Published: March 25th, 2020
Plunging Bitcoin prices and a shutdown at trading platform Bitmex have forced crypto hedge fund Adaptive Capital out of the market.
In a letter to investors this week the company announced it would shutter its business after taking a heavy beating on 13 March, when Bitcoin’s (BTC) price dropped suddenly to a low of $3,775.
The closure follows what looked to be a banner year for the fund, which reported gains of more than 550 per cent between October 2018 and May 2019. The firm said a series of infrastructural problems last week with ‘a trading venue’ – widely understood to be BitMEX – were the primary cause.
‘Many platforms, tools, and exchanges that we use daily in the business stopped operating during the (Bitcoin) sell-off, which significantly held back our ability to take action,’ Adaptive said in the investor letter.
BitMEX was down for close to an hour on 13 March during the mass Bitcoin sell-off, meaning Adaptative Capital would have been less able to respond to the market. BitMEX initially blamed hardware issues at its cloud service provider which delayed trading between 02:16 and 02:40 UTC. Crypto news sites have reported that Adaptive had accounts on BitMEX which were liquidated.
BitMex is now blaming a DDoS attack for the outage. Adaptive Capital says it will soon return its remaining assets to investors.
Since breaking above $10,000 in early February, Bitcoin’s price started signalling a bearish direction according to analysts on or about 26 February, when prices settled at $9,200.
No one, however, predicted the sudden devaluation of nearly 50 per cent, which saw Bitcoin drop to $3,775, a price point last seen in April of 2019.
Like other institutional investors, it may be that Adaptive Capital’s Bitcoin strategy was based on long-term trends around price action.
Led by Bitcoin maximalist Murad Mahmudov, the company has long argued that Bitcoin is the one digital currency crypto investors should look to. Altcoins, in the company’s view, tend to be highly correlated to its price movements, and as standalone investments only increase portfolio risk.
Crypto Funds have grown in popularity with both blockchain and traditional finance, with an uptick in interest starting in 2018 that is till driving many companies and projects today. Along with Adaptive Capital, well-known names included Alliance Capital and VC fund Digital Currency Group, which has led the way in showing traditional venture capital firms the opportunities in crypto.
PwC estimates that 150 crypto hedge funds cumulatively held more than a billion dollars in assets in 2018. While new hedge funds are still being launched, their overall numbers have decreased.
Restrictions imposed on the industry by the US Securities and Exchange Commission (SEC) is part of the picture. A number of exchange-traded funds (ETFs) have been rejected by the SEC due to concerns that movements on the crypto market are prone to manipulation.
The SEC recently said no to an ETF submission by New York-based Wilshire Phoenix, which had designed a fund to hedge against Bitcoin volatility by offsetting risk with US Treasury bonds.
As the impact of the Coronavirus pandemic unfolds, both crypto hedge funds and traditional investment funds may struggle to cope. The performance of safe-haven assets like gold will be an important signpost. If they lose value, crypto may find itself in the spotlight again as a source of investment opportunity.
Adaptive Capital was betting on just that. Describing itself as a ‘multi-strategy cryptocurrency hedge fund,’ the company banked its future success on crypto’s arrival as a significant asset class. This was based on the belief that on-chain analysis of capital flows and network health would de-risk and legitimise crypto-asset portfolio management.
The fund developed custom indicators built on real-time financial data drawn the largest blockchain networks. The loss of BitMEX data, effectively rendering the company blind in a period of intense volatility – may well have been the catalyst for its demise.
Last year close to 70 crypto-focused hedge funds shut their doors. These included funds that catered to institutional investors like pension funds and family offices.
The number of new funds launched in 2019 was also half that recorded the year before. North America led the field in crypto fund closures with 28, followed by 23 in Europe, and 14 in the Asia-Pacific region.
While ‘just wait until institutional investors jump in’ has been a rallying cry for the industry, analysts note that crypto remains essentially a retail-driven investment market. The continuing price volatility for bitcoin and other cryptocurrencies is still keeping institutional investors from climbing on board.
Price swings like the one that killed Adaptive Capital point to yet another year of wild rides for digital currencies even established names like Bitcoin. That will continue to keep institutional investors from committing in a significant way.
Regulatory moves are also to blame, as governments over-reach in an effort to stop industry fraud and mega-companies like Facebook from gaining too much power. The resulting uncertainty, as well as cryptocurrencies’ un-ending volatility – Bitcoin doubling its price over one year then losing half its value in less than a week— will continue to give traditional reasons to sit on the sidelines.
Still, there are signs of progress. High-profile advocates like the New York Stock Exchange’s parent company and household names like Fidelity Investments are moving ahead with initiatives that could make it easier to own digital assets.
The Crypto Fund Research website lists more than 800 cryptocurrency funds, 350 hedge funds and 420 VC funds. The five largest are Brian Kelly Capital Management, Digital Currency Group, Arrington XRP, BlockTower Capital, and Fenbushi Capital.