Bitcoin continued to stabilize Tuesday after a weekend selloff dragged prices to their lowest levels of the year. But renewed selling pressure could be just around the corner as crypto hedge funds complete their first redemption cycle.
Bitcoin’s Next Major Hurdle: Hedge Funds
It may not be long before bitcoin prices face their next major hurdle in the form of an institutional cash crunch, according to Spencer Bogart, a blockchain venture capitalist. In an interview with CNBC, Bogart said many crypto hedge funds are coming up on their one-year redemption cycle.
“If we go back to the summer of 2017, when crypto prices were booming, there was about a 100, 200, maybe 300 new crypto hedge funds that were formed.”
Now, these same investors are planning to redeem out of that fund. “That means forced selling on behalf of all of these new crypto funds that have popped up,” Bogart said.
Bogart, who is bullish on bitcoin, advised against waiting for a price bottom before re-entering the market. Instead, he recommended cost-averaging the virtual currency ahead of the next bull market.
“Most people that are going to wait for lower prices will end up paying higher prices than they are today,” he said. “So I think the right move is to not try and time the market and try and average into it.”
Bitcoin is little changed compared with 24 hours ago, with prices hovering between $6,100 and $6,200.
The Rise of Crypto Hedge Funds
The number of hedge funds dedicated to cryptocurrencies has soared since the bull market began, but that growth could be in jeopardy amid the six-month reversal in prices.
Back in February, fintech research firm Autonomous Next recorded a total of 226 global hedge funds in operation, more than double the October rate and a five-fold increase compared with August. The funds fortunate enough to have opened their doors in 2017 saw massive growth as bitcoin’s December highs gave rise to an even bigger peak for altcoins the following month.
However, cryptocurrency-focused hedge funds have struggled to repeat last year’s performance amid the ongoing price collapse. Nine funds closed their doors in the first quarter, with Yahoo Finance estimating their losses at 23%.
That said, recent developments have not deterred other big-name players from entering the market. On Monday, Andreessen Horowitz launched a $300 million investment fund that will specialize in cryptocurrencies and other blockchain-based projects. The Silicon Valley fund is one of the earliest and most prominent backers of cryptocurrency.
Crypto-focused hedge funds face regulatory constraints that limit the type of holdings they can include in their portfolio. Andreessen Horowitz partner Chris Dixon recently told Fortune that these limitations include “unconventional deals” like purchasing and holding cryptocurrencies. Dixon said the fund’s classification as a registered investment adviser rather than the traditional venture capital designation of Exempt Reporting Advisers will give the firm “maximum flexibility” for deal-making.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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