I understand that this question is loaded and that there is no one perfect investment strategy that can be applied to cryptoassets, but I am interested in hearing the communities thoughts.
The funds that have been most successful (measured by AUM, since for most funds the primary business is asset gathering) have been cryptofunds with VC strategies. Pantera, INBlockchain, and Polychain all supposedly have an AUM that exceeds $1 billion. Furthermore, funds with more VC oriented strategies have by far attracted the most attention, such as Multicoin and Paradigm.
In fact, there are really only two Wall Street type cryptoasset native funds that have generated any significant buzz or raised significant amounts of capital, BlockTower, and Ikigai. Both of the Wall Street type firms have raised substantially less capital than the leading crypto VC funds.
Returns for these various cryptofunds have been less than spectacular, to say the least. The average crypto fund, as tracked by Vision Hill, was generated -8.5% returns in Q3 2018, while BTC generated 3.5% during the same period. The only subsector of funds that generated a positive return using Vision Hill’s numbers for Q3 2018 was quanatative, and even then the median for that group of funds 2.5%, a full 1% below BTC.
I am very interested to hear various community members’ opinions on the matter.
I am more interested in what people think are the best strategies rather than about the struggling strategies (measured by returns against a benchmark, usually BTC) that are currently being deployed. That being said, a forum about those strategies would be very interesting as well. I will create one!
This could be the wrong forum for this type of question, so I apologize if the question is deemed too broad.
How do you define “smart people”, and how do you measure their ability to execute? Is it a feeling, or are there metrics that should be used? Assuming that the investor allocates to tokens, how long should they hold these tokens? What if the token currently doesn’t have a use case, but the team working on the project is “smart” and has the ability to execute? What if those people are anonymous? How do you explain the performance of cryptoassets that are deemed to be led by not smart people?
I have always been fascinated by the VC process, and am very interested to hear someone dissect why they think that is the best approach for publicly traded assets.
Let’s first confirm the definitions of Hedge funds and VC funds.
VC fund: From Wikipedia - “Venture capital funds are investment funds that manage the money of investors who seek private equity stakes in startup and small- to medium-sized enterprises with strong growth potential. These investments are generally characterized as high-risk/high-return opportunities.”
Hedge Funds: From Wikipedia - “A hedge fund is an investment fund that pools capital and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.”
So, VC funds normally invest in equities of unlisted companies and hedge funds invest in basically anything under their mandate. I’ll use these definitions in the following analysis.
I beg to differ with this analysis. Let me explain.
Pantera Capital - It has 3 kinds of funds.
a) Bitcoin Fund (2013 -)
b) VC fund (2014 -)
c) ICO fund (2017 -)
As you can see from the image attached, the VC fund has raised a total of $38 million and converted it to $155 million AUM. When you say they had $1 billion in AUM you can see that most of the money then came from the Bitcoin and ICO fund, which have hedge fund philosophies rather than being VC funds. Also, the $1 billion number is from December 2017, so the present AUM would be considerably lower. Pantera earned money from being early in the market and buying tokens, not their VC investments.
As you can see from their website (www.polychain.capital), Polychain Capital is not a VC firm, rather a hedge fund. They aim to invest in the protocol layer of Web 3.0 which are most of the times tokens and not equities in blockchain companies.
Haven’t looked into INblockchain, so can’t comment.
So, what I want to show is that these companies have got astonishing returns not because of their VC investments rather their token investments before the 2017 bull run.
If one specifically looks at the year 2018, the funds have not performed great. However, that is something expected considering it was a full-year bear market. However, if you look at a 3 year horizon, the returns are still way more than any other asset and greater than returns of Bitcoin alone.
The numbers you provided are starting fund sizes only for Pantera. I don’t know if this is common, but their VC portfolio could be a significant portion of their calculated AUM because of mark-to-market calculations that might be seriously outdated.
Pantera to my knowledge also has an active management fund that they no longer report since it is doing so badly.
I would argue that the ICO fund is much closer to a VC strategy than a typical hedge fund strategy.
The way that Polychain invests is also more akin to a VC strategy. I agree with you that to call them VC funds becomes complicated, but that is why I classified them as cryptofunds with VC strategies. Their lock ups are longer, their investment time horizons are longer, and they take active roles in attempting to shape the strategy of the projects they invest in. Furthermore, the tokens they invest in might end up being considered equities.
Returns for the ones that got in before 2017 are great, I agree. But they gave much of those returns back in 2018, and most funds seemed to have launched sometime in 2017.
Every investor has a different mindset and criteria they evaluate.
Evaluation metrics keep on changing with time. Warren Buffet was a brilliant investor for non-tech companies. However, he could not catch up to investments in tech. So, its an ever evolving field.
Basically, what I mean to say is, take whatever I tell below with a grain of salt.
There are generally the following methods of making money of crypto:
Passively invest in Bitcoin and don’t focus on it. However, be aware of market cycles.
Invest in non-BTC crypto tokens.
Invest in equities of blockchain companies.
Actively trade in crypto without focusing on which coins you trade.
1. Passive Bitcoin investment -
Whatever tokens one supports, one has to understand that in the near future Bitcoin will have value. It is the token everyone knows about when they enter the crypto world, and most trades happen with BTC pairs. So, it makes sense to have a part of your folio in BTC.
