A large number of crypto funds did not survive the crypto winter

The Bitcoin and ICO boom of 2017, which saw digital currencies and tokens multiply in value almost overnight, birthed a new type of hedge fund, the crypto fund.

Prior to 2017, only a handful of funds were investing in cryptographic assets but the crypto gold rush led to the formation of hundreds of investment funds competing to bring institutional money to this exciting new high-risk, high-reward asset class.

70 funds closed in 2019

However, in 2019, according to a new study by Crypto Fund Research, almost 70 crypto funds were forced to shut their doors due to a lack of investor interest, reports Bloomberg. The number of newly launched crypto funds has also declined this year, amounting to less than half the amount of new launches in 2017 and 2018.

In total, there are around 800 crypto funds globally, of which around 355 are hedge funds, according to data compiled by Crypto Fund Research.

Global consulting firm PwC, however, believes that out of these, only around 150 are actually active in the markets. In the ‘2019 Crypto Hedge Fund Report,’ which was published in collaboration with Elwood Asset Management, researchers stated, “We estimate that there are 150 active crypto hedge funds collectively managing US$1bn AuM (excluding crypto index funds and crypto venture capital funds).”

Additionally, PwC has concluded that 60 percent of these funds have less than $10 million of digital assets under management and that the average AuM of crypto hedge funds amounts to around $22 million, as of Q1/2019.

Interestingly, PwC has found that the median AuM at launch was higher in January 2019 than it was in January 2018 ($3.6 million vs $1.2 million) for crypto hedge funds, which suggests that institutional investor demand for diversification into crypto does exist despite the burst of the ICO bubble.

Where is the wave of institutional money?

The “institutional money is about to flow into crypto” narrative has been pushed by industry experts, pundits, and crypto media for years. The reality, however, is that the actual level of institutional participation pales in comparison to traditional asset classes. The “big wave” is yet to hit the crypto markets.

While CME Bitcoin Futures trading data shows that there is institutional investor interest in bitcoin, the majority of trading activity on exchanges comes from retail investors. Moreover, their newest competitor, Bakkt, has struggled to garner similar levels of attention from institutional investors since its launch in September.

“Taking a step back, I think some would argue that the levels of institutional adoption are disappointing or underwhelming but, of course, this view depends entirely on expectations. To me, the fact that there is any institutional adoption for Bitcoin only 10 years into existence is a radical success and beyond what anyone could have imagined just 3 or 4 years ago,” Spencer Bogart, partner at Blockchain Capital, told Bloomberg.

The lack of a clear regulatory framework in the US and other major economies is arguably a major hurdle for institutional investors who want crypto exposure. The performance of the altcoin market since its peak in January 2018 is another likely factor why crypto hedge funds are not generating much interest from the traditional markets.

There are some exceptions. U.S. pension funds doubled their crypto asset exposure in Morgan Creek Digital’s fund this year and the Grayscale Bitcoin Trust has seen large inflows through the course of 2019.

With improving crypto regulations and an eventual crypto market rally, we should eventually see a turnaround in the crypto hedge fund market and, maybe even, that wave of Wall Street money finally hitting crypto. Until that happens, crypto market participants will have to play the waiting game and keep building as best they can.