Cryptocurrency Funds Undeterred By Price Slump

Polychain Capital made headlines earlier this year when it became the first crypto-fund with more than $1 billion in assets under management with a limited partners list that is a real “who is who” of Venture Capital -including Andreessen Horowitz, Union Square Ventures, Founders Fund and Sequoia, among others big names.

San Francisco-based Polychain is just the spearhead leading a new wave of traditional money looking to enter the blockchain ecosystem through funds whose number, in spite of this year’s crypto-asset bear market, has risen steadily and is expected to reach a new high by the end of the year.

Bitcoin’s price slump to below $7,000 from highs around $20,000 last year may even end up highlighting the appeal of cryptocurrency hedge funds. After all, they are set up to make money in both bull and bear markets. Market volatility has not deterred fund formation. There have been more than 60 crypto funds launched in 2018 and, at this pace, this year could exceed the record 130 crypto funds launched in 2017 despite the substantially lower prices.

Crypto-custody is coming

While most of the mainstream media and crypto outsiders are focused on price declines and when, or even if, a rebound will occur, much has been happening this year on the back-end. And there are many reasons to remain optimistic about the crypto sphere’s future.

First, regulatory clouds are dissipating, with gradually more clarity for investors. And, while some countries have shut themselves to crypto or are hesitant over how to react, many others are fully embracing the technological leap in Asia, Europe, and the Americas. Even the United States, which has been more conservative than many jurisdictions, seems to be finally addressing the cryptocurrency phenomenon, something that should help lead to full legitimization.

At the same time, the crypto community itself is solving some of the most pressing issues holding institutional money from entering the space.

Coinbase, the world’s largest crypto exchange, launched its custody business a few months back. The company, which holds more than $20 billion in assets, aims to have 100 large institutional clients by the end of the year, bringing another $5 billion in assets. Coinbase is not the only company pushing the custody limits for the crypto space. Dozens of projects are working on third-party custody solutions for retail consumers and institutions alike. This could unlock billions of dollars which are now barred from going crypto because of U.S. regulations that forbids any investment fund with more than $150 million in assets to custody its assets.

Pros on board

Many other players in the market are also doing their part to professionalize the blockchain-sphere.

During the first crypto-fund wave in late 2017, few people had a clear idea on such basic questions as how to structure them, which regulatory jurisdiction to pick, what bank to use, or how crypto assets are treated. Now, there are companies such as Vauban, Fundplatform, Otonomous, and Bluemeg, all working to provide professional money support in selecting an investment fund type, its jurisdiction and even the target-size at launch.

In the accounting services area, MG Stover, a Colorado-based boutique financial-services firm, has become known for offering fund administration and treasury management services. Since forming an early crypto-focused hedge fund four years ago, the firm has amassed more than 50 funds as clients, according to CEO Matt Stover.

The same has happened with asset managers, who began braving the waters of an atomized and extremely volatile market full of technical outages with just spreadsheets and rudimentary exchanges pages. Now, there are institutional-grade solutions in the market. Caspian, which has seen increasing demand this year, offers trade execution and risk management tools with a comprehensive platform that facilitates large purchases of crypto-assets across various exchanges. The key to ensuring institutional money pours into the space is to provide the full integration these big players have come to expect in traditional markets.

All this activity has set the foundations for the arrival of fresh resources into the ecosystem. After reaching a ten-year high of US$155 billion in 2017, global venture capital is looking for new venues to invest and clearly some of that has turned to crypto and its promising startups, looking for positions in the growing asset class.

From Andreessen Horowitz raising $300 million for a crypto-dedicated fund to Lightspeed Venture Partners carving out crypto-dedicated funds from within their own larger fund, to Union Square Ventures or Sequoia Capital investing indirectly through crypto hedge funds, fresh money has been flowing into crypto.

Of the crypto funds launched in 2018, about two-thirds are hedge funds or tokenized investment funds investing primarily in cryptocurrencies, while the other third are venture capital funds investing in startup blockchain companies.

Perhaps the bear market has clouded some outlooks, but a closer look at the trend of institutionalization of crypto suggests the future may well still be bright.

Robert Dykes is CEO and cofounder of Caspian, a full-stack crypto asset management platform tying together several crypto exchanges in a single interface.