What are hedge funds?
Hedge funds are privately managed investment funds. Their primary goal is to gain outsized financial returns for its investors and are involved in virtually every market. Most investment vehicles like Mutual Funds and Exchange Traded Funds (ETFs) are publicly traded, must disclose their positions regularly, and undergo significant financial scrutiny. Because hedge funds are privately held they are not affected by these constraints. Frequently these funds are only looking for investments in the $10’s to $100’s of millions or more because of their limited time, and the large amount of funds they need to manage. While the bitcoin market cap was fairly small, the bitcoin economy was not large enough to warrant their attention – and this is all about to change.
The early stages
Last week the Financial Times reported:
“Exante predicted that public and media interest would take off when Bitcoins were trading at $100. Managing partner Gatis Eglitis claims they are now getting 20 calls a day from large asset managers looking to invest up to $100m.”
Exante was one of the first funds to publicly acknowledge they were building a position with their bitcoin hedge fund. According to a Forbes article in early March, they’ve acquired 80,000 bitcoin which at the time was worth $3.2 million and currently worth over $20 million. On Exante’s website they recently announced the details of their fund: confirming an 81,000 bitcoin reserve, and requesting $100,000 minimum transactions. Given the significant return that many bitcoin investments have seen over the last few months, it would come as no surprise that many others would be looking to join the game. Looking over the bitcoin charts during this tremendous growth shows a tell-tale sign of large investors.
Several buy orders over $1 million have been executed fairly regularly over the last couple weeks, which would be a strong indicator of large funds moving into the market. For large $1 billion funds, a few million testing the water is no significant feat despite the huge impact it’s been having on the bitcoin exchange rate.
Unlocking bitcoin’s potential
Significant investment by large bitcoin hedge funds will be necessary to build out the infrastructure for wide-spread bitcoin adoption. While bitcoin has seen tremendous growth over the last few years, it is still lagging other industries in user-experience and ease-of-use. While the foundation exists in the bitcoin ecosystem, most would agree it is nowhere near its full potential. It is still a nightmare for new users to get money in and out of exchanges, wallet software is not ready for the computer-illiterate, and many large companies are still unwilling to take the technological and exchange risk associated with accepting bitcion. With big-money investment, also comes the big-money attention to the bitcoin system. When these large investors have a position in bitcoin, they will have an explicit financial incentive to see bitcoin succeed. They will be more likely to fund bitcoin startups and allow adoption of bitcoin into existing systems. They will experience bitcoin’s strengths, and recognize the opportunities in the ecosystem’s weaknesses. We are on the precipice of change, and this is just the beginning.