Crypto hedge funds are launching at a record rate in 2018, despite the ongoing downtrend in the market.
20% of all hedge funds launched in 2018 are crypto-related, according to new research from Crypto Fund Research. It’s a sign that “big money” and institutional investors haven’t been put off by the year’s selling pressure.
90 Cryptocurrency Hedge Funds Launched in 2018
90 new crypto hedge funds have appeared this year, and that number is expected to rise to 120 before the end of December.
Compare that to 2016 when just 3% of all new hedge funds were crypto-related.
Approximately half the new crypto hedge funds are based in the US, while others have popped up in the UK, Netherlands, Switzerland, China, Australia, and the “Blockchain Island,” Malta.
Rapid growth aside, however, let’s put things in perspective. The total number of crypto hedge funds still account for just 3% of all hedge funds. In terms of market capitalization, crypto funds manage $4 billion compared to the global hedge fund total of $3 trillion.
What’s a Cryptocurrency Hedge Fund?
A crypto hedge fund invests predominantly in crypto assets like bitcoin and ethereum. They may also invest in ICOs (initial coin offerings – a form of crowdfunding capital in the crypto space).
They differ to crypto venture capital funds and private equity funds which invest directly in blockchain projects and crypto startups.
When you invest in a cryptocurrency hedge fund, your money is pooled with others and the returns are shared. Bear in mind, however, that participating in a hedge fund usually involved high minimum deposits.
Undeterred by Low Prices
The rapid growth of hedge funds in a year when bitcoin has dropped almost 70% is curious. Traditionally, hedge funds sprout up during boom markets to capitalize on an uptrend.
Founder of Crypto Fund Research Joshua Gnaizda said:
“These seemingly unfavorable market conditions have not deterred managers from launching new crypto hedge funds at a record pace. While we don’t believe the rate of new launches is sustainable longer-term, there are currently few signs of a significant slowdown.”
Profit From Volatility
While the market conditions might appear unfavorable, a number of crypto hedge funds still make money when prices are down. Hedge funds can profit from volatility, which is why one crypto hedge fund, Amber AI Group, was able to make a 30% profit in the first quarter of 2018, when crypto prices slumped.
Hedge funds are notorious for short-selling, or profiting from an asset’s decline. By doing this, they can “hedge” their losses and, in some cases, make a profit when the whole markets moves downwards.
Wall Street Embraces Bitcoin
The rise of crypto hedge funds is yet another sign that Wall Street is edging closer to broader cryptocurrency adoption.
Blockchain technology is often referred to as one of the most disruptive developments of the 21st century. From medical records to artificial intelligence, the list of potential use cases is endless. In particular, the finance sector is one of the best fits for this technology.
Blockchain has several key advantages. It is secure, transparent, and immutable (meaning it cannot be edited and transactions cannot be reversed). That makes it the perfect way to store data and funds, and open doors to the world of big money.
With the debut of smart contracts (contracts that execute automatically when certain criteria are met), the blockchain world got a massive step closer towards wider adoption. These features are sending ripples through the financial world in the following ways:
A decentralized, digital system has the potential to weaken fraud attempts, improve document turnaround times, and streamline accounting for businesses. Moreover, by working with smart contracts, the consortia aims to progress in cross-border trading and to enhance the supply chain industry.
At this point in time, the third-most-valuable cryptocurrency is Ripple’s XRP, which has announced more than 100 partnerships with major banking institutions around the world. Most of the banks are using Ripple’s blockchain solution called xCurrent. However, at least three companies are now using Ripple’s cryptocurrency service, xRapid, to settle cross-border payments.
Initial pilots reveal that blockchain solutions can reduce international payment times from days to minutes (and at a 40-70% discount in fees).
Blockchain and the Stock Market
Wall Street is one of the best places for the implementation of blockchain technology, and the conversation is ramping up around “security tokens.” Security tokens are issued by companies, much like stocks and bonds, but on a blockchain.
It has benefits for shareholders and the company itself.
Shareholders, for example, can take advantage of increased transparency and simplified stock market duties, like dividends and voting. Companies may also add extra features to their security tokens, which might be access to products, discounts or memberships.
For the company, issuing stock on a blockchain improves liquidity, distribution, control and investor relations. Companies that issue security tokens will also benefit from customizable trading settings, automated whitelisting processes and the tracking of their investors.
