Crypto Hedge Funds Are Closing at a Startling Rate, But All is Not Lost
After the 2017-18 boom-bust that took the market to new highs and dropped it 80-90 percent from there, the current scenario of over 70 crypto-focused hedge funds closing is not very surprising. The number of hedge funds focused on the space has reduced in 2019 relative to the past two years, and CME volumes are minuscule when our next to unregulated exchange volume, Bloomberg reports, December 4, 2019.
Ignoring Years of Practical Information for Instinct
The spur of cryptocurrency as an asset class has led to the rise of a new breed of investment managers. Rather than relying on decades of practical portfolio construction theory, they defy the expertise of long-time practicers and asserted themselves as the ultimate authority. This is a constant theme as we see people question the credibility and veracity of those who have practiced in a field for decades.
Take a look at any cryptocurrency fund and one common theme sticks out: they allocated 75 + percent of their funds into cryptocurrency. They speak of risk mitigation and diversification, yet they only diversify within a single asset class. Refusing to accept the need for asset class diversification was the primary shortcoming that led to their downfall.
Cryptocurrency is a risk-on asset, meaning it is incredibly volatile and thrives when people have a high appetite for investment risk. So to allocate 75 percent or more of an institutional portfolio to a single risk-on asset class, not even a wide variety of them, leaves you with higher downside risk and a less diversified portfolio. Using it in the right way – and right quantity – can drive performance into orbit.
Are Institutions Crypto’s Saviour?
To think that a monetary asset class that can override the authority of sovereign states, erode the profitability of corporations, and empowers the people is begging regulators for approvals and pleading institutions to invest is irony at its finest.
Peer to peer was the initial ideology in Bitcoin, but a lot of people have devolved its purpose from enabling and empower to wealth creator fuelled by the big banks.
Crypto will survive with institutions. There are a good number of specialist institutions from Pantera Capital to GSR that is helping bring innovation and liquidity to space without disturbing the core ethos that has been built out.
Bringing the efficiencies and power institutions have held for years to the retail sector is a priceless benefit that decentralized monetary systems bring. No amount of hedge fund closures can stop this ball from dropping.