Why Are Hedge Funds Flocking To Crypto?

According to a recent survey conducted by global fund administrator Intertrust, hedge funds are expected to hold 7% of assets in crypto in the coming five years. This survey targeted 100 hedge funds, which were found to have plans of holding an average of 7.2% of their assets in cryptocurrencies in the coming five years. 

The most adventurous region is the North American hedge funds, with an exposure of about 10.6% against the European hedge funds’ 6.8%. 

Hedge Funds Getting Involved in Cryptocurrencies

Even before the publication of this research finding, hedge funds had been steadily moving to crypto. The key motivation for hedge funds to move to crypto is boosting returns. All hedge funds are tied by their common motivation for diversification. 

Crypto offers an ideal investment platform for any hedge fund seeking diversification. Accounting firm PwC polled global hedge funds and found that 57% of them cited diversification as the only reason for moving to digital currencies. 

Apart from diversification, crypto is also considered a “safe haven” for most hedge funds. In a very unlikely scenario, the digital currencies have survived the high inflation and low yields, thus, proving to be a safe haven for investors. The recent market instability hasn’t affected digital currencies severely as it did to other financial markets. 

Another reason why hedge funds are flocking to crypto is that they want to take advantage of the gains experienced in the crypto market. In recent months, Bitcoin has risen, accounting for the largest share of gain in the crypto market. Therefore, trading on a bitcoin trading platform is an advantage in the financial markets. 

Whilst Bitcoin remains the prominent digital currency, it has also been hit by a series of ups and downs in recent months. The U-turn by Elon Musk regarding Tesla accepting Bitcoin was the biggest setback, as BTC declined in value from $64,000 to $40,000 in just two months. However, looking at it broadly, Bitcoin has gained 400% in the last 12 months, thus asserting its market authority. 

Implication on investors 

The forecast of hedge funds’ commitment to getting involved in cryptocurrencies is not news to investors. However, the amount of commitment is pretty exciting to investors. 

The certain commitment by hedge funds means that investors in cryptocurrencies are feeling safer to put more of their money into this asset class. However, investors are still likely to face some challenges in the crypto market. 

Challenges facing cryptocurrencies

All is not rosy, even after Intertrust confirmed that hedge funds will be involved greatly in cryptocurrencies in the next five years. One of the challenges is regulatory uncertainty, which has rocked this financial market for quite a long time. Lack of infrastructure and reputational risks also form part of the challenges that investors are facing in their quest to invest in digital currencies. 

Many countries do not have a legal framework to support digital currencies, thus, creating uncertainty that worries investors. However, the digital currencies market has survived such challenges since its inception and still remains strong.