Several big institutions have expressed interest in issuing tokenized securities. The most popular supporters are Overstock’s subsidiary tZero, cryptocurrency exchanges Coinbase, Binance, and OKEx, as well as the main stock exchanges in Switzerland and Malta.
The real estate sector is one of the most profitable businesses in the world, but there are many ways it can be improved. Real estate agents, as well as private investors, usually face high costs for bureaucracy and notaries. They are also flooded with tremendous waves of paperwork. Blockchain and smart contracts would undoubtedly save time and wealth by cutting out intermediaries. It also provides a secure and reliable place to store data.
The tokenization of assets would drastically reduce the time needed to trade property. And it would allow us to easily divide the ownership of property among multiple investors. As a consequence, investing in property may become available to everyone around the globe, and not just wealthy individuals.
Insurance corporations represent another industry primed for the introduction of blockchain technology. On the one hand, there are lots of people in the world that can’t live without insurance for health or property. But dealing with insurance companies is extremely time-consuming, especially when trying to claim refunds.
Meanwhile, most businesses in this sector are confronted with several issues in terms of verifications, data collection, and auditing policies.
One of the world’s largest insurance companies, People’s Insurance Company of China (PICC), has teamed up with the blockchain startup VeChain to address these problems. According to VeChain, its native blockchain VeChainThor “provides enterprises with the tools, securities, and governance to properly control their assets while collaborating across multiple verticals, industries, and even countries.”
S&P 100 enterprise MetLife is also wading into the blockchain space. With their Singapore based innovation center LumenLab, the insurance company is actively experimenting with smart contracts on a private blockchain.
In their sandbox project Vitana, the customer connects electronic medical records with their smartphone to issue a policy in a matter of minutes. In addition, a smart contract triggers an automatic payout upon diagnosis, without the need to make a claim.
Blockchain and Cross-Border Payments
Everyone who has ever made an international wire transfer has experienced the huge effort and time it requires to do so. Cryptocurrencies and blockchain are perfectly poised to fix this issue. Projects like Ripple and Stellar are already building an ecosystem to transfer value across borders, yet these digital assets still face serious obstacles before a wide adoption is in sight.
To become a viable form of money, currencies need to store value fairly well. Most cryptocurrencies do not fulfill these requirements due to their extreme volatility. However, many people depend on a currency with a relatively stable value. Tether’s USDT is probably the most popular stable cryptocurrency at the moment. Unfortunately, this does not solve the problem of fiat currencies, as the token is pegged to the US dollar and controlled by a centralized power.
Consequently, many projects are working on an alternative, more suitable, method of creating a stable coin. One of the main ideas is to back a cryptocurrency with all kinds of assets, including precious metals, stocks, property, and other cryptocurrencies. Stable coins and tokens are still in a very early stage of development, but the potential to substitute all fiat currencies is real if a project eventually succeeds.
A handful of international governments, such as Russia and China, are currently exploring the potentials of having their own cryptocurrency. The South American nation Venezuela announced its official cryptocurrency petro, which was created after the hyperinflation of the bolivar this year. The petro is based on NEM’s blockchain and backed by the country’s oil and mineral reserves. However, many critics denounced the project for its lack of transparency and decentralization, which are originally the fundamentals of a blockchain currency.
Obstacles for Blockchain Adoption in Finance
There are still some hurdles standing in the way of worldwide acceptance. Not least the problems of scalability, speed, and decentralization. Applications that include micro-transactions or high-frequency trading, like decentralized exchanges, are particularly in need of a fast, scalable and secure blockchain architecture.
There are hopes for improvement. New concepts are being developed, like “proof-of-stake”, where block validations are conducted through owning stakes instead of computation power. Sharding is another alternative, where the blockchain history is split into multiple sections and computed in parallel.
A decentralized network is also required to maintain extraordinary security standards. A blockchain is generally referred to as a secure place to store funds and data. Yet, we occasionally observe serious security issues like 51% attacks, which happened at least half a dozen times to prominent cryptocurrencies in the last year.
In other cases, the chains of major cryptocurrencies face problems when consensus nodes go offline all of a sudden. The fear of quantum computer attacks is something every digital currency has to deal with.
