Sharks are stranded: how cryptocurrency funds survive in a falling market and colossal losses

More than 20% of hedge funds launched in 2018 specialize in working with cryptocurrencies. Deservedly digital assets attracted the interest of a huge number of investors and financial organizations. In 2017, Bitcoin has grown more than 13 times, not to mention many altcoins. None of the markets has already demonstrated such profitability for a long time, and among the owners of capital there naturally arose a request for investments in this sphere.

In 2018, the market situation has changed, but even the current drawdown does not prevent beginners from launching cryptocurrency hedge funds. The reasons for such enthusiasm in a special material for the BlockchainJournal magazine were told by the head of the communications department of the investment fund Inception Fund Ekaterina Skobitskaya.

The graph below shows how the number of crypto funds soared over the past two years. The figures for 2018 are still forecast, currently 162 funds have already been launched. It is known that in the third quarter the pace of opening new organizations slowed down. Therefore, we are unlikely to reach the amount predicted by the Crypto Fund Research research group, but most likely we will repeat the result of the past “explosive” year.

At the moment, more than 630 crypto funds are working on the market, of which a substantial part – more than 300 – falls on hedge funds. They also run most actively. 90 out of 162 organizations launched fall into this category. In addition to them, the total mass of crypto funds also includes venture, private and other categories of funds.

Beginners are not deterred from starting either the current drawdown on the crypto market, or the problems of their colleagues, which were launched in 2017 or in early 2018. A bear market usually discourages new investors, however, in the case of cryptoactive assets, the opinion is firmly fixed that they will definitely grow, and the only question is when the bottom will be found where you can buy at the best prices. In part, this motivation can be attributed to the ongoing expansion of crypto funds.

If you pay attention to geography, then the launch of funds unconditionally leads North America – 77 out of 162 funds were launched this year, followed by Asia with 36 funds and Europe with 35 funds. Only 17 organizations are running in the rest of the world.

Survive the strongest

However, with operating organizations, not everything goes so smoothly, despite the fact that far from newcomers come into the sphere. According to Autonomous Next, the assets managed by the majority of funds in 2018 sank by more than 60%. Thus, according to the August investment report of Pantera Capital's Digital Asset Fund, from the beginning of the year to the end of the summer, the company recorded a loss of 72.7% .

This is one of those organizations that enjoys a well-deserved prestige in the market – and yet could not avoid a huge drawdown. Along with her, such prominent funds as Mike Novograz's Galaxy Digital LP (more than $ 175 million), Multicoin Capital, Polychain Capital have already reported on losses. Some major players even made the decision to leave the market – this was, for example, announced by the Crowd Crypto Fund and Alpha Protocol. Lex Sokolin, director of fintech strategy at Autonomous Research, expressed confidence in July that 10% of the crypto funds would not survive the year 2018.

How to increase profitability?

In addition to the general market drawdown, a significant minus on the balance sheets of the funds is generated by frozen investments in the ICO. They are recorded in ethereum, which dipped in a year from $ 1300-1400 to $ 120. If at the beginning of the year, it was possible to earn enough on ICO due to the difference in price when entering at an early stage and listing tokens on stock exchanges, now this is a purely venture type of investment. At the moment, it does not provide intramonthly profit, and, like any classic venture, is designed for the medium and long term. The difference in funds raised on ICO at the beginning of the year and now speaks for itself. Investors are not yet ready to return to active work in this area.

Considering that a HODL strategy or the collection of some fundamentally promising basket of tokens does not bring short-term profit now, the funds turn to other tools. Rebalancing is in progress, which allows you to react flexibly to events in the market, get out of some assets in time, and re-start at the best price. Also, a small part of the balance is sometimes sent to margin trading.

Some get up in short positions, that is, they put them on a lower market. The latter would be the most logical in the current situation, but it is complicated by the unpredictability of the market in recent months. The latter does not respond to fundamental news, indicators do not always show an adequate picture. As a consequence, it is difficult to determine points for entering and exiting shorts, which somewhat reduces the effectiveness of such a strategy.

Partly on crypto funds put down last year’s merit. In 2017, the average profitability of organizations reached about 1000% per year; investors are accustomed to seeing crazy profits in reports. And this year the game has changed radically: the priority was no longer receiving super-profits, but the preservation of the capital that we managed to make on the growth of the market. Many investors are not psychologically prepared for this.

Also somewhat complicates the work of the situation with the regulation. It is extremely difficult to find a comfortable jurisdiction for registering a fund, while banks and payment systems are not eager to open accounts easily for organizations working with a crypt. To solve this issue, as a rule, it takes a lot of time and additional documentation. Sometimes regulators literally survive a new foundation from their jurisdiction. For example, such a fate befell the first official crypto-fund of South Korea – Zeniex. He was forced to close immediately after launch in early November. Soon the cryptocurrency exchange belonging to this organization was closed.

In the market with a cool head

However, in the very environment of crypto funds, the current situation is experienced stoically. At crypto-events and in the course of backstage meetings, market participants actively exchange information, share solutions to the difficulties that arise. Investments in ICO are treated coolly, as the time for their profitability will come. Fundamentally strong projects will surely show profits in the future – any experienced venture investor knows about this. But Pantera Capital doesn’t stop the losses at all – the company is diversifying its portfolio with might, entering, for example, the ErisX futures exchange project.

In moments of strong failures like the latter, it is practically impossible to stay in positive territory, however, Inception Fund, in its experience, was convinced that in other months it turns out to make profitability even in the current conditions. Below, as an example, we will give a screen for the dynamics of our portfolio from the 3commas service, which clearly shows that even before the collapse it was possible to extract profits from the market.

Those who do not achieve positive results, of course, are forced to close, but this is a healthy reorganization process that absolutely any market goes through during periods of turmoil. Weak participants leave, and investors' funds are concentrated in more capable hands.

In looking at the market, most crypto funds now have something in common: everyone is waiting for the best point to re-enter the crypt. There are no exact values ​​that the market will push off from, but most expect the market to stay flat for some time.

At the same time, a lot of fundamentally positive news has accumulated so that it is expected to give impetus to market growth in the foreseeable future. Recall the imminent launches of platforms for trading digital assets – Bakkt from ICE and the platform from Fidelity Investments , about the announcement of its own platform from NASDAQ . Also, the issue with ETF will finally be finally resolved – the discussion was scheduled for December 29, and the last opportunity for the SEC to decide will be February 27. In parallel, according to Bloomberg, large investors are actively entering the digital asset market through OTC transactions.

Therefore, all professional teams are now holding their hand on the buy button. Some will continue to accumulate assets on their balance sheets during the expected flat. Others will gradually re-enter the market, approaching the point that they consider the bottom. “Buy cheaper, sell more expensive” – this is a classic scheme for extracting profits from any market, and, perhaps, on the crypto market, the moment of very cheap shopping is coming.

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