Although the broader financial world has been slow to recognize cryptocurrencies as a viable area of investment, that hasn't stopped some hedge fund managers from making moves in that direction. In fact, as cryptocurrency interest among everyday investors has surged over the past year, the number of cryptocurrency-focused hedge funds launched has also climbed. (See also: Cryptocurrency Hedge Funds Gained More Than 1,000% In 2017.)
According to a report by Benzinga, the number of hedge funds with a cryptocurrency or blockchain focus stands at roughly 150, and Agecroft Partners CEO Don Steinbrugge expects that number to double – or perhaps even triple – over the course of 2018.
A Venture Capital Approach
Many of the new cryptocurrency hedge funds have adopted an approach familiar to venture capital firms. (See also: The Rise of the Crypto Hedge Fund.) In these cases, hedge funds look to fund new entries into the cryptocurrency space, lending their support and financial backing to new coin offerings or startups which help to enhance the industry or make use of the new technology.
That's not to say, however, that the hedge funds focused on cryptocurrency are playing an outsized role when it comes to the amount of money they are working with. The entire hedge fund industry worldwide stands at roughly $3 trillion in assets under management. (See also: Hedge Funds Topped $3 Trillion in 2016 Despite Rough Year.)
By comparison, only about $3 trillion – or one-tenth of 1% of that total – is allocated toward the cryptocurrency and blockchain spaces. Steinbrugge anticipates this number will increase by five times over the next year. Even still, the percentage of hedge fund money allocated to cryptocurrency investments will likely be miniscule in comparison to the rest of the hedge fund world.
Investment or Gambling?
One reason why hedge funds may be cautious about entering the cryptocurrency space is that it has been largely speculative up until this point. "People should be very careful investing in cryptocurrency," Steinbrugge warned. "They should view it as gambling. We are very bullish on crypto long-term, but a lot of the valuations have been driven by greed and unsophisticated investors who have jumped in after seeing how much these securities have gone up recently and are projecting it is going to continue."
Even if there is a crash of the cryptocurrency bubble, though, hedge funds could still make money off of the space. With a market that is constantly evolving, and with plenty of money made from blockchain and cryptocurrencies being invested back into the space, there are new coins and services all the time. "Those who can identify the future leaders can make a lot of money. Those who are investing in cryptocurrency just because it went up are basically gambling," Steinbrugge said.
Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns cryptocurrencies.