The Rise of the Crypto-Fund

by / 0 Comments / 462 View / March 7, 2015

Hedge funds may have a long economic history but there is a new player in this game: the crypto-fund.  Put simply, these hedge funds specialize in generating a portfolio off of gains from mainly cryptocurrency trading and mining bitcoins.  But barely anyone, even relatively literate investors, have a strong understanding of their prospect.  The youth of such entity has contributed to widespread hysteria over their trustworthiness and function.  

So what does a crypto-fund do?  Some may specialize in dividing a portfolio evenly between mining crypto-coins and trading on different exchanges.  But mining crypto-coins is an arduous and nearly unprofitable exercise: millions of dollars of hardware is needed to mine coins effectively at a near profit – at best.  Thus, most strategies in regards to bitcoins and similar currencies is contained in standard trading – some bought off exchanges and 3rd party individuals.  

Some hedge funds that are specializing in Bitcoin branch off into other markets to maintain a broad portfolio.  Pantera Capital is an example of this – the firm acts a venture capital wing to startups in the similar line of business.  Its investors invest in not only the prospect of gains from Bitcoins but also the chance of gaining from success of other cryptocurrency headed firms. Yet while the hybrid nature of such firms make options to invest in the market of cryptocurrencies more diverse, they are exclusive to a certain threshold: only those with incomes over $200,000 a year or a net worth of over $1 million dollars can easily invest in such firms without being subject to obscure federal regulations.  

But is trading bitcoins and other cryptocurrencies any different from trading stocks?  Understandably yes, but the devil is in the details.  A rather new firm, Metis Management, relates to this challenge.  Their founder, Tillman Huett-Lassman, talked to me in an interview about the process of moving from traditional hedge fund strategies to algorithms situated for the bitcoin and cryptocurrency market.  They discovered tools to do traditional financial modeling doesn’t seem to work well in relevance to cryptocurrency.  But optimism for this market was plenty – Mr. Huett-Lassman noted that since “exchanges like Coinbase have received millions in venture capital funding, it is likely that this will be a heavily traded security in the future.”  As a consequence of future, greater volume, market trends and data will likely come more easily. 

For Metis Management, it is about the balance.  75% of the portfolio is kept in established cryptocurrencies and then 25% are reserved for radically new coins.  Remember Coinye? The short-lived half-joke half-serious cryptocurrency attempt abandoned quickly after Kanye West filed a trademark infringement lawsuit against them.  But with joke coins emerging, it is not surprising that there are dozens of others growing which has led to a diversification of the cryptocurrency market.  

Does it work?  The returns can be magnificent – in the week I interviewed Metis Management, the company had a 30% return of their weekly trade.  But Mr. Huett-Lassman admitted the risk: the sheer volatility of cryptocurrencies make them far more riskier than slower moving options like classic stocks.  But the way to master this market is in a plurality of ways including the internet itself: Metis outside of the classic monitoring of outstanding market orders, exchange prices, and volume in specific time intervals, also looks over carefully Google news alerts for keywords on market moves.  While supply and demand may give a “good picture,” they are far from being the only factors at play.  

Granted, Mr. Huett-Lassman isn’t a lawyer as much as a businessman, and therefore his description of the legal provisions was adjoined with a disclaimer of potential convolution.  Simply and understandably put, United States law surrounding the bitcoin and cryptocurrency market is so obscure that it isn’t fully clear how hedge funds are allowed to operate.  

But the market is planned to expand with the amount of hype being built around cryptocurrencies.  And while Mr. Huett-Lassman agrees that more regulations are likely to come in the near future, it is clearly a market that soon will be of choice of many investors.