Greyspark, the capital consultancy company, has released a report which charts the evolving landscape of the world of cryptocurrency investment. And while the marketplace continues to mature, there are two profound changes taking place: the first being that Initial Coin Offerings are failing to hit their mark when it comes to alluring retail investment, and alternative avenues for institutional investors to enter the space are increasing significantly.
So what is pulling down the world of ICOs? A conflagration of disappointing progress, poor marketing and the continuing prevalence of scam projects which are cited in the report as crucial reasons for why ICOs continue to fall, along with seeing their returns continue to fall through 2018.
As if a night and day scenario, the same is definitely not true of crypto hedge funds which, on the other hand, have seen a continuously surprising level of growth, all in spite of a downturn in tandem with the underlying bearish crypto market.
More Than Half of ICOs Fail to hit Their Funding Target
Within the same research, Greyspark points out that more than half of ICOs that went on the market from 2017 and 2018 failed to meet their funding targets, with as many as 890 token sales raising no funds at all. And during the same period, more than 40% of ICOs, which equates to 743 firms, raised more than $1 million.
This data demonstrates that since the crypto mania of 2017 and its subsequent subsiding, investors have become far more astute in their observations of particular blockchain projects and their affiliated ICOs. Greyspark’s report discovered that in the second quarter of 2018, roughly 15% of ICO projects had an already working product, in contrast with only 6% of projects within the first quarter of the same year.
In spite of this lagging performance from ICOs, the report finds that general cryptocurrency development remains unabated, when measures by growth in google search queries, at least, which is still increasing from last autumn in spite of the initial value bubble, and by number of exchange sign ups, which demonstrate a similar upward momentum.
But while this market is maturing, the growth its experiencing is taking a whole other form. Retail investors that are otherwise swayed by specific ICOs and their marketing are being replaced by institutions, whose trading is predominantly conducted through Over the Counter (OTC) cryptocurrency trading desks, and a small (but growing) population of crypto hedge funds.
These are distinctly different avenues which are relied upon by institutional players in order to help them overcome the challenges they . would otherwise face when entering the market – including access to sufficient liquidity, privacy, security, and reduced risk from counterparties.
“Financial institutions have started to engage, although carefully, with their first cryptocurrency-related projects and the whole industry is evolving rapidly with the clear objective to attract the big money” according to the hedge fund manager and co-author of the report, Eitan Galam, who made the statement.
As of September this year, the number of crypto hedge funds has dramatically increased, and since bouncing back from the crypto crash of January, the total amount of funds is steadily approaching 150, which is a profoundly different landscape when compared with the nine in existence back in 2012.
What on Earth is a crypto Hedge Fund?
In the conventional financial world, hedge funds use their sage wisdom and expertise in order to invest the money of institutions and wealthy individuals, luring them in with the prospect of earning significantly larger returns compared with those than would be offered by standard market index trackers, all by managing market ups and downs by taking long and / or short positions.
Much in the same way, cryptocurrency hedge funds offer active portfolio management for crypto assets, done by utilizing a range of different investment strategies to try and generate larger returns than would otherwise be possible through following the market movements of any particular cryptocurrency.
This is an approach that has proven itself truly attractive to institutional investors, a demographic which otherwise usually doesn’t have the desire to keep up with a market like cryptocurrencies, or the . means to store large amounts of cryptocurrency in a safe way.
Crypto Hedge Funds: Successful and Hold up to $5 Billion
While the institutional trading of cryptocurrencies remains relatively low compared to other kinds of asset classes, the report demonstrates that the number of crypto hedge funds has continued to increase at a dramatic pace over the last two years. This is a trend that’s expected to continue, reaching 160-180 by the end of 2018.
These . funds, which are usually operated by a team of less than five people, consist of a mixture of both defectors from the traditional world of finance, seeking escape from the . painfully low yields of bonds and equities, and famous advocates from within the crypto community.
As a collective area, these same funds are responsible for the management of $5 Billion worth of crypto assets. This is mostly done on the behalf of institutional investors, wealthy individuals and Venture Capital firms such as Sequoia Capital, and Andreessen Horowitz, all of whom have backed Naval Ravikant’s crypto hedge fund, MetaStable.
Crypto’s Entered the Passive Versus Active Debate
Over the last few years, managed money has under-performed passive strategies with the continued proliferation of ETFs, all of which have eroded the underlying profits of hedge funds, hitting at their market share as a result.
Traditionally speaking, hedge funds have charged notoriously high fees which are otherwise referred to as the “two and twenty” ratio, which is a flat 2% management fee and a 20% slice in profits should it reach a particular threshold.
So hypothetically, if a fund which has $1 billion worth of Assets Under Management (AUM), it is guaranteed an annual $20 million whether it generates a profit or loss, and with their underperformance in this extended stock market bull run even wealthy individuals have switched to passive funds.
By stark contrast, the SPY ETF, which is regarded . as one of the worlds most liquid Exchange Traded Funds, that tracks in conjunction with the S&P 500, has an underlying management fee of 0.09%. Hedge fund managers have responded by cutting their fees to as low as 1:10 split.
So, what this investment avenue means for the crypto world isn’t an easy one to conclude on. But by operating as supersized individual investors, or ‘whales’ in the cryptocurrency world’s vernacular, these funds can add liquidity to the market, overall. This would potentially create a greater stability in price, and provide more confidence for an increasingly mainstream institutional investor to enter the space.