Why do hedge funds stock cryptocurrencies?

A recent study by the global fund manager Intertrust shows that hedge funds appear to be significantly increasing their investment in cryptocurrencies over the next five years.

The first report published in the Financial Times examined 100 hedge funds and found that they plan to hold an average of 7.2% of their assets in cryptocurrencies by 2026 – 17% of hedge funds plan to hold more than 10%.

North American hedge funds are the boldest: their average exposure is 10.6%; UK and European funds claim a share of around 6.8%. However, all hedge funds, regardless of their location, assume that crypt is at least 1% of their portfolios. Intertrust, using data from alternative financial data provider Preqin, estimates it could add about $ 312 billion in assets.

Why do hedge funds accumulate in crypt?

Although the current capital injections of hedge funds are not known, it is clear that even before these findings were published, they were increasingly accumulating in the cryptocurrency sector to increase productivity.

According to PWC, the most common motivation for hedge funds to invest in digital currency was simply “general diversification”, with 57% of the funds surveyed citing diversification as the reason for buying crypt.

Another factor was that hedge funds claim to see cryptocurrencies as a safe haven in times of inflation and low productivity.

Hedge funds have also probably wanted to take advantage of the frenzy that has gripped the crypt market in recent months. Namely, bitcoin accounted for most of the profits in SkyBridge Capital, a US hedge fund founded by Anthony Scaramucci, former director of communications for the White House.

Although the bitcoin and broader cryptographic market has been somewhat upside down in recent weeks, the market has been on the rise for several months now, as the big Titans of Wall Street have embraced it in the mainstream media and Tesla CEO Elon Musk has made upbeat speculative statements .

A series of musical regulatory issues and negative tweets have brought bitcoin down from $ 64,000 to $ 40,000 in just two months. However, even with the recent decline, bitcoin has risen more than 400% in the last 12 months.

What does this mean for investors?

Hedge funds looking at cryptocurrencies are not a new thing, but the amount by which their capital should be encrypted is still interesting.

However, their increased interest does not necessarily mean that the outlook for cryptocurrencies is rosy. As PWC points out, hedge funds wishing to invest in digital currencies face many challenges. These include customer / reputation risk; regulatory uncertainty; the current availability of the service provider and the lack of infrastructure.

Many countries are experimenting with central bank digital currencies (CBDCs) that promote the opposite of cryptocurrencies. They are unlikely to want competition, so a new setback for regulators could still send cryptocurrencies into decline.

Thus, the participation of hedge funds in the cryptographic sector may offer some growth to the market, but as long as the market is not mature and resilient to everyday shocks and surprises, it is still a very speculative asset.