Cryptocurrency hedge funds continue to be one of the fastest growing segments of the hedge fund industry. 2017 was a record year for the launch of new crypto funds, both hedge funds and venture capital. With 34 launches already this year, 2018 is on pace to meet or exceed that number, according to cryptocurrency investment research firm, .
The growth in crypto funds comes amidst significant headwinds. The SEC has announced its intent to regulate ICO’s and has suggested it may investigate up to 100 crypto hedge funds. Several have reportedly already received subpoenas. Included in these subpoenas was the $100 million crypto Arrington XRP capita, run by Tech Crunch founder, Michael Arrington. The confusion lies in whether current securities laws apply to digital coins.
The SEC is not the only hurdle for crypto hedge funds. Depressed prices for the underlying cryptocurrencies that make up the bulk of their portfolios is eroding their asset base and undermining investor confidence. Prices for bitcoin and Ethereum are down over 50% from their December 2017 highs. bitcoin Cash, which once traded for over $3,900, now sits at about 1/3 of that price.
The potential obstacles haven’t deterred new crypto funds from entering the market. Even with SEC uncertainty, the US investment market is lucrative enough that it remains the number one location for the launch of new cryptocurrency funds. According to Crypto Fund Research, which provides a comprehensive , 17 new crypto funds have launched in the US in the first four months of 2018. This represents half of the funds launched worldwide and this ratio is consistent with prior years.
Given the uncertainty of the regulatory environment and unpredictable cryptocurrency prices, not everyone is certain the crypto fund industry can continue its current trajectory. Josh Gnaizda, CEO of Crypto Fund Research says, “Consolidation amongst crypto funds is almost inevitable at some point. The majority of funds are quite small by hedge fund standards – under $10 million in assets. It is difficult for funds of this size to remain profitable long-term and we expect many to close as they face pressure from regulatory agencies and volatile prices in cryptocurrencies that make performance fees unpredictable.”
There are currently a total of 276 cryptocurrency funds in existence. 174 of these are either hedge funds or tokenized investment pools. 90 are venture capital funds investing largely or exclusively in blockchain companies.
The hedge fund side is led by funds like Grayscale and Pantera Capital. Both were founded in 2013, years before the boom in crypto funds hit full steam in early 2017.
Likewise, the venture capital side is dominated by existing powerhouses like Andreessen Horowitz and Sequoia Capital. Both have expanded their fintech and technology funds to include blockchain companies. Andreessen Horowitz has given indications it may soon launch a dedicated cryptocurrency fund.
Whether cryptocurrency funds can keep up the blistering pace of new launches remains unknown. It will likely depend on the trajectory of cryptocurrency prices as well as what measures regulators like the Securities and Exchange Commission and Financial Services Authority take to monitor and regulate the industry.
provides detailed information on over 275 crypto hedge funds and venture capital firms.
You can view more on the current state of the crypto fund industry in this infographic:
