Cryptocurrency investing has – until now – been a high-risk, high-gain enterprise, with private individuals making up the bulk of the open market.
This is due to several converging factors. Cryptocurrencies have a relatively barrier for entry, due to price and to the technological wall surrounding them. As a result, the bulk of investments have been made by relatively tech-savvy individuals contributing relatively small portions of their personal incomes. Even so-called whales are typically operating on personal cash.
The golden prize for cryptocurrency investing has always been the vast sums of money locked in institutional investment vehicles, like hedge funds. In a hedge fund, accredited investors pool their money for investment in the fund’s often complex portfolio.
These funds tend to be conservative, prioritizing investor returns and safety over massive gains. Hedge funds are also heavily tied to government regulation. This has, up until recently, made them a poor fit for the cryptocurrency market. Quite simply, hedge funds are not really designed to cope with double-digit percentage swings in a daily period, and the cryptocurrency market still very much operates in a legal Wild West.
As the market matures, however, cryptocurrency is becoming more attractive to institutional investors, and some projects are even specifically geared toward bringing those oodles of investment money into the market. We’re going to take a brief look at the state of cryptocurrency hedge fund investing and review a couple of those new projects.
State of the Market
The state of the market can perhaps be best summed up by the actions of billionaire investor Steven Cohen. Cohen recently decided to back Autonomous Partners’ blockchain hedge fund investing project. Autonomous Investors was founded in late 2017 to produce an institutional investment blockchain platform, prioritizing scalability, infrastructure, and access to privacy coins.
Steven Cohen, Image from Bloomberg
Cohen declined to comment directly on the investment in a story by Fortune magazine, but Autonomous Partners leader Arianna Simpsons called Cohen’s liquidity injection a vote of confidence in the cryptocurrency hedge fund investment industry.
She added that the final shape and form of cryptocurrency hedge fund investment is still uncertain, but there’s a great amount of enthusiasm in the space.
“It’s still up in the air if people want to do a number of things on the blockchain,” she told Fortune. “We’re still figuring out what needs done and what doesn’t. But it’s clear they want to trade, and they want to play games.”
Autonomous Partners is leading the charge into cryptocurrency hedge fund investment from the hedge fund side. However, quite a few crypto-first projects aim to break into the institutional investment arena by prioritizing the crypto technology first and foremost.
CG Blockchain‘s Blockchain Terminal – or BCT, after its native token – aims to create a cryptocurrency trading ecosystem geared specifically toward institutional investors.
BCT hopes that institutional investors will use the ecosystem’s decentralized application and platform tools for hedge fund trading purposes. Essentially, BCT collects data from cryptocurrency exchanges, social media, and initial coin offering releases for its users. This data can then be used to trade, backed by the platform’s so-called ComplianceGuard security shield, a dual-purpose cybersecurity suite and regulatory compliance tool.
Quantopian is another project operating in the institutional investment sphere, but not quite as directly as Blockchain Terminal. Quantopian functions as a trading algorithm marketplace.
“Our goal is to make algorithmic trading available to everyone – regardless of your location, background, or experience,” the developers said on the project’s homepage. “We provide the tools, data, and capital – all you need to think about is the strategy. And if you find an idea that is successful, we want you to share in the trading profits on a capital allocation.”
This is a kind of side entry into the world of institutional investing, but it’s a sign that the market is growing in complexity. That kind of complexity will be crucial for potential investors to witness.
Numerai takes this kind of complex trading a step further with the introduction of artificial intelligence. Artificial intelligence and blockchain are a neat fit. Blockchain technology can store and manipulate vast quantities of data quickly. However, sorting through all that data is a task best suited for artificial intelligence. The combination of the two, when applied to institutional investing, could give institutional investors a distinct edge over traditional trading platforms, according to Numerai founder Richard Craib.
“Once you have a model in finance that works, you hide it. You hide the techniques you used to build it. You hide the methods you used to improve your data. And most importantly, you hide the data. The financial incentive for secrecy is strong,” Craib said on the project’s homepage. “But when I learned about homomorphic encryption, I was motivated to find a way to use cryptography to share my data set with other machine learning experts. I believed that if I could share the data, other people might some day build better models than mine. So I started Numerai, the first hedge fund that gives its data away for free with structure-preserving encryption, and allows open participation by data scientists around the world.”
Bringing open-source data science to the investment world lends credence to the frequently confusing technology surrounding blockchain, improving both its performance and its PR.
An Embarrassment of Riches
The combination of crypto’s relative newcomer status to the investor world and the big capital reserves of institutional investors can mean huge profits – embarrassingly huge – while the market remains relatively untapped. Blockchain investment lawyer John Lore told Business Insider that at least one of his hedge fund clients felt the need to apologize to him because of the sheer amount of cash his fund had created.
“Some of them make me feel bad about my own net worth and what I’ve done with my life. I even had a fund manager apologize for making so much money and said he’d donate a lot to charity,” Lore told Business Insider. “They’d put in approximately $600,000 and they, in January, were sitting at over $8 million. My son took one look at that and decided he’s going to be a cryptocurrency manager.”
Lore’s New York-based Capital Fund Law Group has seen a big uptick in institutional investor interest in the blockchain hedge fund market, he added.
“There’s a lot of demand but I think right now there’s a lot of need for education,” Lore said. “Never has there been a more diverse group of potential managers come to us. These aren’t just all former buy-side analysts at investment banks, they’re coming from all different aspects.”
Institutional investment money has been sort of a holy grail for crypto investors, who believe the increased liquidity that would bring to the market will increase overall market stability, thus attracting even more investors with even deeper pockets.
Although cryptocurrency hedge fund investing is still in its infancy, interest on both sides of the equation looks likely to push the crypto investment sphere into new – and much larger – financial circles in a relatively short period.