Crypto funds appeal for patience after market rout
Collapse in prices in 2018 shakes faith in the future of digital assets
Fund managers specialising in cryptocurrencies are appealing for patience from investors, after a year in which huge falls in prices severely dented their performance.
Investors poured money into funds trading bitcoin and other cryptocurrencies in 2017, seeking to benefit from a sector-wide boom. But with the price of bitcoin down almost three-quarters last year, mirroring big falls in other digital assets, many investors have tried to head for the exits — prompting funds to urge them to stay the course.
In a December letter to investors, San Francisco-based Pantera Capital admitted that 2018 had been “a difficult year for all cryptocurrencies and tokens”.
The firm, which was set up by Tiger Management’s former head of macro trading Dan Morehead and which runs more than $500m in assets, has been urging clients to look to the longer-term case for crypto. A year ago the firm predicted the price of bitcoin could reach $50,000 by 2019 — a far cry from its current level around $3,800.
“After such a prolonged drawdown in the market, it’s important to reflect and re-evaluate the thesis behind utility tokens,” wrote Mr Morehead and Joey Krug, co-chief investment officer, in the letter.
Pantera’s Digital Asset fund is one of the biggest in the sector, gaining almost 150 per cent between launch in November 2017 and the end of that year. But over the first 10 months of 2018 it was down 77 per cent, according to numbers seen by the Financial Times. A separate fund dedicated to so-called initial coin offerings, a popular method of raising cash for crypto start-ups, fell 75 per cent to October last year, after gaining almost 350 per cent in 2017.
“We firmly believe that tokens will achieve real world usage. In fact, it’s already starting to happen in the depths of this bear market,” wrote Mr Morehead and Mr Krug. But they added it could take two to three years for blockchain networks to achieve scale, which would help digital tokens become more widely used. Blockchains are electronic ledgers stored across thousands of computers, protected by cryptography, making them harder to tamper with than traditional stores of information.
Pantera did not respond to a request for comment.
While crypto-focused funds can in theory bet on both rising and falling prices, most have been reluctant to sell assets short, because of 2017’s sharp price rises or because many managers fundamentally believe in the long-term success of cryptocurrencies. That means many were hit hard by the market crash. Crypto hedge funds on average were down 70 per cent in 2018 to the end of November, according to data group HFR.
Galaxy Digital, a crypto and blockchain-focused merchant bank set up by Mike Novogratz, a former hedge fund trader and Goldman Sachs partner, also found the going tough.
Galaxy’s passively-managed Benchmark Crypto Index fund, which charges a 2.5 per cent annual management fee and holds a basket of cryptocurrencies including bitcoin, XRP, ethereum and litecoin, was down 50.6 per cent from launch in May 2018 to the end of October.
“The asset class continues to show signs of maturity, as headlines that once would have led to frenzied trading sessions have given way to patient market participants who want to see and react to results, not headlines,” Galaxy wrote in a November letter to investors.
Galaxy did not respond to a request for comment.
In November Mr Novogratz told the FT that 2018 had been “ challenging” but he has predicted that financial institutions will move from investing in cryptocurrency funds to investing in cryptocurrencies themselves, early this year. “That’s when prices start moving again,” he said.
Not all hedge funds have suffered heavy losses. New York-based Systematic Alpha Management’s Cryptocurrency fund, for example, gained 4.3 per cent in the first 11 months of last year.
The computer-driven fund trades bitcoin futures and tries to profit from upward or downward trends in prices, meaning it was able to profit during November’s 38 per cent slump in bitcoin against the US dollar.
But losses in December mean the fund is likely to have finished the year slightly in the red, according to Peter Kambolin, chief executive.