Michael Bodley

The operators of crypto hedge fund firms have found themselves in a conundrum: Returns have been up, but capital-raising has been down.



Numerous portfolio managers overseeing digital asset strategies have seen improved performance. This is especially notable for those focusing on multi-strategy and yield-bearing approaches. This uptick comes as we approach the anniversary of Q4 2022.



In a research report focusing on crypto hedge funds through the first half of 2023, 21e6 Capital of Switzerland found that directional funds underperformed <a href="https://blockworks.co/price/btc">bitcoin</a> as the asset took off in the first half of the year. Quantitative strategies and futures-focused approaches also lagged crypto’s largest player, which soared about 84% from January through June.



<a href="https://blockworks.co/news/coinshares-pushing-into-active-management">But there have been signs of life when it comes to new launches.&nbsp;</a>



Most funds were in the green, but the green wasn’t good enough to attract capital, in many cases, according to 21e6 Capital. 



“In our regular conversations with crypto funds, we sense that the market sentiment among their LPs/investors is still lower than would be expected after a positive start to the year,” the firm writes in its August report. “Many funds certainly lagged the market and now have a harder time presenting a value proposition to their prospective investors.”



In the fourth quarter of 2022, institutional investors with traditional finance ties had been ramping up their due diligence as the bull market continued to build, before it ground to an abrupt halt as <a href="https://blockworks.co/tag/ftx">FTX</a> imploded. 



A good number of those Wall Street types, according to industry participants, pumped the brakes on the checks they had been planning to write. And some have continued to stay on the sidelines, driven, at least in part, by regulatory uncertainty that continues to cloud the sector’s US outlook.&nbsp;



Crypto-native funds have mostly stayed the course – even if some players have moved more substantially into cash than they typically would. Meanwhile, digital asset markets saw a decline in July, retracting a portion of their gains from the first half of the year.



<a href="https://blockworks.co/tag/prochain-capital">ProChain Capital</a> is a multi-strategy crypto fund that invests in spot cryptocurrencies, equity and debt associated with digital assets, and venture investments. According to a tear sheet shared with existing and potential investors, the fund reported a 42.21% increase through the end of July.



ProChain, run by its president, David Tawil, dipped 3.2% in July as the fund looks to recover from a 65.15% plunge in 2022, its first full-year negative result.&nbsp;



In an accompanying note to investors, Tawil wrote that the recent Ripple decision that played out in a federal district court was the “biggest crypto-related development of the last few weeks.”&nbsp;



“The SEC’s stance that all crypto assets, except for Bitcoin, are securities was definitely undermined,” Tawil said, going on to note a number of outstanding issues at play in the case, and issues outstanding in the US regulatory landscape more broadly.



<h2 class="wp-block-heading">Hedge funds become buyers</h2>



Hedge fund managers have staked out broader investment mandates in an effort to capitalize on a number of ongoing dislocation opportunities in crypto markets. Last year marked the rise of specialist institutional funds, strategies that bet it all on their investment team’s ability to derive alpha from a particular sector. Yield-farming approaches came into vogue, and a number of asset managers trading nothing but crypto derivatives gained steam.



Faced with smaller capital reserves, as well as more limited opportunities in asset terms to deploy funds in a bear market, traders have been branching out.&nbsp;



Ramped-up buying and selling on Curve DAO (<a href="https://blockworks.co/price/crv">CRV</a>) in the last couple of weeks has marked a key example. The result, according to multiple research reports, has been a sudden spike in liquidity on the <a href="https://blockworks.co/category/defi">DeFi</a> protocol.&nbsp;



Read more: <a href="https://blockworks.co/news/crypto-hedge-funds-prediction">Crypto hedge funds expect digital assets will be up by the end of the year</a>



David Lawant, the head of research for crypto prime brokerage <a href="https://blockworks.co/tag/falconx">FalconX</a>, wrote in a research report on Tuesday that the firm saw “strong activity in CRV from hedge funds, with buy and sell volumes almost evenly distributed.” 



The week prior, FalconX researchers highlighted a trading trend — namely that, “hedge funds and retail aggregators [have been] better buyers while venture funds and institutional wealth managers as better sellers.”&nbsp;



Persistent buys of digital assets, as well as derivatives, by crypto hedge fund managers may reflect a conviction that the market’s bottom is in — or, at least, has been priced in. The buying trend marked a market uptick from July, according to FalconX data, when hedge funds were deemed better sellers, representing 53% of total flows.



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Crypto hedge funds have rallied in 2023, but can they catch up with bitcoin?

