The explosive growth of crypto funds is a compelling story, especially when you consider that the concept has only been around for 6 years. Today, crypto funds have become the engine powering the thriving crypto industry. For one, compared to the 224 funds launched in 2017, 2018 showed unprecedented growth as 239 new crypto funds entered the fray. However, many have projected that the number will drop in 2019. Yet, according to proprietary research by Bitbull Capital, there are reasons to believe that the crypto fund industry will continue to make strides, even as the crypto market recovers from a grueling bearish run.
As expected, the rise of crypto funds has directly impacted the crypto space with several talking points trailing its emergence as a crucial part of the crypto economy. Here, we will discuss 5 key takeaways from the impressive showings of crypto funds.
According to BitBull Capital’s report, the 812 crypto funds presently operating in different parts of the world majorly comprises of crypto hedge funds and venture capital funds, while the remaining are either crypto ETFs or private equity funds. One could argue that the influx of venture capitalist funds has translated to more funding options for blockchain startups, as it is now a common trend for traditional VC firms to launch blockchain funds.
While this is a given, the growing and maturing blockchain/crypto landscape have attracted private equity funds to crypto investment funds. On the part of crypto hedge funds, it’s a matter of maximizing all the investment opportunities made available by the volatile nature of the crypto market. And so, they mostly function as hybrid funds that invest in Initial Coin Offerings (ICOs) and cryptocurrencies. As such, they employ long-term investment strategies with longer lockup periods – similar to how venture capitalists operate.
Although crypto funds are on the rise, a report shows that over 60% of existing crypto funds have assets under management (AUM) that is less than $10 million. Therefore, this translates that many crypto funds are small scale firms with fewer than five employees. However, there exist top crypto funds which have more thafn $50 million in AUM, and only two has AUM that is worth $1 billion and above.
As impressive as these stats are, they do not even come close to the value of assets that traditional hedge funds control. All crypto funds assets combined represents a meager 1% of hedge funds assets.
It is not every day you see hedge funds outperforming their benchmarks. A reality that holds in the traditional asset markets is redundant in the digital assets market, as crypto funds continue to perform beyond expectations. The CFR Crypto index, which tracks over 40 crypto funds, managed to outperform the 1000% increase experienced in the bitcoin market from January 2017 to June 2019. It gained more than 1400% during the same period.
This data is more impressive when you consider that crypto funds lagged behind many of the single digital assets performance in 2017 and overtook the market in a time when many feared the worst – the bear market. Nonetheless, this does not mean that investors did not lose money, rather the fact that crypto funds returned -46% in 2018 compared to the -76% return of bitcoin is in itself a success.
The gruesome effect of 2018’s bear market would have crippled the development of the crypto space if not for the unwavering optimism of crypto funds. Venture capitalists and crypto hedge funds utilized this period to pick out interesting blockchain projects and fund them. There is no doubt that without these funding developments would have stalled.
Experience is one factor that should determine the profitability of investment funds right? This belief is less potent in the hedge fund industry as a recent Loyola Marymount University (LMU) report shows that hedge funds’ performances dipped as they aged. The research stated that the average age of conventional hedge funds is 52 months and returns in the first year of operation are more than triple that of the fifth year. For crypto funds in the CFR index, their median age is 16 months. Applying the information garnered in the LMU report, one could argue that crypto fund managers are in their prime, and this has helped them generate fantastic returns.
According to PWC and Elwood joint 2019 crypto fund report, 64% of crypto funds are based in the United States. Other countries that boast a booming crypto fund space are the Cayman Island, the United Kingdom, Singapore, Liechtenstein, Luxembourg, and Australia. It seems that crypto funds generally prefer cities, which house traditional hedge funds.
In the past, the small size of many crypto funds excluded them from the spotlight. However, things are changing, as the United States, Securities and Exchange Commission (SEC) and other regulatory bodies across the world are establishing guidelines for ICOs and security tokens. And since crypto hedge funds are heavily linked with security tokens, it is looking more likely that they will be required to meet stiffer registration requirements. A telling factor is the case of Pantera Capital, which disclosed in December 2018 that it might pay refunds and fines for investing in ICOs that violate US securities laws.