Cryptocurrency hedge funds have been reporting significant gains this year. They appear to have benefitted from the rise in transactions that let borrowers and lenders settle payments directly, without having to go through third-parties like banks.
Crypto-asset hedge funds could also be performing well due to a substantial increase in the Bitcoin (BTC) price. The flagship cryptocurrency is trading at around $13,750 at the time of writing (after crashing to below the $4,000 mark when the COVID-19 pandemic began around March 2020).
Vision Hill Group’s crypto-asset hedge fund index (introduced in September 2018) reveals that these investments have posted a return of 126% this year. As first reported by Reuters, non-crypto hedge funds tracked by BarclayHedge have also recorded gains, but are only up by around 1.7%.
The explosive growth of the decentralized finance (DeFi) space has been one of the main drivers of the crypto hedge funds’ solid performance in 2020, according to Scott Army, Founder and CEO at Vision Hill, which has allocated a certain part of its portfolio to DeFi assets.
Total DeFi loans stood at $11.1 billion (as of October 29, 2020). Uniswap, a leading non-custodial Ethereum token exchange, remains one of the most widely-used DeFi platforms and had around $2.75 billion in total value locked in its contracts at the time of writing.
DeFi platforms are based on open-source protocols and infrastructure, with algorithms that automatically determine rates in real-time, which are calculated according to an asset’s supply and demand.
Framework Ventures, a $100-million VC fund and one of the most prominent DeFi investors, stated that DeFi may soon achieve mainstream adoption.
Michael Anderson, co-founder of Framework Ventures, stated:
“Users are trying to vote with their dollars in terms of how they view the capabilities of DeFi.”
He added that there are several DeFi platforms that are now recording more volume than more centralized exchanges.
The Bitcoin price has surged over 80% during 2020, which may have also helped hedge funds earn more returns (indirectly). When BTC surges, the entire crypto market (usually) responds positively and the price of altcoins goes up as well (but not always).
Off the Chain Capital revealed that it made 94% returns so far this year. The company has been posting average yearly returns of 112% since its launch back in 2016. It had acquired discounted Bitcoin claims from those affected by the Mt. Gox hack (one of the first crypto exchange hacks) back in 2014, said Brian Estes, the company’s managing partner and CIO.
Terry Culver, CEO at Digital Finance Group USA, claims that the crypto-asset space has matured a lot and that it’s “not as speculative” as it was a few years ago.