Cryptocurrency hedge funds have made significant gains through 2020, vastly outperforming non-crypto funds.
Crypto Hedge Fund Vision Hill Composite Index, launched in 2018 to track the performance of actively managed cryptocurrency hedge funds, showed a 126% return in 2020. At the same time, BarclayHedge – which tracks over 7,1000 hedge funds – reported that non-crypto hedge fund sectors were also in positive territory, but posted comparatively modest gains of 1.70% through September.
One of the reasons behind crypto funds’ strong performance during 2020 stems from the emergence of decentralised finance, or DeFi, according to Vision Hill CEO Scott Army. “DeFi” refers to crypto platforms that facilitate lending outside of traditional banking institutions. These sites run on open infrastructure and make use of algorithms that track supply and demand to set rates in real time.
Data from industry site DeFi Pulse showed a total of $11.1 billion worth of loans on DeFi platforms as of Thursday, an increase of 180% from the roughly $4 billion recorded in August.
Michael Anderson, co-founder of $100-million venture capital fund and DeFi investor Framework Ventures, said that he believes DeFi will soon break into the mainstream. “Users are trying to vote with their dollars in terms of how they view the capabilities of DeFi,” he said, noting that some DeFi platforms have gained more volume than the far larger digital asset exchanges.
Hedge funds were also boosted by the strength of bitcoin. After a record market slide in March, the currency bounced back quickly, jumping more than 10% in April and going on to rise 80% above its 2019 price. The surge drove rallies in the crypto market, with a knock-on effect on hedge funds.
Adding to crypto’s attraction, large-scale organisations have entered the market this year, accelerating the progress of crypto’s adoption into the mainstream. Earlier this month, PayPal announced plans to allow the trading and holding of cryptocurrencies on its platform. This triggered a new surge in the value of bitcoin, which jumped above $13,000 following the news.