Ben Strack

<div id="highlights-block_6270242e79337" class="highlights">
 <ul>
 <li>NFT collection aims to bring together like-minded investors and educate VanEck clients on the crypto space</li>
 <li>Every asset manager needs to focus on crypto in some way, ProChain Capital president says</li>
 </ul>
 
</div>



Asset manager VanEck is launching an NFT collection aiming to create a community for crypto investors — with an executive saying the use cases for non-fungible tokens are “approaching unlimited.” 



“The whole ecosystem — metaverse, gaming, play-to-earn, NFTs, ticket sales — are moving so fast at the same time with a lot of cross-pollination,” John Patrick Lee, a product manager at VanEck tasked with the NFT endeavor, told Blockworks. “To be in the middle of that is what’s exciting and fun for us.”



Designed in partnership with South Korea-based creative NFT agency NUMOMO, VanEck’s Community NFTs are set to launch on Ethereum. The collection features 750 “common” NFTs, 230 “rare” NFTs, and 20 “legendary” tokens.&nbsp;



The NFTs are free and will be airdropped to the first 1,000 who sign up. Still-image NFT placeholders, which are slated to be upgraded to their final versions by the end of the month, will be distributed this week.



“We’re not launching an NFT to monetize followers or list it on OpenSea,” Lee said. “We’re trying to build an active community of crypto-focused investors.”



The NFTs are designed to be a digital membership card of sorts. Holders may be granted early access to VanEck’s digital asset research, as well as exclusive event invitations.



The project will additionally trace the journey of a fictional character modeled after Alexander Hamilton as he explores the past, present and future of monetary policy.



As of last November, the 2.7 million NFTs in existence were owned by 360,000 people, according to data from blockchain analysis platform Chainalysis — compared to the roughly 300 million people that use cryptocurrencies.



“I think use cases like this will only further promote the NFT as an asset and provide utility for other companies and projects down the road,” Matthew Bartlett, VanEck’s head of internal sales, said. “It’s still a really small segment of the market that owns these assets, and there’s a lot of room to grow.”



<h3 class="wp-block-heading">Will other asset managers follow?</h3>



VanEck’s NFT move follows Fidelity Investments’ launch of <a href="https://cms.blockworks.co/fidelity-launches-metaverse-experience-in-tandem-with-new-etfs/" target="_blank" rel="noreferrer noopener">a financial education experience in the metaverse</a> last month. JPMorgan <a href="https://cms.blockworks.co/jpmorgan-enters-the-metaverse-with-virtual-decentraland-lounge/" target="_blank" rel="noreferrer noopener">unveiled</a> a virtual lounge in Decentraland in February.



But Lee said the firm is the first large asset manager to launch such an NFT collection, and he expects competitors to follow suit,



David Tawil, president of crypto hedge fund firm <a href="https://www.crunchbase.com/organization/prochain-capital" target="_blank" rel="noreferrer noopener">ProChain Capital</a>, called VanEck’s launch “a bit of a gimmicky way” to draw people into the NFT universe. He added, however, the effort could help bridge the gap between the collectibles aspect of NFTs and the segment’s broader use cases.



“The one thing that’s clear is they know this is the way that their business is going,” Tawil told Blockworks. “Whether it be Fidelity, or VanEck or BlackRock…every asset manager needs to be focused here. No one knows exactly what is going to be the one that catches like wildfire.”



Tawil noted Fidelity’s announcement last week to allow clients to invest in bitcoin through 401(k) plans shows crypto is moving beyond speculative investments.



“We’re in a paradigmatic shift…and how it all turns out nobody knows, but you’ve got to be on the train,” Tawil said. “You can’t expect to catch up two, three or five years from now when it’s all mature.”



<h3 class="wp-block-heading">An NFT ETF?</h3>



VanEck has 64 ETFs trading in the US with combined assets of roughly $62 billion, according to ETF.com.



The firm’s Digital Transformation ETF, which holds various crypto stocks, such as Coinbase,  launched in April 2021. The company in November <a href="https://cms.blockworks.co/vanecks-bitcoin-futures-etf-set-to-launch-tuesday/" target="_blank" rel="noreferrer noopener">launched its Bitcoin Strategy ETF</a> (XBTF), which offers indirect exposure by investing in cash-settled bitcoin futures contracts, and more recently launched a Digital Assets Mining ETF (DAM). 



