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Why Pure Crypto Hedge Funds Failed

Why Pure Crypto Hedge Funds Failed

Last updated: February 18, 2021 | January 23, 2020 | Elisa Mueller

Table of Contents

  • Market Dynamics in Crypto
  • Think of a fund back in 2017 that was 100 percent encrypted.
  • These shortcomings were mostly due to ignorance, but there were blatantly idiotic mistakes also.

According to FreeBitcoin, Crypto Hedge Funds are as follows:

Many conventional investors and fund managers claimed they could tame the crypto market and make abnormal returns in an asymmetric avenue in 2017 when the longest bull run in Bitcoin's history began to unfold. When more and more executives switched to cryptocurrencies from the worlds of equities, forex, and commodities, they discovered that the Bitcoin market was a different species, and they were shot down.

Let’s look at why these funds failed in such a dramatic fashion.

Market Dynamics in Crypto

Over 70 crypto-focused hedge funds closed in 2019. This was probably because, over the course of 2018, these funds lost most of their capital and were shut down by LP withdrawals. 

Because of the huge capital injection, they had during the bull market and the previous credibility of the fund manager, some of the biggest funds, including Galaxy Digital, were able to stay afloat. After losing 20-40 percent in consecutive quarters, smaller funds did not experience the same advantages and ultimately broke down.

When an investor puts money into a crypto fund, they are likely putting only a small amount of their portfolio into it. But for the fund itself, their entire portfolio is just a massive concentration of highly correlated, hyper-volatile assets. So when the top blows off and the market tanks by 50-70% over the course of a few months, the investors with a small allocation to crypto don’t mind the losses, but the fund itself is put in jeopardy due to an inability to sustainably and consistently generate profits. 

Think of a fund back in 2017 that was 100 percent encrypted.

Over that time, it probably saw unimaginable gains. Now, remember the fact that most funds came in when the price of Bitcoin was at $20,000 or when 2018's big bear market began. A pretty scary picture, huh?

First and foremost, these fund managers, who were superstar stock and commodity traders, claimed they could come and conquer the market dynamics of cryptography instantly. In the span of half a year, the 2018 bear market's rude shock brought these funds down almost 50 percent. They may have been mentally prepared for the volatility, but they did not expect the statistics to be so different from traditional markets. Volume profiles, technical indicators, and order book mechanics absolutely threw these funds off their game.

These shortcomings were mostly due to ignorance, but there were blatantly idiotic mistakes also.

In 2018, market cap based allocations were the most common occurrence for crypto funds. Basically, these funds threw investor money into allocations that looked like 60 percent BTC, 15 percent ETH, and the remaining 25 percent spread across altcoins like NEO, Monero, ZCash, IOTA, etc. 

Long story short: they burned and crashed. We hopefully see more funds than at the moment understand that crypto is a very small market. During corrections, long-term positions over years and years need to be accrued, which funds didn't do in 2017 and 2018. Short-term positional hedge funds are the need of the hour. A trader that can take advantage of short term swings in crypto will be far more profitable than any long term trader – at least as things stand right now.

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