By
Darya Rudz
June 6th, 2023
Bitcoin continues to boom, with at least two digital currency hedge funds appearing every week and total value of all cryptocurrencies growing to more than $170 billion this year.
Following the global hype, most prominent institutional investors are seeking ways to join the market to make use of its light regulations, volatility and low risk to lose other people’s money in.
Over the past six years, the most famous and biggest cryptocurrency, Bitcon, has been just outperforming all the existing traditional currencies year by year, though 2014 appeared not so fruitful for it. The meteoric rise of digital currencies prompt only positive predictions on their prices’ growth. Thus, at press time, Bitcoin was trading at $5.866, according to the CoinMarketCap’s Index. That’s why more and more investors consider it an esoteric instrument used by gun-runners and drug-dealers on the Dark Web that should be avoided.
This year marks a growing number of new hedge funds offered by institutional investors who might be unfamiliar with the market a potential route into the world of digital currencies.
Autonomous NEXT, a financial technology research house, released a report which claims that over 80 crypto hedge funds have been launched just this year, with the total growing to 110 with about $2.2 billion in assets altogether. “Like wild mushrooms, crypto hedge funds have been taking root in the volatile and unregulated soil of the crypto economy,” Autonomous NEXT said in a post on their website.“So we went digging, and digging and digging,” the firm added.
However, most of these funds are relatively small with a limited track record what means that pension funds, insurance companies and large mutual funds are staying away.
“While cryptocurrencies are probably here to stay, they are difficult to analyze, wildly volatile and some may be prone to fraud,” said Trevor Greetham at Royal London Asset Management (RLAM), part of the Royal London life insurance company. “Diversification is a good thing but that doesn’t mean investing in everything just because it’s there. We favor assets with a long track record in producing returns or reducing risks,” he added.
Autonomous NEXT partner Lex Sokolin mentioned that only a couple of the mentioned in the report hedge funds worth several hundred million dollars with most in the $5 million to $20 million range. “For many institutional, discretionary fund managers, those funds wouldn’t get cleared because the big question would be around liquidity,” explained James Butterfill, head of investment strategy at ETF Securities in London.
Defining the cryptocurrency’s value is a tricky issue as there’re about 17 million of bitcoins existing while its total supply is limited to 21 million which won’t be reached until the next century, Reuters explains
“If the supply is truly fixed then the price of these securities are determined purely by demand which, in turn, is determined largely by sentiment,” said Ken Dickson, investment director, money markets and FX at Aberdeen Standard Investments. “This means huge price swings with bubbles, booms and busts. Unless the supply processes of these instruments are reformed then it is unlikely that they will play any part of an investment portfolio,” he added.
Bitcoin and one more popular cryptocurrency – Ethereum – are on a roller coaster ride this year what makes committees at institutional investment firms to take into consideration risks related to asset classes. “Your risk-budgeting committee will say: you can’t hold a lot of that because of the amount it increases risk in your portfolio,” said Butterfill. “I do expect volatility to decrease over time but risk budget teams tend to look historically.”
Nevertheless, the Wall Street has a close look at cryptocurrencies with even traditional hedge funders paying attention to this market, that’s why further creation of digital currency oriented funds is quite expected.
“We have seen managers invest in the actual currencies and/or in the ICOs, and soon there will be derivatives as well,” Steve Nadel, a hedge fund attorney, and partner at Seward & Kissel, said in an email sent to Business Insider. “Cryptocurrencies have garnered a fair amount of interest in the investment management space, primarily because of the returns they have recently shown,” he said.
