Cryptocurrency hedge funds have posted hefty gains so far this year, benefiting from the surge in transactions that allow lenders and borrowers to transact without banks, as well as a steady rise in the bitcoin price.
A crypto hedge fund index launched in September 2018 by crypto fund of funds Vision Hill Group showed a return of 126% in 2020.
Non-crypto hedge fund sectors tracked by another data group, BarclayHedge, were also in positive territory, but up a modest 1.70% through September.
The emergence of decentralized finance, or DeFi, which are crypto platforms that facilitate lending outside of traditional banking institutions, was at the core of crypto funds’ robust performance this year, said Scott Army, founder and chief executive officer of Vision Hill, which has exposure in DeFi as well.
The total number of loans on DeFi platforms was $11.1 billion on Thursday, industry site DeFi Pulse data showed, up 180% from roughly $4 billion in August. DeFi sites run on open infrastructure, with algorithms that set rates in real-time based on supply and demand.
Framework Ventures, a $100-million venture capital fund and the biggest investor in the DeFi space, believes DeFi will soon have its mainstream moment.
“Users are trying to vote with their dollars in terms of how they view the capabilities of DeFi,” said Michael Anderson, co-founder of Framework Ventures, noting that some DeFi platforms have more volume than the much larger digital asset exchanges.
Meanwhile, bitcoin’s more than 80% increase this year also helped propel hedge funds, as it drove rallies in the crypto market.
Off the Chain Capital posted returns of 94% so far in 2020 and average annual returns of 112% since its inception in 2016, purchasing at a discount bitcoin claims from those impacted by the Mt. Gox hack in 2014, said Brian Estes, the firm’s chief investment officer and managing partner.
That hack saw 24,000 customers lose access to hundreds of millions of dollars worth of bitcoin.
Terry Culver, chief executive officer at Digital Finance Group USA, said the crypto space has matured, with a lot more innovation in the industry.
“It’s not as speculative as it was three or four years ago.”