2. Invest in non-BTC tokens -
There are 2 ways to make investments in non-BTC tokens.
i) Invest in ICOs
ii) Accumulate those tokens from existing exchanges/team/OTC
3. Invest in equities of blockchain companies -
Even though most blockchain companies are making protocols which need tokens rather than equity, there are certain companies which earn from the services they offer apart from their token (for e.g. CHX). So, it makes sense to invest as equities in the company.
4. Active trading -
Crypto markets are extremely volatile, so money can be made on either side of the trade if one follows TA etc.
However, how does one choose which ICO/blockchain company to invest in? That is an answer which is very subjective. I will try to answer that in another post.
The numbers are for 31/12/17 exactly. Their AUM was greater than $1 billion then which means AUM in Bitcoin and ICO fund was greater than $845 million ($ 1 billion - $ 155 million), which is at-least 84% of the fund.
True, it started in 2017 end, performed well till 2017 end, then obviously performed terribly in 2018.
Well, I agree these investments are like VC investments just that they are liquid and until the token is used, the value is speculative.
So, give the funds time. Most of the tokens are trying to create networks, and network effects take time to come into fruition. Think of WhatsApp, Facebook and Uber. Most of the value of these companies was accrued when more and more people started using the services. Think of the tokens in crypto as early stage versions of these companies.In a longer term, these funds will return value to their investors.
For short term gains, one has to actively trade the volatile market. Since, the avenues for shorting were not great in crypto till now, most of the big funds did not perform well. However, once institutional grade infrastructure comes up, you will notice that these big funds will make money in bear markets too.
For investors with corpus less than $1 million, active trading and short-term ICO investments can be extremely profitable. Just that, one needs to develop skills for that.
Hope this helps you.
Disclaimer: I have done all this analysis already as I run a crypto investment fund - Bitazu Capital (www.bitazu.com). You can contact me personally if you want details on that.
I don’t think the numbers you provide are for 12/31/17, as the document you provide states the starting fund size numbers. The AUM for those funds at the time of the reporting of the $1 billion could have been marked up because of unrealized asset appreciation which wouldn’t be accounted for in the starting fund size. The asset appreciation could have been marked higher due to higher valuations in previous funding rounds for the respective projects that Pantera invested in. I don’t think all three of those funds were launched on 12/31/17. I could be wrong of course. We have already acknowledged that there is another fund that is no longer being presented, so that could account for some of the AUM of the fund.
I would argue that the companies you listed are more the exceptions, rather than the rules. Agreed that it is still early though. I am interested to see if the “big funds” will make money in bear markets now that shorting is available (they could have always gained short exposure to BTC through futures products throughout 2018). I am going to postulate the opposite. I think the big funds will still struggle despite being able to gain short exposure.
Even for investors with more than $1 million, active trading can still be incredibly profitable, even when only focusing on BTC or ETH.
These large funds have huge exposure to the companies they invest in. So, they can’t actively trade them without moving the market.
So, the funds have to take a longer view and not back out during bear moves.
During these times, most companies which feel that BTC will still hold relevance in the future, trade their holdings vs. BTC instead of USD. So, even though we might feel their fund value in USD is falling, they might be increasing their BTC under management. Thats what we and other funds are doing.
My sincere apologies, that was incredibly silly of me to not see the AUM line under the starting fund size line.
Your point that many of the VC strategy funds having to take large position in a illiquid market is well taken.
Alternatively, the funds could create trading strategies around the largest, most liquid coins. They haven’t though and have chosen the more VC oriented route, which is why I classify them as funds with VC strategies.
They do have a quantitative fund, but it performed horribly in 2018 and thus they can’t raise any money from investors to support it. It seemingly ended up tracking the beta for cryptoassets rather than generating alpha. They are trying to revamp the strategy currently.
Most of the funds with VC strategies (Pantera included) have not been able to create an active trading strategy that generates alpha. In fact, Pantera was one of the few funds that have VC strategies that tried.
This gets back to the point that we won’t be able to evaluate the success of VC strategies in cryptoassets for a long time, and the ones that have systematic strategies focused on generating alpha either don’t exist or have performed horribly.
They did make money by trading, though they were taking advantage of an undeveloped market structure (to put it very very nicely). The article only skims the surface. Furthermore, many of the types of “inefficiencies” that they exploited will be smoothed over time because of regulation and maturity.
We have a couple funds and it isn’t so much the strategy in our opinion, but the tools for executing the strategy. Even if you find an excellent trading strategy, many exchanges lack the tooling needed for funds to execute it efficiently. Delays cause slippage. Limits constrain trade sizes. Data is inconsistent. Strategies have to be fluid because the market is moving erratically quite often, so even a “winning” strategy has to evolve constantly.
What types of tools do you think are successful in executing trading strategies at this point in time?
Systematic strategies built around diverse data sets have piqued my interest. While there isn’t enough data to prove that there are correlations that last for long periods of time, you can hedge this risk through diversifying across many different sub-strategies that are uncorrelated with each other.
I’m biased in regards to the tools because we have built our own platform, which works extremely well. We have some fantastic engineers and they attack everything from an engineering lens.
There are some interesting ways to deal with the lack of data, which come from things the traditional markets have been doing for years. Creating synthetic months/years for example by using randomized days and then backtesting across multiple timelines. Our backtesting suite allows a bunch of tools like that. In the end though, there is just not enough data in many of these markets to allow a strategy to run without constantly checking it. We run strategies live and backtest them at the same time to make sure they are performing as expected.