In yet another sign that the party might be coming to an end in crypto markets, more funds devoted exclusively to cryptocurrencies closed in the first quarter of 2022 than were launched in the same period.
According to a new report from research firm Crypto Fund Research (CFR), only 11 new crypto funds were launched last quarter while 14 shut down their operations in the same period. Those figures mark a sharp reversal from trendlines for the last two years when figures for crypto fund openings outpaced those related to closings. Their losses have also multiplied. As the prices for Bitcoin and other major cryptocurrencies tumbled in the first quarter, crypto funds lost 3.4% in the first quarter of 2022.
A decline in the number of crypto funds does not translate into a waning of investor enthusiasm for the asset class, however. The overall number for assets under management (AUM) managed by crypto funds remained fairly steady at $69.2 billion, down by just 0.7% from the previous quarter. The report states that a quarter of the total AUM is managed by the five biggest crypto funds.
A Swell of Crypto Funds
In the first quarter of 2020, when bitcoin was still shaking off the effects of a prolonged crypto winter, 17 crypto funds debuted even as 28 funds closed shop. The tide turned in the third quarter of the same year, when a pandemic shutdown and cash from stimulus checks pushed investors into risky corners of the market. The swell propelled assets like Bitcoin to record highs and attracted speculators and investors to its ecosystem.
Crypto funds thrived in this period. According to CFR’s numbers, ninety-nine crypto funds were launched between the third quarter of 2020 and the final one of 2021. Fifty-nine funds closed shop in the same period.
Investor inflows into cryptocurrencies peaked at 8.5% of the total assets managed by funds in August last year. There have been net outflows from crypto funds only in two of the last twelve months.
The first one occurred in September 2021, one of the worst months for Bitcoin price, when crypto funds registered a 1.4% net outflow. [The cryptocurrency was down by roughly 7.2% from the previous month before it took off in October 2021]. Crypto funds also recorded a net outflow of 2.5% in February 2022.
A Long Haul
There were more than 850 funds invested in cryptocurrency markets at the end of the latest quarter. More than 825 funds were invested in crypto at the same time last year. While crypto’s wild price swings and quick profits are an important motivation for funds to put money into the asset class, many are in it for a long haul.
In fact, venture capital tops the list of sectors invested in the sector with 426 funds devoted to cryptocurrencies. Hedge funds followed closely with 407 crypto funds and private equity and others formed the tail end of this mix with 25 funds. The report’s authors wrote that fund flows into cryptocurrencies are an important indicator of investor sentiment and independent of the price of underlying assets.
But a comparison with figures from last year tells a different story. The number of hedge funds invested in cryptocurrencies increased by 21 from Q1 2021 while only three more VC funds were added to the crypto ecosystem. [Of course, the VC funds’ size makes a difference to the overall tilt but the hedge fund rush means more financiers are diversifying their portfolio with crypto].
VCs are essential to crypto since its infrastructure and ecosystem remain under construction and nascent as compared to the plumbing of modern finance. Venture capitalists will likely reap multiples of their returns (as happened in the case of Coinbase), when their crypto bets take off.
One thing that is made clear by the report is that the promised ‘floodgates’ of institutional investment in Bitcoin are yet to open. While large investors have warmed up to cryptocurrencies in recent times, their embrace of it seems largely opportunistic and limited. That strategy is reflected in the small size of crypto funds.
Seventy three percent of all crypto funds are $50 million or less. Thirty six percent of all funds manage $10 million or less. Those statistics are similar to a 2020 study by consulting firm PricewaterhouseCoopers which found that the average ticket size for investment in crypto funds was $0.3 million.
But there’s good news. “While most crypto funds remain relatively small, the proportion managing $10 million or less continues to shrink…[and] the proportion of funds managing more than $100 million continues to grow,” the reports authors wrote.