take very tough measures in relation to everything related to cryptocurrency, is indeed surprisingly calm about crypto funds.
Experts believe that in the foreseeable future the situation is unlikely to change and cryptocurrency funds are not threatened by any tough actions from regulators. In their opinion, the main disputes related to legislative norms have recently shifted to the area of state cryptocurrencies.
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