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Crypto Fund Strategies Edge Out Hedge Fund Models

Crypto Venture Fund Strategies are Beating Hedge Fund Models

A report from Bloomberg shows the changing nature of cryptocurrency investment, with crypto venture fund strategies surpassing their hedge fund counterparts for the first time.

The reason for this shift is suspected to be the changing conditions brought by the ongoing bear market and the collapse of initial coin offerings (ICOs) in the wake of the increased regulation from the US. The prices of tokens fell up to 90% last year, meaning investors wanted out and venture funds replaced them, entering with purchases at cents on the dollar.

Jeff Dorman, partner and portfolio manager at Los Angeles-based Arca, explained to Bloomberg the benefit for the venture capitalists, saying that it was an opportunity to ”buy below even the cash value of the company”.

Last year, 125 new cryptocurrency venture funds launched, compared to 115 investment-oriented cryptocurrency hedge funds — a stark difference to 2017 that saw 136 hedge funds and just 85 venture funds emerge.

This change is perhaps not surprising; Eurekahedge Crypto-Currency Hedge Fund Index reported average losses of around 70% for crypto hedge funds in 2018.

Despite poor performances, several hedge funds told Bloomberg they are seeing an influx of institutional investors. “We are talking to a lot”, one contributor added.


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Reality Shares Launch $100 Million Crypto Hedge Fund

Reality Shares is launching a USD 100 million crypto hedge fund, joining a long list of new crypto hedge funds, a sure sign that institutional investment into the crypto space is increasing.

Reality Shares has already set aside USD 25 million to start the fund up and shouldn’t have a problem expanding to the projected USD 100 million. The firm is responsible for launching the first blockchain exchange traded fund (ETF) in the world, listed on Nasdaq China as BCNA, which has been extremely successful, generating USD 100 million of cash in only a couple of months.

There are already 466 crypto hedge funds in existence, most of which were launched during 2017 and 2018. Some of these hedge funds have made headlines on Bitcoin News, such as Galaxy Digital, Benson Oak, Andreessen Horowitz, Lightspeed Ventures, Autonomous Partners and Grayscale Investments. Essentially, lots of big names and big investors recognize the potential of Bitcoin and crypto, and are building their investment infrastructure.

This new crypto hedge fund from Reality Shares will be in the top 100 crypto hedge funds, when using total investment to rank. Even though USD 100 million isn’t enough to significantly impact global crypto prices, the aggregate of institutional investment so far is definitely pushing crypto prices higher and setting the stage for much bigger investments in the future. Once the crypto markets start rallying again, institutional investors will pour money into crypto hedge funds, accelerating the rally. The most important thing is that the infrastructure is being solidified and will be ready by the time this happens.

Reality Shares will use a mix of arbitrage, venture, and directional strategies. To break this down, this means it is planning on making profits from price differences on exchanges across the globe, investing money into crypto startups, and also will be making long or short bets on crypto prices.


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Crypto Hedge Funds Face Tax Uncertainty

With US government scrutiny focusing in on cryptocurrencies, hedge funds face tense uncertainty due to the unclear tax regulations regarding digital currency assets.

Trying to play by the rules

With billions of dollars on the line, cryptocurrency hedge fund managers face a challenge when trying to fully comply with tax laws just as individual investors do. Their jobs required them to maximize profits while minimizing liabilities, but with few guidelines regulating their holdings, there is a lack of direction for this to take place in a fully legal manner.

The US Internal Revenue Service (IRS) is attempting to keep up with the pace of innovation with regulations, last month announcing that the large business and international division would focus on cryptocurrency audits in the coming year. Bigger tax bills and penalties have been threatened by the government department when the rules come in.

Clay Littlefield, a tax attorney for Alston & Bird in Charlotte, North Carolina, told Forbes that there is indeed a lot of uncertainty considering how the IRS will treat cryptocurrencies in the near future. Littlefield acknowledged that while there is plenty of analogies that can be placed on circumstances, there is not a lot of solid legal framework for investors to reference.

Why the lack of clarity?

There are several key factors that have contributed to this uncertain climate. Most crucially, regulatory bodies such as the IRS have been slow in laying out their full positions on digital currency.

Karl Walli, senior counsel at the Treasury Department’s office of tax policy earlier this year told tax professionals there is a ”long list” of issues the IRS needs to address, adding that planned new tax laws would increase the efficiency of comprehending all these problems. Walli said: “There’s no way in this environment that we’re going to be able to put out guidance on the majority of those issues.”

