What is Crypto Hedge Fund? How does crypto hedge funds work?

Dec 22,2022
What is Crypto Hedge Fund? How does crypto hedge funds work?

Although there is still some room for development in the field of new crypto hedge funds, it is undoubtedly the future of finance. The emergence of cryptocurrency hedge funds has made it a hot topic. So, what exactly is crypto hedge fund? How does it work? Next, let's have a look.

What is Crypto Hedge Fund?

Crypto hedge funds are hedge funds that invest in cryptocurrencies and crypto based products. Some of these funds may invest exclusively in cryptocurrencies and digital currencies, while others combine cryptocurrencies with traditional asset types - individual stocks, products, derivatives, etc. In other words, cryptocurrency hedge fund is a partnership that uses cryptocurrency to try to make a lot of short-term profits. Cryptocurrency is very volatile, which makes hedge funds based on it more volatile than those based on other investment types.

Composition of Crypto Hedge Fund:

1. Quantitative fund (48%) - This is a fund that uses the "automatic" trading standard, and does not require fund staff to identify and evaluate investment strategies.

2. Discretionary long only (19%) - This is a dual investment fund that believes that asset prices will rise.

3. Discretionary long/short (17%) - This is a fund that can switch investment strategies, allowing hedge funds to pursue both short and long positions based on market conditions.

4. Multi strategy fund (17%) - this is a fund that combines the above fund types.

Among these funds, most of them choose to trade BTC (97%), followed by Ethereum (67%), Ripple Coin (38%), Lite Coin (38%), Bitcoin Cash (31%) and EOS (25%).

More than half of crypto hedge funds trade derivatives (56%), and 48% of crypto hedge funds are active short sellers. Traders can use derivatives trading to infer the future price trend of the underlying assets in order to hope for profits, without having to buy actual assets.

In addition, funds with short-term investment vision usually adopt short selling, and they are interested in betting that the price of cryptocurrency may fall. It is worth mentioning that the composition of hedge funds is crucial because it can show the effect and method of their investment in the market.

How does crypto hedge funds work?

Hedge funds look for the difference between the spot price, the current price of assets such as BTC, and the value of derivative contracts that expire in a few months. This is commonly referred to as a basic transaction. For example, at the time of writing this article, the price of Bitcoin was about 55000 dollars.

However, there are also some futures contracts, such as those of CME Group, which predict that the price of Bitcoin will reach about 60000 dollars in July.

A hedge fund bought BTC at the spot price and then sold the futures in July, which means that if BTC fell, the derivative contract would appreciate. According to this, there will be a so-called "price difference" between today's price and tomorrow's chips. When these differences continue to expand over time, it will generate substantial benefits.

This kind of transaction also gradually infiltrated into Ethereum, making its price hit a new high this month, thanks to investors' 700% income from applying similar countermeasures.

As mentioned before, hedge funds have risks. If one of the market makers adds margin, the risks of this market making game will become very real.

This situation once appeared in the French currency market. At that time, Archegos, an investment company operated by Bill Hwang, a hedge fund manager, went bankrupt after the margin was added, which dragged down several large banks. When the curtain fell, Credit Suisse, one of the largest banks, suffered losses of more than $5 billion.

Speaking of this, I believe you have a certain understanding of what crypto hedge fund is and how it works. In general, today's currency circle market has a variety of investment projects, and investment methods are also emerging in endlessly. However, the currency circle market is unpredictable after all, and risks are ubiquitous. It is recommended that everyone must have a comprehensive understanding before entering the market and not blindly invest.