Why crypto hedge funds are rising?
Hedge funds are financial market investments where money is made irrespective of market fluctuations. This is known as hedging. Only accredited investors can apply to hold a share in the pool of hedge investments. In a crypto hedge fund, strategists invest crypto owner’s share of digital currencies in crypto loans, crypto yield farming, and derivatives to earn returns.
An Amsterdam based company, Intertrust Group has predicted that about 98% of the hedge fund executives are speculating and planning to invest in digital currencies in the coming five years. The survey was conducted on top 100 hedge fund investors of US, UK, Europe and Asia. The investors plan to invest 7.2% of their holdings on cryptos.
High returns and more returns
Very few financial securities have grossed returns as spectacular as earned by Bitcoins. If we compare its current value with its opening value in 2009, its value has broken all the records with 500,000,000% growth over the years. Ethereum or Ether is not behind. Its value has risen over 35,000% since its launch in 2015.
A frenzy in the investment market was created when hedge funds dealing in cryptocurrencies and distributed ledger technologies rose over 48% in January 2021 after gaining 189% in 2020 as calculated by the Hedge Fund Research’s Blockchain Composite Index. Over time, almost $800 billion financial and economic institutions like Unbanked have become a part of the cryptocurrency market.
However, the market for cryptocurrencies may be volatile, but investors here are less vulnerable to hedge fund frauds. Still several factors are scrutinized before making nay investment such as: –
- Types of digital currencies to be traded
- Identifying accredited investors who possess cryptos to be qualified for investing
- Internal strategies for balanced and smart investment to ensure high return
- Knowledge of regulatory framework and new rules published by the authorities from time to time
- Declaration of risks and expected returns to investors
How to invest in crypto hedge funds
The first step is to identify the type of crypto you want to invest in. According to the Coin Market Cap, market is full with more than 9000 virtual currencies as of now. This is important to avoid the fraud commenced by a self-proclaimed crypto queen, Dr Ruja Ignatova. She duped people for $6 billions by proclaiming that Onecoin is going to a BTC killer and then, she vanished.
Still, there are many virtual currencies to start from and they have much untapped potential. According to Electric Capital’s Developer Report, there are more than 8000 developers that work actively in a month on different cryptocurrencies such as: –
- Polkdot
- Filecoin
- Near
- Flow
- Avalanche
- Uniswap
- Balancer
- Arweave
Recognition by regulators
According to a report published by the Stanford University, stock and securities regulator like IRS, CFTC, and SEC identify cryptocurrencies as a commodity rather than a security. Therefore, their regulations don’t apply to digital currencies. But investors apply the traditional model of hedge funds like: –
- Forex Trading
- Fund of Funds
- Quant Model or Quantitative Model
- Arbitrage Trading
- Hybrid Trading
Trends in the market
SEC has identified Bitcoin as a virtual currency, but modern cryptocurrencies like Ethereum which is a conduit of executing smart contracts is identified as securities. For instance, when a company uses decentralized applications on Ethereum for fundraising, they become securities. It means Ether can be subjected to traditional federal regulations.
North America is leading the way in crypto hedge funds
Investors are willing to invest 10.6% of their assets in digital currencies. If we compare it with overall investors in UK, Europe, and USA, their average investment made by all the 100 participants of the survey is 1%. Only three out of 100 investors are willing to give 20% of their holding to cryptos.
Bill Miller’s hedge funds filings with the SEC reflect that USD 2.7 billion Miller opportunity hedge fund will invest in cryptocurrencies through a private investor- Grayscale Bitcoin Trust.
The next big fish is Tudor Investment Corp founder Paul Todor- Jones. He, along with Michael Novogratz, finance manager at the the Fortress Investment Group have converted their substantial assets in crypto funds. 5% of Tudor’s investments are in BTC.
Following suit, Brevan Howard Asset Management will invest 1.5% of its assets into BTC as reported by Bloomberg. SEC filing of Rothschild Investment, 211-year-old financial giant, has revealed that they have purchased over USD 4,75 million worth of shares in Grayscale Ethereum Trust Shares.
Takeaway
Investment in stock and speculative market would always be risky. However, governments around the world are recognizing the utility of virtual currencies. El Salvador has become the first country to recognize BTC as a legal tender. For now, the future of cryptos appears bright. But can only speculate!