Funds specializing in cryptocurrency are opening at a record rate, new research finds – challenging the popular notion that a bearish market is hear to stay.
96 new crypto hedge funds and venture capital funds launched in the first seven months of 2018, research by CryptoFundResearch found. At the average rate of three opening every week, the study expects 165 funds to launch by the end of the year, making 2018 the largest year for crypto funds.
Although there are currently 466 crypto funds across the world, more than half launched in the past 18 months. The exponential growth in investment firms follows rising popular interest in cryptocurrency last year, a growth in investment vehicles and an influx of institutional capital.
“The growth began when Bitcoin broke through $5,000 and in the run-up at the end of the year”, said Josh Gnaizda, the founder, and CEO of CryptoFundResearch.
Newly launched firms in the first seven months of the year continued to set up in established global financial and technology centers. Nine funds opened in San Francisco, with a further six opening in New York. Singapore, already a center for cryptocurrency projects like VeChain (VET) and Litecoin (LTC), saw five open for business; London had four.
The research also suggests that whilst crypto funds are continuing to choose Western cities, as well as Singapore, China is becoming far less attractive. Technically the second biggest destination, with 34 crypto funds in the country (predominantly in Hong Kong), far fewer launched in China in the past seven months than in previous years.
This might be because of regulatory uncertainty in Beijing; with the government banning exchanges and ICOs back in September of last year. Considering the recent drop in new Chinese crypto funds, the study suggests businesses have moved to crypto-friendly jurisdictions.
“There’s no way to operate a hedge fund in China legally at the moment”, said Gnaizda. “What is interesting is the venture capital market hasn’t been affected to the same degree; Chinese-based funds like Huobi are working with government subsidies. This shows they’re still interested in trying to cultivate blockchain startups.”
“Far More Optimistic For Crypto Than Their Investors”
Most crypto funds are small scale operations; the vast majority have less than five employees, with many comprised of the founder and one or two additional members of staff. Only 28 had more than 25 employees and these were generally VCs invested in other businesses as well as in cryptocurrency.
There’s a real difference in how many of these hedge funds work, according to Gnaizda. Some crypto fund managers have worked in existing asset markets and jumped into cryptocurrency, anticipating an oncoming surge in demand. “These fund managers are far more optimistic for crypto than their investors”, adds Gnaizda.
However, Gnaizda says the story of the four Harvard students setting up their own fund isn’t unique: a growing majority are run by people under the age of thirty, many who have a lack of investment management experience.
Out of the estimated $7-9bn assets controlled by funds, half are controlled by the top-dozen by giants, like Sequoia Capital and Pantera Capital. The remaining 454 hedge funds control an average of $5-10m which Gnaizda doesn’t think is enough capital to create a sustainable fund.
“We haven’t seen how they’ll perform yet compared to more experienced fund managers”, said Gnaizda, who argues younger people who fully-understand the tech may have a crucial advantage.
Some of these funds could find it hard to survive in an extended bear market. If the volatility rate declines potential returns could become smaller, making it harder to attract capital.
Crypto hedge funds have grown off the back of an exciting new markets. As reality sets in, many of these funds will now have to justify themselves. But the continuing market exuberance on the part of long-term investors should give retail crypto clients some reason for optimism, despite the current market conditions.
The author is invested in BTC, which is mentioned in this article.