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Evolving crypto fund landscape hints at maturing crypto markets

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Crypto Funds Morph Into Venture Capitalists Shunned in ICO Boom Crypto Heroes

Data published by Crypto Fund Research shows that the number of crypto-focused venture funds exceeds the number of crypto-focused hedge funds for the first time, a sign of fundamental support for the still embryonic crypto sector. There are now 372 crypto venture capital (VC) funds and 350 hedge funds, according to Crypto Fund Research, a consultancy run by a former Merrill Lynch analyst.

Hedge funds as volatility contributors

Crypto hedge funds carry an active trading bias, are typically focused only on short-term profits, have “lockup periods” as short as a single quarter, and do not usually provide support to the projects they invest in.

Up until now, the dominance of crypto hedge funds for investing in the crypto sector has been considered a contributing factor to the boom and bust volatility of the crypto markets.

“Hedge funds’ active trading style can help with a token’s liquidity, but will provide more volatile capital,” writes Joel Monegro, a partner at the New York-based crypto VC fund Placeholder.

The next step on the ladder: VC funds

By contrast, the structure of VC funds, which are designed to provide a stable, long-term supply of capital to risky ventures, is expected to reduce market volatility in the crypto space.

“Venture funds can afford to “hodl” independent of market fluctuations, which is important for both early and long-term network capitalization,” continues Monegro, whose fund currently has over 150 million USD in committed capital under management.

VC funds generally take equity in the projects they invest in, meaning they have a direct interest in the long-term success of the project. Many of the crypto-focused VC funds created in the last year have lock-up periods of up to ten years. Polychain Capital, for example, recently raised 175 million USD for a seven-year fund, meaning the limited partners in the fund will be expected to wait up to seven years to see a return on their investment.

Traditional VC funds frequently help the startups they invest in by providing recruiting support, advising founders on strategy, and providing services like office space and public relations. In the crypto space, some VCs are providing additional “crypto-native” support to further boost the projects they are invested in. This is outlined in the recent post The Evolving Role of Crypto Investors, by Tushar Jain, a partner at the crypto VC fund Multicoin Capital.

Crypto Funds Morph Into Venture Capitalists Shunned in ICO Boom Crypto Heroes Header

Crypto-native investment

Jain defines “crypto-native” as “providing marketplace liquidity, governance, and other services where a crypto-native investor can add value.” Jain gives the example of a VC fund that invests in the distributed file storage system Filecoin. The fund could support the project by providing storage capacity for the network in the early days when it is still getting off the ground. The fund could also generate demand on the network by choosing to store files on it. These actions, which would not be economically rational in the short-term, could pay off in the long-term if Filecoin became the standard protocol for distributed file storage.

This form of support can be uniquely provided by crypto-focused funds because it “requires the confluence of capital, technical ability, and understanding of how these networks function,” writes Jain.

Further crypto market maturity factors

Further evidence of the maturity of the crypto sector is that despite drastically lower cryptocurrency prices in 2018, assets under management (AUM) for crypto funds actually increased by 33% from 6.8 billion USD to over 10 billion USD, according to a Crypto Fund Research report.

The rise in AUM is particularly bullish considering that crypto funds posted losses of about 70 percent on average last year, according to the Eurekahedge Crypto-Currency Hedge Fund Index. The implication is that smart investors are actively accumulating.

“We are talking to a lot of institutional investors,” Kyle Samani of Multicoin recently told Bloomberg. “A lot of smart people who’ve been interested in crypto for a year, two years, and were waiting for it to cool down, are now looking at the space activity.”


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