Hedge funds see the crypto market decline as an investment opportunity

Published at: July 13, 2021

Crypto market capitalization is down more than 40% since its $2.5-trillion high back in early May, but institutional investors continue to pile into the market. Despite Bitcoin (BTC) losing over half of its United States dollar value and altcoins tanking almost 70% on average, big-money players like hedge funds are still taking up digital currency investment positions.

From direct exposure to crypto to backing firms developing products and services in the digital asset space, institutional investors are building a more significant presence in the cryptocurrency and blockchain space. Back in June, a survey of 100 chief financial officers at hedge funds across the world indicated an expected increase in crypto exposure for hedge funds in the next five years.

As regulated entities continue to explore digital currency investment options, crypto regulations also seem to be taking shape in many jurisdictions. Meanwhile, in the U.S., regulators such as the Securities and Exchange Commission are coming under significant pressure to enact a stricter legal framework for cryptocurrencies.

Crypto investment appeal still strong

Earlier in July, Cointelegraph reported that London-based hedge fund giant Marshall Wace was set to create an investment portfolio focused on digital assets. According to the report, the $55-billion hedge fund was looking toward late-stage funding for digital finance companies and blockchain outfits working on use cases such as payment systems for digital currencies and stablecoins.

Amit Rajpal, CEO of Marshall Wace Asia Limited, outlined the company’s digital asset investment thesis, stating that the focus is on projects working toward redefining financial services, especially in the area of payments. According to Rajpal, digital finance is already changing the architecture of the underlying financial system.

Even before reports of its crypto-focused investment portfolio emerged, Marshall Wace had made some forays into the digital asset space. Back in May, the hedge fund participated in USD Coin (USDC) stablecoin issuer Circle’s $440-million fundraising round.

Marshall Wace is only the latest in a growing list of hedge funds and other institutional investors exploring crypto investment options. In April, United Kingdom-based asset management outfit Brevan Howard floated an $84-million crypto investment fund.

Speaking to Cointelegraph China earlier in July, Cornell University professor and Avalanche creator Emin Gün Sirer stated that the current market downturn had done little to dampen enthusiasm for crypto exposure among institutional investors. According to Sirer, the legitimacy of crypto as an asset class is “beyond question,” stating:

“I have been getting contacts from retirement funds, not hedge funds, but retirement funds. Very different piece, far more slower-moving but with maybe 10 times more dollars under their control and they are slowly coming into crypto.”

Joe DiPasquale, CEO of crypto hedge fund BitBull Capital, also echoed Sirer’s comments, telling Cointelegraph, “Institutional investors are still interested and continue to build positions at key support levels.”

“Naturally, the market hype has dampened, but these downturns have been historically opportune moments for long-term entries,” the BitBull Capital CEO added.

A spokesperson for Nickel Digital Asset Management, a $200-million crypto hedge fund, also provided some insight into the emerging strategies among institutional players amid the current range-bound trading for cryptocurrencies. In a conversation with Cointelegraph, the Nickel Digital representative said, “We are seeing active and continuous engagement from the entire institutional community, including (but not limited to) pensions, foundations, endowments and funds of hedge funds,” adding:

“Recent volatility has proved to be an opportunity for certain trading strategies (like market-neutral arbitrage) while being a headwind for others (beta exposures to underlying crypto assets). In fact, it created an immediate demand for lower-volatility defensive funds. The investment objective, sizing and risk tolerance are the critical factors in assessing any investment opportunity, especially in crypto.”

Indeed, Nickel Digital recently rebalanced its cash position as a result of the current market decline in a move the company described as an exercise in “financial discipline.” According to the fund’s CEO, Anatoly Crachilov, Nickel Digital is keeping its investment powder dry for the future return of parabolic price gains in the crypto market.

Big-money players welcome more crypto regulation

As more institutional players make crypto forays, stakeholders say asset managers are not worried about regulatory risks. Indeed, the bulk of attention from financial regulators appears to be focused on protection for retail investors.

Meanwhile, banks and other regulated entities seem to be getting clearer mandates from regulatory bodies to interact with digital assets. Commenting on the advantages created by enacting clear-cut regulations for cryptocurrencies, the Nickel Digital spokesperson told Cointelegraph:

“We embrace regulation because we feel that regulation brings clarity, and clarity brings broader market participation. Crypto has had years of regulation in the U.S., and the recent changes in Germany could unlock billions of dollars into the crypto space.”

Earlier in July, authorities in Germany passed a landmark ruling allowing institutional funds to allocate up to 20% of their assets under management to cryptocurrencies. This move came despite warnings by Germany’s Federal Financial Supervisory Authority about the dangers of speculative investments.

The new law in Germany could potentially see up to $415 billion worth of investments flowing into the crypto space. Germany’s Fund Allocation Act is also on top of previous rulings that put security tokens on equal footing as other regulated investment vehicles in the country.

Dismissing concerns regarding regulatory scrutiny having any negative impact on institutional crypto involvement, DiPasquale told Cointelegraph, “Regulatory fears are always present in the crypto space, but there is a drive towards compliance, which is likely to result in a more lenient attitude in the future.”

Bulls will return in the fall

If the current crypto downturn offers a premium investment opportunity for hedge funds and other institutional investors, such a strategy most likely relies on the expectation of a market bounce in the future. As previously reported by Cointelegraph, Sirer has predicted that sideways accumulation will dominate the crypto price action during the summer months.

Indeed, since dipping by over 50%, Bitcoin has been range-bound between the $32,000 and the $36,000 price marks. Bitcoin’s lack of a significant breakout either way has almost meant repeating mini-dips and pumps across the crypto market.

However, Sirer said he expects a return to the upward parabolic price trajectory in Q4. According to the Avalanche founder, the expected resurgence should begin in October or November.

“I am really excited about what’s to come because I know that there is so much interest in institutional, retail, as well as in this new technology that is poised to change the world. […] We are in the early days of a very big movement to restructure the entirety of the financial infrastructure.”

“Bear market is actually great for getting work done. The transformation of finance isn’t going to stop because we hit a relative price correction,” Sirer added to Cointelegraph China. The Cornell University professor also stated that serious stakeholders are utilizing the current period as a time for consolidation and growth.

Like Sirer and Marshall Wace’s Rajpal, there is a growing belief that the crypto and blockchain space is on its way to upending the global financial system, hence the emerging interest from institutional entities. Even on the retail side, regulated institutions, such as banks, are also becoming keen on offering cryptocurrency-related services.

Having seen millions of dollars flowing into the coffers of exchanges like Coinbase on a daily basis, firms like NYDIG say U.S. banks are keen to get in on the action and begin offering Bitcoin trading services to account holders. As such, the company has recently announced a raft of partnerships that will allow crypto trading right from customer bank accounts in America.

BitBull’s DiPasquale also touched on the possibility of a bull market return in 2021 but offered a date closer to the winter period, adding, “We could see a return in 2021, yes, but parabolic gains may not be seen until December or early next year.” DiPasquale, however, predicted that Bitcoin will end the year trading above the $50,000 price mark.