Industry Outlook: Crypto Hedge Funds

YungBull's picture
Rank: Gorilla | 556

Hello,

The purpose of this thread is to serve as an overview of the Crypto Hedge Fund industry. Other common names for this space include Cryptocurrency Hedge Funds, Blockchain Hedge Funds, and Digital Asset Hedge Funds. In this thread, I am going to discuss the following:

1. Industry Trends

2. Major Players

3. Crypto Hedge Fund Tools

4. Market Manipulation

5. Additional Ideas

6. About Me

###1. Industry Trends
With rising public awareness of the cryptocurrency space, hedge funds in this area have also been on the rise. According to [this article](https://www.the-blockchain.com/2018/10/17/record-r...) on the-blockchain.com, we are on pace to have a record rate of new crypto hedge fund launches in 2018, despite being in a bear market for most of the year. In 2017, there was a total of 735 hedge fund launches during the year, 118 of which were crypto hedge funds (of all hedge funds launched in 2017, 16% were crypto hedge funds). There are currently projected to be 596 hedge fund launches during 2018, 120 of which are projected to be crypto hedge funds (of all hedge funds launching in 2018, 20% are crypto hedge funds).

At this current pace, crypto hedge funds are the fastest growing segment in the hedge fund industry.
- [cryptofundresearch.com article](https://cryptofundresearch.com/cryptocurrency-fund...)

Not surprisingly, Cryptocurrency AUM have also been growing quite rapidly. This can be attributed to an increase in the number of crypto hedge funds, net inflows to previous funds, and an increase in the value of cryptocurrency AUM, which for instance was applicable during the latter half of 2017 when most cryptocurrencies more than tripled in value. Below is a graph from cryptofundresearch.com indicating this trend.

If you would like more information regarding the Cryptocurrency Investment Fund Industry, I highly recommend checking out [this article](https://cryptofundresearch.com/cryptocurrency-fund...) here by crptofundresearch.com for trends on all cryptocurrency funds (hedge funds, venture capital, and private equity trends combined).

###2. Major Players

Currently, some of the major crypto hedge fund players include:

**Pantera Capital**
website: [https://www.panteracapital.com](https://www.panteracapital.com)

Pantera is an investment firm exclusively focused on cryptocurrency and blockchain technology. The firm manages over $700mm across two venture funds and four cryptocurrency funds. Pantera was the first U.S. Bitcoin investment firm and one of the largest institutional owners of cryptocurrencies.

**Polychain Capital**
website: [https://polychain.capital](https://polychain.capital)

Polychain is an investment firm committed to exceptional returns for investors through actively managed portfolios of blockchain assets and manages the largest digital asset fund in the world.

Polychain Capital is at the vanguard of cryptocurrency investing, attracting backers from prominent ventures capital firms like Andreessen Horowitz, and betting on companies that might define the next generation of the blockchain. Earlier this year, Polychain became the first crypto fund with more than $1 billion in assets under management, according to a regulatory [filing](https://adviserinfo.sec.gov/IAPD/content/ViewForm/...).
- [Fortune.com article](http://fortune.com/2018/06/26/polychain-capital-bi...)

**Galaxy Digital Assets**
website: no website found
Galaxy Digital Assets is a NYC-based multi-strategy investment firm focused on digital assets and blockchain technology. Leveraging a hybrid hedge fund and venture capital fund model, the firm is both stage and geography agnostic with the objective of generating short and long-term returns.

**Digital Currency Group**
website: [https://dcg.co](https://dcg.co)

DCG describes themselves as "the epicenter of the bitcoin and blockchain industry." They operate three subsidiaries: Genesis Trading, Grayscale, and CoinDesk. [Genesis Trading](https://genesistrading.com) is a full-service, institutional trading firm focused on digital currencies, providing two-sided liquidity on a daily basis for buyers and sellers. [Grayscale](https://grayscale.co), a trusted authority on digital currency investing, provides unparalleled market insight and investment exposure to the developing digital currency asset class through its funds. [CoinDesk](https://www.coindesk.com) is the leading independent source of blockchain news, research, and events.

**MetaStable Capital**
website: [http://www.metastablecapital.com/index.html](http://www.metastablecapital.com/index.html)

MetaStable is a long-term value investing crypto asset hedge fund. They operate solely as a hedge fund investing in coins, not companies. The firm believes by investing in the underlying digital currency of a company, they are able to remove some of the risks with investing in the company itself (venture capital/private equity).