The firm’s attempts to launch a spot bitcoin ETF have so far been stymied by the SEC.&nbsp;&nbsp;



Asked if the company could look to bring to market an NFT ETF, Lee said there are not yet enough publicly traded companies focused on the segment.&nbsp;&nbsp;



“Our thought process when approaching NFTs or any of these new, exciting areas is we’re going to be thoughtful about it,” he said. “We’re not going to rush to market with something when maybe the market can’t support it.”



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VanEck Exec: Use Cases of NFTs ‘Approaching Unlimited’

Casey Wagner

<div id="highlights-block_624de6f47b4f6" class="highlights">
 <ul>
 <li>Fed officials plan on pulling back economic support at a faster rate than expected</li>
 <li>Cryptocurrencies fell on the news while stocks traded sideways</li>
 </ul>
 
</div>



Federal Reserve officials are planning on reducing the central bank’s trillions of dollars in bond holdings by around $95 billion a month, minutes from the March meeting show.&nbsp;



Central bankers also plan to allow some of their government-backed holdings to expire, helping to pare down the Fed’s balance sheet, which currently stands at $9 trillion. A limit of $60 billion in Treasurys and $35 billion in mortgage-backed securities would be allowed to roll off, officials “generally agreed,” the <a href="https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20220316.pdf">minutes</a> note.



The Fed voted to raise rates a quarter of a percentage point in <a href="https://cms.blockworks.co/fed-raises-interest-rates-a-quarter-percentage-point/" target="_blank" rel="noreferrer noopener">March</a> and officials noted that an increase in the pace of interest rate hikes may come in the near future. 



St. Louis&nbsp; ​​Fed President James Bullard was the only official to vote against the action, “preferring to raise the target range for the federal funds rate by 0.5 percentage point to ½ to ¾ percent in light of elevated inflation pressures,” according to the minutes.



“The Fed cannot afford, literally and figuratively, to bail out the economy from the forthcoming recession,” David Tawil, president of crypto hedge fund firm ProChain Capital. “Rates must go higher, otherwise we will have a decade of stagflation.”



The minutes come as the central bank begins to tighten monetary policy with inflation rising at the fastest pace in four decades. Russia’s invasion of Ukraine has also presented additional economic challenges, the minutes note. Commodity prices have been pushed higher, “hurting global risk sentiment, and exacerbating supply bottlenecks,” the minutes read.



Cryptocurrencies largely fell on the news, with bitcoin and ether losing about 4% and 7%, respectively. Stocks traded sideways with the S&amp;P 500 losing close to 1% and the Dow Jones down 0.5%. The tech-heavy Nasdaq was trading almost 1% higher.&nbsp;



“We were having a bad day before the announcement, and it got worse,” Tawil said. “Today, crypto is trading like a technology company equity.”



Others are less certain, though, that the Fed’s current policy path will push crypto lower.



“I don&#8217;t think history supports the view that reduction of the Fed&#8217;s balance sheet is necessarily bad for crypto,” said Jack Farley, macro analyst and host of Blockworks&#8217; <a href="https://cms.blockworks.co/podcasts/forwardguidance/" target="_blank" rel="noreferrer noopener">Forward Guidance</a> podcast. “The last (and only) instance of quantitative tightening by the Fed began in October 2017, and bitcoin went up 340% from then until its peak in December 2017.”



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Bitcoin and Ether Plunge as Fed Moves To Shrink Balance Sheet by $95B a Month

<div id="highlights-block_619d440c1055f" class="highlights">
 <ul>
 <li>Crypto native and traditional VC firms alike are investing in the space en masse</li>
 <li>Opinions are split on whether this is just what the industry needs or if the dollar flood is a little too frothy</li>
 </ul>
 
</div>



With more than $3 billion in venture capital funding this month alone, there is no shortage of cash in the crypto space.&nbsp;



In the first nine months of 2021, crypto startups raised more than $15 billion in venture funding, nearly five times the total amount for 2020, according to data from <a href="https://www.cbinsights.com/research/report/blockchain-trends-q3-2021/?utm_source=CB+Insights+Newsletter&amp;utm_medium=email&amp;utm_campaign=newsletter_general_thurs_2021_11_18&amp;utm_term=block-1&amp;utm_content=research-public" target="_blank" rel="noreferrer noopener">CB Insights</a>. 



