Bitcoin was trading more than 1,000% higher in 2017, with many investors and institutional firms pouring heavily into the new digital gold. Now Bitcoin has lost more than 80% of its value, and many of the hedge funds that invested in Bitcoin are now closed, and some are going out of business.
Josh Gnayzda, CEO of Crypto Fund Research, estimates that 35 hedge funds have closed since the start of 2018, nearly 5% of the 633 funds the company tracks. But, he said, despite the dire state of the market this year, many of the funds continued to launch new cryptocurrency initiatives.
An interesting trend we noticed was that hedge funds opened in both the first and second quarters, when the price of Bitcoin was already falling. This appears to be due to a delay effect. Many funds have taken much longer to set up than their founders intended, so they have hit the market at the worst possible time.
Failure of investment funds to make a profit will lead to mass closures, according to fund manager Anthony Pompigliano.
“I've already thought about this problem, and one question interests me: why didn't most fund managers realize this and close down sooner?” - he wrote.
The issue with watermarks - clauses in the contract that describe how much a fund manager can charge a client - will increase the pace of fund closures, he said.
If that happens, most fund managers will struggle because they won't be able to collect much of their compensation.
Working with a pool of investor assets in a falling market is not an easy task even for highly qualified professionals. Indeed, in these conditions, working with leverage and derivatives against the backdrop of panic sales is reminiscent of a balancing act without insurance at high altitude.
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