The price of bitcoin has rallied by over 400 percent since the start of the year to hit an all-time high of over $5,000 in early September, while the price of one bitcoin started out at less than $0.01 only eight years ago. These exuberant returns have not gone unnoticed by the institutional investment community.
In the early years of bitcoin, this new digital asset class was too illiquid, too irrational, too immature, too unregulated and simply too complicated for institutional investors. However, as bitcoin has managed to mature into a viable new alternative asset class in its over eight years of existence the institutional investment community is now increasingly starting to offer bitcoin as an investment option to its clients.
While some private banks and brokerages, such as Switzerland-based Falcon Bank and UK-based Hargreaves Lansdown, are now offering bitcoin investment vehicles to their clients and several currency funds are boosting their fund performances by diversifying into digital currencies, the most notable development in the cryptocurrency investment space is the emergence of a wave of new digital asset-only hedge funds.
In 2017, over 20 new cryptocurrency-focused hedge funds have either launched or are in the process of launching with the intention to capitalize on the above average returns that the digital currency market has been able to generate during its early days.
New Funds on the Block
The Cayman Islands-based AlphaBit Fund was launched in January 2017 to apply a diverse range of trading strategies to the digital assets market. The hedge fund was founded with the aim to invest in bitcoin and other crypto assets by applying a combination of algorithmic trading, opportunistic trading, and investing in newly issued ICO digital tokens. AlphaBit has already invested in cryptocurrencies such as ether, ether classic, and ark, among others, and has managed to raise over $10 million so far, with the aim to raise $300 million in total.
Brian Kelly Capital Management was launched in March 2017 by CNBC Fast Money commentator and portfolio manager Brian Kelly. Kelly launched his BKCM Digital Asset Fund with his own funds at first and has since opened it up to new investors. He aims to raise $50 million in total and has already made investments in bitcoin, litecoin, and ripple, among several other digital assets.
Roberto Ponce Romay, a former senior manager at Bain & Co, launched a cryptocurrency hedge funds in July 2017, which is targeted at South American investors. The new fund invests in a diversified portfolio of digital assets and was launched with $10 million of assets under management with a target to reach $50 million before year end. The Crypto Assets Fund is the first fund of its kind offered to South American high net-worth individuals.
Other digital asset hedge funds that have launched this year or are in the process of launching include Auryn Capital, BlockTower Capital, Block View Capital, Coinshares 1 LP, Crypto Asset Fund, Crypto Lotus, Cryptocurrency Fund LLP, General Crypto, Grasshopper Capital, Pollinate Capital, and SuperBloom Capital.
While 2017 is witnessing a wave of new cryptocurrency hedge funds, none of them are the first funds to venture in this market.
Prior to 2017, investment firms such as Pantera Capital, PolyChain Capital, and MetaStable Capital have already been investing exclusively in digital currencies for their investors.
California-based Pantera Capital is an investment company that invests in blockchain startups as well as digital currencies. Its Pantera Bitcoin Fund is a fund that invests exclusively in bitcoin and has a minimum investment requirement of $100,000. It was launched in 2013 and was one of the first funds of its kind. Pantera Capital is currently also in the process of raising funds for a second digital assets fund, which will invest exclusively in newly issued ICO tokens.
California-based MetaStable is another investment firm that recognized the potential of cryptocurrencies as an asset class in 2014 and now offers two specialized funds for this asset class; MetaStable Balanced and MetaStable Edge. MetaStable Balanced invests in an array of cryptocurrencies to provide investors with a diversified portfolio of digital assets, while MetaStable Edge provides investors with further diversification by investing in new digital tokens that arise from initial coin offerings. The hedge funds currently has around $45 million worth of assets under management.
In 2016, former Coinbase employee Olaf Carlson-Wee launched Polychain Capital, which has managed to accumulate over $200 million assets under management, to run an actively managed digital asset portfolio that invests in a range of cryptocurrencies.
Institutional Money Could Push Digital Currencies to New Highs
Given that the cryptocurrency market has so far been largely driven by high net-worth individuals and retail investors, an inflow of institutional investor funds could give cryptocurrencies a boost like we have never seen before.
Should this new breed of digital currency hedge funds raise several hundred millions each, that would mean billions of new money pouring into crypto assets in the coming months. This would likely mean a boost for the more established top ten cryptocurrencies such as bitcoin, ether, litecoin, and DASH as they are the most liquid, but promising new blockchain projects that have issued their own digital tokens in 2017 could also see new investors buying their coins, pushing them to new highs.
Simple maths tells us that if each of the 20+ new digital currency funds hedge funds raises an average of $100 million, that would mean over $2 billion of fresh funds entering a market where the third largest cryptocurrency, bitcoin cash, has a market capitalization of less than $10 billion. In other words, as institutional money starts to flow into digital currencies it will likely push prices to new highs due to the relatively illiquid state of this hot new asset class.