Cryptocurrency hedge funds have reportedly been experiencing a steep decline after steadily rising in value throughout 2017. Statistics released by Hedge Fund Research (HFR) Blockchain Indices noted that the performance of some funds dropped as much as 35 percent since the start of the year.
Funds in Jeopardy
Almost all funds have reported negative returns in four out of five months since January. A significant contributing factor to cryptocurrency hedge funds performing poorly may be the bearish market sentiment prevalent in 2018.
While the cumulative market cap was nearing $800 billion in December 2017, the valuation of the entire asset class has since declined to around $275 billion.
Furthermore, at press time, bitcoin is trading at one-third of its value established at its all-time high in January 2018, at $6,500. Given that bitcoin alone accounts for approximately 40 percent of the market cap, it is not surprising that other the valuations of other cryptocurrencies have also declined proportionally.
The Rise of Cryptocurrency Hedge Funds
Due to the omnipresent cryptocurrency volatility, investors are often tempted to choose hedge funds rather than relying on individual trading. After all, with how much the cryptocurrency market tends to swing on most days, even veteran traders are susceptible to missteps and losses.
Cryptocurrency hedge funds were relatively unheard of a few years ago when the market was relatively tiny and represented no real value to most people. However, the eventual rise in prices of most popular currencies has caused the demand to soar spectacularly in value. Eventually, the discovery of blockchain technology’s many advantages also fuelled investor interest.
Regulatory pressure is a significant concern for investors in most parts of the world. So far, very few countries have laid down any regulation for the asset class. While Japan was one of the first to legalize cryptocurrency usage and trading, most other nations continue to treat it as a gray area, despite having a tax compliance requirement on them.
In September 2017, the Chinese government imposed burdensome regulation on cryptocurrency exchanges and initial coin offerings, banning the latter without exception and indefinitely. While digital token trading has not been deemed entirely illegal in the country yet, the state is undoubtedly hostile towards the idea, as is evident by the government’s numerous attempts to edge out exchanges.
Asian cryptocurrency exchanges have also been hit with numerous security breaches in the past year, leading to market uncertainty in those regions. South Korean exchange YouBit, for instance, lost $5 million to a hack that transpired late 2017. Given that the company lost a small percentage of its assets and almost all of the goodwill it maintained with its customer base, it was forced to declare insolvency and exit the exchange business.
The Future of Digital Asset-focussed Hedge Funds
While nobody knows how long it will be before bitcoin and other digital currencies soar once again, hedge funds typically are not concerned with short-term price movements. The introduction of institutional money, especially in the form of cryptocurrency futures last year, may be an opportunity for the market to grow further.