Crypto Funds Launch at Fastest Pace Since 2021 as ETFs Fuel Hype

(Bloomberg) — New funds focused on cryptocurrency strategies are setting up shop at a much faster pace as excitement returns to the market, fueled by new ETFs specific to the asset class.

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According to Crypto Fund Research, 25 new venture capital and hedge funds launched in the first three months of the year; This figure is the highest since the second quarter of 2021. This is double the number that closed in the same period and almost three times the nine funds that closed in the first quarter of 2023. Last year, the number of new crypto funds barely exceeded the number of closures after the asset class fell into shambles in 2017. market in which prices are falling.

The collapses of hedge funds Three Arrows and Alameda Research have opened opportunities for new players to arrive as the market recovers, said Joshua de Vos, research leader at data provider CCData. And many of the funds that have managed to survive have posted double- and triple-digit percentage returns in recent months.

“Given the cyclical nature of cryptocurrency, it is highly likely that new crypto-native funds will emerge to help fill the gap left by these institutions and take advantage of new opportunities that arise during this cycle,” De Vos said.

Among the new funds launched, Xavier Meegan founded Frachtis, which means “protection” in Greek, in February this year. Casey Caruso, formerly a partner at crypto investment firm Paradigm, founded Topology to invest in crypto and artificial intelligence. In May, Steven Waterhouse, co-founder of crypto startup Orchid Labs, founded Nazare Ventures, which also invests in the intersection of crypto and artificial intelligence. Existing companies such as Pantera Capital are also raising new capital en masse after a few dry years.

The total crypto-dedicated hedge fund market reached $21 billion for the first time since October 2022, up from $16.3 billion in December, according to tracker Galaxy VisionTrack.

‘Really good time’

“It’s been a really good time for a lot of actively managed strategies to raise new funding,” Bailey York, VisionTrack’s data lead, said in an interview.

Still, the rate of new fund launches is far below the heyday of 2017, when around 73 new funds were launched each quarter, according to Crypto Fund Research; This more than doubles the total number of crypto funds that year.

The story continues

Moreover, raising funds for new vehicles is still not as easy as before. On the venture capital side, new fund raises tend to be lower than in 2021 and 2022 because the number of new investors in this area is less. According to VisionTrack, only $2.62 billion was invested in 631 VC deals in the first quarter. That’s less than the $2.9 billion invested in 781 deals in the same period a year ago and a fraction of the $7.2 billion invested in 817 deals in the first quarter of 2021, according to VisionTrack.

Read More: US Paves the Way for Ether ETFs in Test of Demand Beyond Bitcoin

Much of the revival in crypto markets this year can be attributed to the January launch of exchange-traded funds that invest directly in Bitcoin, as well as progress toward regulatory approval for ETFs based on Ether, the second-largest cryptocurrency.

While ETFs are helping to revive the market, they are also leaving hedge funds facing stiff competition by providing cheap, simple and safe opportunities for investors seeking passive exposure to the asset class.

ETF Cannibalization

“Crypto hedge fund launches will likely be a little smaller than they were a few years ago, in part because crypto ETFs have cannibalized part of the crypto hedge fund market,” said Josh Gnaizda, CEO of Crypto Fund Research.

Trying to raise $20 million, Meegan has been fundraising intensively for about five months.

“It’s still pretty hard to raise money,” Meegan said. “There aren’t a lot of new LPs in this space. And you have to be very different. Raising funds for the first time is almost harder than ever.”

Steven “Seven” Waterhouse disagrees. He was formerly a partner at crypto investment firm Pantera Capital and is currently raising $50 million.

“I would say it was harder to raise money between 2014 and 2016, when I was with Pantera,” Waterhouse said. “The question I faced was: ‘Does this thing make sense?’ Now the question is quite different: ‘What really happens next and what’s important?’”

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