Hedge Funds Are About To Spoil The Crypto Party

Hello hedgies, goodbye alpha.
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By Mike Cauldwell (https://www.casascius.com/photos.aspx) [Public domain], via Wikimedia Commons

By Mike Cauldwell (https://www.casascius.com/photos.aspx) [Public domain], via Wikimedia Commons

Late last month, the folks at Autonomous Research released a list they'd assembled of cryptocurrency hedge funds. They counted 55. That was about two weeks ago. As of now, the count is 68. If that pace were to continue, we'd have 150 or so newly sprouted investment firms by the end of the year rooting around for absolute return in the same increasingly crowded crypto space.

From one vantage point, the crypto hedge fund rush is a good thing for digital coin speculators. More sophisticated investors in bitcoin and ethereum and everything else should make for a more rationally functioning market. It also means more demand for digital tokens, which might help prop up what is currently looking like a bear market.

But in the longer term, all these new funds mean the real crypto fun could be coming to an end:

"Cryptomarkets today are extraordinarily irrational," Kyle Samani, managing partner of Multicoin Capital, said in a phone interview. "There are so many inefficiencies. There’s a bunch of guys from Wall Street coming up right now and picking up money left and right. Once enough of these guys get into the market, these inefficiencies are going to go to zero. We can generate real money by catching some really large winners."

That's from a piece in Bloomberg, which reports on how these new funds are deploying actual computer-science chops to vet investments in crypto assets and, eventually, suck up all the crypto alpha. In order to find winners like Monero and avoid the likes of BananaCoin and TulipToken, these funds are digging as deeply into the nuts and bolts of their potential investments as an activist fund would of a company it's looking to challenge.

Given the technical challenge involved here – sifting through thousands of lines of complex code to ensure that a coin will do what it's supposed to do without being hacked into oblivion – the funds are hiring actual bonafide scientists. In the context of bitcoin that's just unfair. The typical crypto buyer is supposed to be a community college dropout who posts on the Ron Paul subreddit during breaks from his job running a middle school's IT system, not an elite data scientist with a PhD in neuroscience.

That said, the crypto market is still way too loopy and chaotic for a little bit of hedge fund crowding to tame it. But their growing share of the the crypto pie is substantial. Autonomous estimates that the 68 currently existing crypto funds are seeking an eventual $2 billion in capital. To compare, the ten largest cryptocurrencies have a current combined market cap of around $100 billion. In a few months' time, it's not unlikely to see hedge funds owning a greater proportion of the crypto market than they do of the increasingly alpha-less equities market (which is currently about 3 percent).

Once again, hedge funds ruin everything.

Hedge Funds Are Hacking Blockchains to Guide Crypto Investments [BBG]

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