“Early-stage rounds (seed/Series A) dominate the dealmaking, capturing almost 80% of deals in 2021 YTD,” Anand Sanwal, CEO and co-founder of CB Insights, wrote in a recent note.&nbsp;



So far in November 2021, <a href="https://cms.blockworks.co/paradigm-launches-2-5-billion-crypto-fund/" target="_blank" rel="noreferrer noopener">the largest crypto venture fund ever</a> — $2.5 billion — launched, <a href="https://cms.blockworks.co/blockchain-com-gives-bitcoin-mining-infrastructure-company-griid-525m-credit/" target="_blank" rel="noreferrer noopener">over $500 million</a> was invested in a mining infrastructure company and <a href="https://cms.blockworks.co/gemini-aims-to-raise-400m-to-bring-valuation-over-7b/" target="_blank" rel="noreferrer noopener">Gemini secured $400 million</a>, valuing the exchange at over $7 billion. 



“Investors like Coinbase Ventures are also bursting onto the scene — the VC arm was by far the most active blockchain crypto investor with 24 deals in the quarter,” Samwal wrote.&nbsp;



The money isn’t only coming from crypto-native firms, either. Traditional VC groups, from <a href="https://cms.blockworks.co/sam-bankman-frieds-ftx-raises-precisely-420-69m/" target="_blank" rel="noreferrer noopener">Sequoia Capital</a> to <a href="https://cms.blockworks.co/polychain-capital-paris-hilton-and-others-invest-20m-in-swiss-based-origyn-foundation/" target="_blank" rel="noreferrer noopener">Bill Ackman’s Table Management</a>, are beginning to enter the space, and experts are not surprised.  



“Venture capital is a great way for institutional investors to invest in crypto without in fact investing in crypto,” said David Tawil, president of ProChain Capital. “They get the exposure to the asset class in some way, but they don&#8217;t have to deal with the issues of the regulatory environment and compliance issues and risk related issues of Bitcoin or Ethereum and so on.”&nbsp;



<h3 class="wp-block-heading">Venture capital everywhere</h3>



It is no surprise that crypto projects are seeing an increase in funding given the broader success of venture capital investments in recent years, Tawil said, pointing to endowment funds.&nbsp;



“A limitless number of endowments clocked over 50% returns for the year, and the overwhelming majority of the outsized gains was attributable to venture capital-related investments,” Tawil said. “So although at some point, you would think that there would need to be a rotation, at least for now, it seems that there&#8217;s continued investment in venture capital in terms of leading the way for portfolio gains.”&nbsp;



There has also been a significant increase in the number of protocols and projects in the digital asset space seeking funding, Samwal and Tawil agreed. Tawil admitted that with so much money in the space and so many new projects, there are inevitably going to be companies or tokens that don’t succeed, but overall, he is confident that the VC trend will continue for some time.&nbsp;



<blockquote class="wp-block-quote">“I believe that this technology is revolutionary, it has a crazy growth trajectory,” Tawil said. </blockquote>



“Crazy, like parabolic — in terms of what it is going to do for the world, how much revenue it&#8217;s going to generate. It&#8217;s going to take revenue away from other business lines — older line businesses, and so on — but there&#8217;s a ton of value to be generated.”



Others are less certain that the funding is being directed towards the best areas of the market.&nbsp;



“People are trying to put hundreds of millions of dollars into projects that have no product, no roadmap — just a general idea they wanna figure out with like, $1 to $2 [million] in funding,” Meltem Demirors, chief investment officer at CoinShares wrote in a <a href="https://twitter.com/Melt_Dem/status/1462956344403767298?s=20" target="_blank" rel="noreferrer noopener">Tweet</a> on Monday. 



David Pakman, a managing director at CoinFund thinks these seed and early-stage funding rounds are just what many companies in the digital asset space need. Over the last 18 months he has seen many projects develop with the support of small rounds, and now they are ready for larger investments.&nbsp;



Companies that were once largely overlooked are now “getting real revenue, and they&#8217;re accelerating rapidly — basically, they hit product-market fit,” he told <a href="https://fortune.com/2021/11/18/vc-crypto-funds-are-getting-bigger-so-are-the-opportunities/" target="_blank" rel="noreferrer noopener">Fortune Magazine</a>. 



Tawil is confident that even a bear market, which some experts have been calling for in recent months, will not dissuade venture money from entering the space.&nbsp;



<blockquote class="wp-block-quote">“The VC money and the VC investment is probably going to grow even while cryptocurrencies themselves may swoon or may just stagnate,” he said.</blockquote>



“That begs the question of how there could be such dislocation in terms of pricing trajectory? You would think that things would stagnate on the VC side if they would stagnate on the cryptocurrency side, but if they&#8217;re not, then clearly there are different dynamics driving each one of those markets.”



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