**Protocol Ventures**
website: [https://www.protocolventures.com](https://www.protocolventures.com)

Protocol is a leading fund of funds hedge fund investing in the top ten crypto funds in the asset class. The firm focuses on initial coin offerings and crypto assets. They claim to be the first ever crypto fund of funds. Other crypto fund of funds include BitBull Capital, KitTrading, and Napoleon Capital.

**Alphabit Fund**
website: [https://www.alphabit.fund](https://www.alphabit.fund)

Alphabit is a crypto hedge fund that implements the following strategies: Manual Trading, Algorithmic Trading, Tokenised Startup Investments, Futures, and Cash Management. The firm blends different investment strategies to improve the efficiency frontier of the fund with the purpose of generating higher returns per unit of risk than that of Bitcoin.

**BlockTower Capital**
website: [https://www.blocktower.com](https://www.blocktower.com)

BlockTower is a leading cryptoasset investment firm, applying professional trading, investing and portfolio management to an emerging digital asset class. The firm's approach to the crypto asset space operates at the intersection of cryptography, game theory, network and behavioral economics, competitive strategy, computer science, investing and portfolio management.

###3. Crypto Hedge Fund Tools

What tools do crypto hedge funds use in their investment strategies? More specifically, how do these firms take short positions on illiquid cryptocurrencies?

The following platforms can be used to short cryptocurrencies using forwards:

**BitMEX**
website: [https://www.bitmex.com](https://www.bitmex.com)

BitMEX is a cryptocurrency exchange and derivative trading platform that allows individuals to trade Bitcoin and other cryptocurrencies with up to 100x leverage. The platform prides itself on fast execution, low fees, and Bitcoin futures and swaps, as well as its "Perpetual Contract", a high-leverage contract that never expires.

**LedgerX**
website: [https://ledgerx.com](https://ledgerx.com)

LedgerX is an institutional trading and clearing platform that has received approval from the U.S. Commodity Futures Trading Commission (CFTC) to trade and clear swaps and options on digital currencies. LedgerX is registered with the CFTC as a swap execution facility (SEF) and derivatives clearing organization (DCO). The exchange is the first federally regulated exchange and clearinghouse to list and clear fully-collateralized, physically-settled bitcoin swaps and options for the institutional market.

**Bitfinex**
website: [https://www.bitfinex.com](https://www.bitfinex.com)

Bitfinex is a digital asset trading platform offering state-of-the-art services for digital currency traders and global liquidity providers. In addition to a suite of advanced trading features and charting tools, Bitfinex provides access to peer-to-peer financing, an OTC market and margin trading for a wide selection of digital assets. Bitfinex's strategy focuses on providing unparalleled support, tools, and innovation for professional traders and liquidity providers around the world.

Note: I am actually not sure of how frequently crypto hedge funds use these tools and would love some feedback from a professional in the industry, if possible.

###4. Market Manipulation

Market Manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a product, security, commodity or currency. Due to the current lack of regulation, as well as the size of the current cryptocurrency market, market manipulation occurs more frequently in this market compared to other public and heavily-regulated markets, such as the equities market. This is conducted by using the following fraudulent activities:

* **Pump and Dump (P&D)** is a form of securities fraud that involves artificially inflating the price of an owned stock through false and misleading positive statements (i.e., hyping up the cryptocurrency), in order to sell the cheaply purchased cryptocurrency at a higher price.

* **Wash Trading** is a process whereby a trader simultaneously sells and buys the same financial instruments to create misleading, artificial activity in the marketplace.

* **Tape Painting**, also known as painting the tape, is a process where manipulators buy and sell a security among themselves to create artificial trading activity. The succession of trades reported on the ticker tape lures in unwary investors because of the unusual volume.

From my understanding, the difference between wash trading and tape painting is that wash trading occurs when AN individual makes a buy and sell order at the same time at roughly the same price to create an artificial increase in volume, whereas tape painting is the process of two or more individuals exchanging a security among themselves to create an artificial increase in volume. Please correct me if I am wrong.

###5. Additional Ideas

Suggestions?
Thoughts?
Please give me ideas!

Possible Ideas:
crypto hedge fund trading strategies
scandals/fraud in the space
regulation

How the crypto hdege fund industry is shaping the hedge fund industry and having an impact on a macro scale...