Apart from the blockchain itself, there are also many incidents where smart contracts have been reported as wrong. In order to convince massive enterprises to adopt the technology, blockchain constructions are required to provide a predictable and trustless experience.
There’s one more problem. Blockchain and cryptocurrency communities are split as to whether the technology should offer full anonymity or explicit transparency. The dilemma is a stumbling block for convincing big institutions and governmental authorities. The vast majority of governments around the globe are not in high spirits about privacy coins. Tax bureaus and other regulatory entities demand insight into transaction histories.
However, most companies and institutions refuse to use cryptocurrencies as long as the histories of their accounts are public to everyone. In order to find a fitting solution, several international universities are collaborating in the “Accountable Privacy” initiative. With its project Abelian, the initiative is proposing a concept of privacy, where the user determines the transparency level of his transactions.
We are still in the experimental phase of blockchain in the financial world. But as we can see above, there is phenomenal scope for this technology to transform the way we do business. Just don’t expect it to happen overnight.
One Firm Is Way Ahead of Wall Street on Bitcoin
The New York Times reports, ” The financial firm, Susquehanna International Group in Bala Cynwyd, Pa., just outside Philadelphia, is one of the largest players in trading traditional investments like stocks, options and exchange traded funds, or E.T.F.s. Over the last two years, the privately owned company has also built up a trading desk of around a dozen people that buys and sells millions of dollars’ worth of Bitcoin and other virtual or cryptocurrencies in private deals.”
Block Explorer’s Tony Spilotro reports, “Cold storage through a hardware wallet such as the Ledger Nano S is among the safest, most secure, and widely recommended way to store crypto assets. However, using a hardware wallet isn’t always straightforward: not all coins are supported, user interfaces are clunky, and users are often required to use multiple apps to interact with different blockchains.”
Goldman Sachs, hiring their first cryptocurrency trader, becomes the first major Wall Street bank to open a bitcoin trading desk. Trading will start in the next few weeks, accordingly to a New York Times report.
NEW YORK CITY (Oct. 25th, 2017) – The Wall Street Blockchain Alliance (WSBA), is pleased to announce that Symbiont, a leading smart contracts platform for institutional applications of blockchain technology, has joined the non-profit trade association as a corporate member. The addition of Symbiont to the WSBA reflects the ever increasing need for blockchain knowledge and expertise across multiple segments and disciplines of financial markets.
Notes Ron Quaranta, Chairman of the WSBA: “We are very excited to have Symbiont join the WSBA as one of our premier corporate members. Symbiont has been one of the true pioneers in the evolution of blockchain and smart contract technologies, and both the WSBA and our global members are eager to collaborate with Symbiont to reinvent the future of financial markets in a blockchain and smart contract world.”
Notes Mark Smith, CEO and co-founder of Symbiont: “We are happy to join the WSBA and welcome the opportunity to work with Ron and his team to educate financial industry professionals about the tremendous opportunities for blockchain technology to make Wall Street more efficient, leaner, and better at delivering value to its customers. Much work is needed to deepen the knowledge of financial professionals as this technology moves from pilot to production, and WSBA will be an important player in making that happen.”
Mark Smith, along with a Symbiont customer, will present the keynote at Blockchain for Wall Street, the WSBA’s annual education day, taking place on November 14th, 2017 at the New York Law School. For further information on the keynote and the entire program, visit www.blockchainforwallstreet.com.
Symbiont is the market-leading smart contracts platform for institutional applications of distributed ledger technology. Disclosed users of its platform include nineteen financial institutions for Smart Loans™, arranged by Credit Suisse and executed via Synaps, its syndicated loans joint venture with Ipreo; the State of Delaware for Smart Records™; a major European insurance company for Smart Swaps™ in the catastrophe insurance market; Orebits, a provider of asset digitization services; PrivateMarket.io, an alternative assets platform; and Medici Ventures, a blockchain-focused venture firm. For more information about Symbiont: www.symbiont.io.
About the Wall Street Blockchain Alliance
The Wall Street Blockchain Alliance (WSBA) is an industry leading 501(c)(6) non-profit trade association created for financial market professionals, by financial market professionals. Its mission is to guide and promote comprehensive adoption of blockchain and distributed ledger technology across global financial markets.
For information about the WSBA, including membership, visit www.wsba.co or email to [email protected]