In 2014, the IRS settled on considering crypto as property, not currency, meaning that investors, miners and those earning wages in Bitcoin would be required to report profits and losses as is required with property. The market was dominated at this time by small investors; hedge funds trading in cryptocurrency has created problematic issues for the concept of crypto as property which has yet to be addressed.

Ultimately, funds may well end up owing more in taxes than their current estimations, dependent on the IRS’s decision.  David Shakow, professor emeritus at the University of Pennsylvania Law School assumes that the lack of guidance right now may well provide a solid defense for hedge funds, regardless of future implementations.

For now, however, offshore tax havens such as the Cayman Islands have begun to attract big investors looking to avoid the necessity of following the unclear US tax regulation, although operations investing in cryptocurrencies for a foreign investor have not yet been legitimized by the IRS as non-taxable by the US.


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Crypto Hedge Funds’ Rapid Growth Proof of Booming Crypto Industry

A study by crypto analytics firm Autonomous Next has found that the number of crypto hedge funds has been rapidly growing since 2016, showing that crypto investment is a booming industry. All together, crypto hedge funds manage USD 7.5 – 10 billion of assets. This represents the start of what could be a massive wave of institutional investment into the crypto space.

Prior to 2014, only 12 crypto hedge funds were formed; to put this in perspective, Bitcoin launched in 2009. By the end of 2014, there were 27 crypto hedge funds. This growth in hedge funds occurred during and after the rally that pushed Bitcoin’s price above USD 1,000 for the first time. In 2015, there were 35 crypto hedge funds, the small amount of growth was probably due to the strong bear market at the time. In 2016, the number of crypto hedge funds jumped 60% to 56.

2017 saw the biggest crypto rally in history, with Bitcoin rising all the way to USD 20,000 and Ethereum rallying to become the second most valuable cryptocurrency. Simultaneously, numerous other cryptocurrencies launched and became very popular. By the end of 2017, there were 251 crypto hedge funds, a 348% increase since 2016.

There is definitely some correlation between a rising crypto market and the rate of formation of new crypto hedge funds, but even during bear markets, additional crypto hedge funds have been forming. During the first half of 2018, which was a strong bear market, the number of crypto hedge funds rose 24% to 312.

Crypto hedge funds are using different strategies, including making money from trading, buying and holding various cryptocurrencies, tracking an index comprised of various cryptocurrencies, hedge funds that track the average of crypto hedge funds, and investing in crypto infrastructure like wallets and exchanges. A tiny fraction of crypto hedge funds is focusing on artificial intelligence and quantum technology.

Apparently, the top hedge funds hold most of the capital, with the top ten crypto hedge funds holding 43% of the total money in crypto hedge funds and the top 50 crypto hedge funds holding 80%.


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Crypto Investor Apologizes for Earning $8 Million

John Lore, a lawyer who has managed over 30 cryptocurrency hedge funds, has shared his experience with an investor who approached him for his services while apologizing for turning his USD 600,000 into USD 8 million.

Embarrassed by crypto riches

The investor in question reportedly apologized for how much money he had made, even seeming embarrassed with his newfound cryptocurrency riches.

Speaking to Business Insider, Lore said: “Some of them make me feel bad about my own net worth and what I’ve done with my life. I even had a fund manager apologize for making so much money and said he’d donate a lot to charity.”

Lore went on, “They’d put in approximately USD 600,000 and they, in January, were sitting at over USD 8 million. My son took one look at that and decided he’s going to be a cryptocurrency manager.”

New York firm Capital Fund Law Group was founded by Lore, with the business having a history of specializing in hedge fund and asset management. Demand for his specialist services has been growing, with Lore telling Business Insider he has seen a huge spike in inquiries.

Managing crypto hedge funds in 2018

Lore noted that his clients come from a far more diverse background than that of traditional hedge funds, some being just amateur traders who experienced huge investment returns.

“There’s a lot of demand but I think right now there’s a lot of need for education,” Lore told Business Insider. “Never has there been a more diverse group of potential managers come to us. These aren’t just all former buy-side analysts at investment banks, they’re coming from all different aspects.”

In 2017, Bitcoin rose 1,000% over USD, and with a recent report suggesting the average ICO investor sees 82% profit. Lore has attributed this to his recent increase of clients. Despite a rocky cryptocurrency marketplace this year, Lore noted that the funds he advises are still seeing strong returns.

“I would say right now most fund managers are not looking to necessarily grow a large fund, they’re looking to grow a track record,” he said. “In 2017, the market’s the track record – anyone who’s in is doing great. No one would form a cryptocurrency fund without absolutely fantastic performance returns.”


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