###6. About Me

I have a genuine passion for finance and blockchain assets (cryptocurrencies). My passions in finance relate to the hedge fund industry, the investment banking industry, the venture capital industry, and the private equity industry. I have been involved in the cryptocurrency realm for years, sometimes following the space more closely than other times. My drive for this thread was spurred spontaneously from Crypto Jones's [AMA: Crypto Hedge Fund Trader](https://www.wallstreetoasis.com/forums/ama-crypto-...) thread. If you have the time, I highly recommend checking it out.

If you are a professional in this space and would like to help contribute to this thread, please feel free to reach out to me via a PM.

I hope you find this thread helpful as an introduction to this exciting space. If you have any questions for me regarding my background, ambitions, or anything at all, please feel free to ask them below. Also, feel free to share any suggestions or ideas you may have or any topics you would like me to research regarding this industry.

*Disclaimer: I am currently an undergraduate student taking a hedge fund course and by no means am I professional in this space. I have gathered the information provided in this thread from numerous sources, most of which are linked and credited. I do not mean to pass any of the above content as my own despite assembling the above information into this coherent piece.*

Comments (17)

Oct 23, 2018

This is super helpful. Thank you

Oct 24, 2018

can I pm you ? passionate about crypto as well.

Oct 24, 2018

Of course. Happy to talk

Yung Bull

Oct 24, 2018

Nice contribution. Bookmarked and +1!

Thanks for taking the time to compile this and sharing.

Oct 24, 2018

Thanks, I appreciate it. If you happen to have any suggestions as to more ideas to incorporate, feel free to PM me or post below.

I am currently thinking about trying to create a section on how the HF industry might change or has changed due to the rise of Crypto Hedge Funds.

Yung Bull

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Oct 24, 2018

A subsection over investment strategies would be very helpful. How do these funds make any money with cryptocurrencies on the decline for months?

Oct 25, 2018

Most (if not all) pre 2018 funds are losing ridiculous amounts of money.

I remember reading that Pantera's crypto fund is down like 40% this year, and I think Polychain is doing even worse

Oct 25, 2018

It is interesting to attempt to transfer already established investment strategies and apply them into the crypto space.

I don't think I would ever put my money into a crypto hedge fund, the management fees would not be warranted when they hugely outperform whatever the benchmark is, especially if the 2/20 fees remain.

Most Helpful
Oct 27, 2018

Fwiw I have met analysts that work at all the funds you mention and they are some of the dumber people I've met in the investment community. I think there's a lot of opportunity, especially to short coins. That said, I think there's opportunity mostly because the other players are remarkably inept. A great example is MultiCoin, whic articles on their site and posts these models online that are pretty much just wrong. Not wrong in their assumptions mind you - literally just wrong formulas. I would generally avoid want to even associating myself with these people. Many of them are deeply unethical as well. I unfortunately have a close friend that got involved here and honestly he is probably doing something that could be considered fraud if it was in any industry

    • 6
Oct 24, 2018

Really interesting insight and enjoyed your comment about there being opportunity because the other players are inept. Thanks for sharing.

Yung Bull

Nov 1, 2018

I have to ask - if this is true and you know about it and you know how to do it better, then why don't you act on it and make money?

Oct 27, 2018

Because all of the ideas are short ideas and there is limited borrow to short. If there was a liquid options market, I would do this on the side with my personal money all day (e.g., buying puts or selling calls). I spoke to several of the funds and a few offered to interview me. I wouldn't work for them, because I would have far less to learn from them than at a strong equities hedge fund. If I wanted to work a job where getting alpha is easier, I could just work at a smaller equity hedge fund.

    • 1
Oct 28, 2018

Very insightful write up! Hopefully we can have some industry experts chime in on some of the nuances in the industry. +1

Oct 29, 2018

How do you think this crypto fund industry will behave in 2019? Are there mountains of institutional capital about to flood into every coin? Or are some funds about to shut down, puking altcoins until they're worthless?

Oct 24, 2018

That's a great fucking question. I believe the answer to that question relies on the government and the passing of regulations that will promote this industry through greater mainstream adoption. For example, the SEC has yet to approve a bitcoin ETF. However, there recently have been talks about BlackRock and Coinbase pairing up to attempt to get the first crypto ETF to the market. Once an ETF is successfully passed, I could see a greater influx of institutional capital flow into the market. That's just my take, and there is a case for the opposite happening as well.

Yung Bull

Oct 30, 2018

"Bitcoin is the next financial crisis and it's going to trigger the next big recession "
- faux intellectual dumbass talking behind me at the grocery store

Oct 30, 2018
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