Hedge funds in crypto on the rise - icoinic
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Franklin Feringa - Fundamental Analyst - Icoinic B.V.
Franklin Feringa
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Analist

Hedge funds in crypto on the rise

There have been some mixed messages regarding adoption among institutionals in the cryptocurrency market. A lot of news sites have reported a negative development with regards to hedge funds that focus on cryptocurrency. The key takeaway of one such report is as follows:

As many as 70 crypto-focused hedge funds closed down this year as institutional turn out to the sector remains on the lower side.

Reported by Bloomberg on Wednesday, the funds mostly catered to pensions, family offices, and wealthy individuals. Moreover, according to Crypto Fund Research, a San Francisco-based market analytics firm, the number of new funds started in 2019 remains less than half of the new funds initiated the previous year.”

Growing number of hedge funds

All of this looks pretty bad and leads to believe that the number of active hedge funds has declined. However, when digging just a bit deeper, we can see that this is far from the case. Although the closure of 70 hedge funds is definitely not a positive development for institutional adoption, it is no real downturn either. Despite the closures, the total number of hedge funds active in the cryptocurrency market has actually increased over 2019 according to the same Crypto Fund Research report.

Despite the 70 closures during 2019, twice as many hedge funds opened their doors that year. Although this is down significantly from the two years before, this comes as anything but a shock. You will probably remember the state of the market during the years 2017 and 2018. The overwhelming hype surrounding altcoin projects increased tremendously during the second half of 2017 and lasted into the beginning of 2018, leading to massive amounts of capital raised. 

All of this hype and the massive returns on investment that were generated in a relatively short term led to more demand for cryptocurrency and a significant rise in newly started hedge funds looking to capitalize on the hype. 

The hype seen during that period has not been seen since. Instead, it somewhat died down while a lot of volatility in the market caused some significant losses among many hedge funds and eventually led to closures. 

A lower growth rate of cryptocurrency hedge funds seems nothing but logical after such a period. And despite the more difficult times for these professional investors, the growth still remains significant, a positive development. It shows that there is still increasing demand for exposure to crypto markets among institutionals. 

Grayscale investments

Another hint that institutional interest is expanding instead of stalling, as many suggest, is this report from Grayscale Investments, a company that lets accredited investors own Bitcoins and other cryptocurrency investments via its funds. It reported that it raised $608 mln over 2019, the highest amount in 6 years, bringing the total amount invested to about $2 bln. Grayscale’s  investor base grew by 24% during 2019. The managing director of the fund had this to say about it:

“It’s clear that we’re experiencing institutional adoption,” and “The asset class is experiencing increased validation from legacy companies like Fidelity and CME, signaling to institutions and the investment community as a whole that crypto as an asset class is here to stay.”

It was also mentioned that hedge funds, pensions and endowment funds were boosting crypto holdings.

Summary

So reports have actually been very promising regarding institutional interest despite what some might say. The number of hedge funds are increasing and key figures implying increasing demand.

Luc Correia Cabrito