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Despite the ongoing volatility and uncertainty in the cryptocurrency market, many traditional hedge funds are still maintaining their presence in the digital asset space. According to reports, there are around 300 active traditional hedge funds that have invested in digital assets.
Perks of digital asset investments, such as their ability to offer a new value-creating ecosystem, have attracted interest from numerous traditional hedge funds. Ideally, these hedge funds utilise fundamental trading, passive approach, and arbitrage as their investment techniques in cryptocurrencies.
An Entry Chance into the Crypto Market
Although volatility is inevitable in any asset class, it is significantly higher in crypto. When investing in virtual currencies, it is essential to consider the factors affecting their price movement. There is an ongoing crypto winter; the market cap has crashed from its $3 trillion high, trickling down to as low as below $1T. The move sent the whole market into a frenzy, and there was a lot of confusion about crypto's future. However, this was a chance for crypto exposure, aka "buying the dip" for hedge funds.
According to David Miller, the head of the investment management division of Quilter Cheviot, hedge funds are well aware of the risks associated with cryptocurrencies. The growing number of hedge funds investing in virtual currencies shows that they are more confident about the potential of this asset class. However, traditional asset managers are still cautious of cryptocurrencies' 'popular' trait - volatility.
Besides being aware of the risks, hedge funds have a variety of factors that they consider when it comes to investing in cryptocurrencies. For instance, they usually prefer to invest in blue chips of the market instead of new projects. Many new projects come during the peak of the bull market cycle, rising at ridiculous valuations only to die out in the end.
On the other hand, DeFi is also getting ready for big money, especially blue chip projects like AAVE, Compound, and Maker that treat security and risk management with the highest level of seriousness. However, there are still significant risks. We have seen breaches where hackers stole funds of entire projects, and sometimes projects can't even pause the event due to the decentralisation factor.
Traditional Hedge Funds Remain Cautious
Despite the increasing number of traditional hedge funds investing in cryptocurrencies, many remain cautious. A survey conducted by PwC revealed that over half of the firms currently offering assets under management (AUM) services have only allocated around a fraction of their total assets to this asset class. According to the survey, over half of the asset managers do not expect exposure to digital assets in the next three years. A third of them are interested in cryptocurrencies but are waiting for the market to mature.
Most respondents who were not involved in crypto investments cited regulatory uncertainty as the biggest barrier to their participation. On the other hand, those exposed to cryptocurrencies said the lack of clarity on taxation and regulatory matters was a major concern. For cryptocurrencies to be regarded as a more reliable and inviting asset class for everyone, they need to have more security measures.
DeFi blue chips are working on this aspect by making their projects more secure and hence, more attractive. When investing in DeFi projects, it is important to do your due diligence and pay attention to what tools a particular project uses to safeguard its clients’ funds. Some of the more reliable security measures include time-delaying mechanisms that don’t affect decentralisation but allow double-checking of transactions before their execution. In addition, limiting the amount of funds that can be transferred per transaction is also advantageous. Such methods prevent the possibility of draining a project’s liquidity in one move by bad actors.
Since cryptocurrencies are considered high-risk assets, one should approach them cautiously and make investment decisions based on risk appetite. The recent collapse of Terra highlighted the potential risks investors might face when dealing with this asset class. The crypto industry is relatively young and volatile, experts recommend that clients keep their exposure to the sector low. Anjali Jariwala, a financial planner, said that clients should allocate no more than 3% of their assets to crypto.
Cryptocurrencies are Here to Stay
With all this said, regardless of the volatility in cryptocurrencies prices, it is still expected that the market will continue to grow. The advancements in the sector have become appealing even to traditional financial institutions.
At the time of writing, the current correction phase in the market hasn't deterred the adoption of cryptocurrencies. Many projects in the industry are in the pipeline to be launched. It's no surprise that hedge funds are getting in on the frenzy and are aggressively investing in the crypto space.
Kate Kurbanova is the co-founder and COO of Apostro, a risk management and security platform for DeFi projects which utilizes blockchain data to prevent economic exploits of smart contracts on client platforms. She is an experienced financial project manager and startup builder and has a strong background in blockchain including DeFi, DApps, yield farming and crypto trading projects. In the company, Kate drives product development and leads customer and investor relationships.
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.