Hedge Funds Discover Crypto’s Value Beyond Arbitrage Opportunities

Hedge funds are known for their extensive knowledge of trading markets and quick opportunities for positive results. As crypto popularity increased over time, these institutions learned how to exploit the sector’s volatility for arbitrage, which allowed for significant profits from price differences. Hedge funds have learned to identify the best crypto to buy for the highest chance of significant returns, the possibility of a price spike, and the best opportunity to exploit the market’s price inefficiencies. However, these institutions now have a broader outlook on cryptocurrencies beyond arbitrage opportunities.

The major driving factor for the shift is the recent approval of spot cryptocurrency exchange-traded funds (ETFs). While hedge funds still earn from arbitrage, these companies are entering the ETF market to make crypto a more stable part of their long-term investment strategies.

Before now, many financial companies were reluctant to participate in the cryptocurrency sector because of its unregulated nature. However, since the SEC gave its greenlight, institutional investment has been on the rise, with hedge funds also investing heavily. For instance, Millennium Management, a New York-based hedge fund with $68 billion in assets under management, invested about $2 billion into spot Bitcoin ETFs in the first quarter alone. The company put $844.2 million in BlackRock’s IBIT ETF and another $806.7 million in Fidelity’s FBTC. Millennium Management also pumped $291.7 million into ETFs from Grayscale, Ark, and Bitwise.

Schonfeld, another New York hedge fund, also invested about $500 million in the Bitcoin products, with $248 million in IBIT and at least $231 million in FBTC.

Although Millennium Management and Schonfeld are the two largest, several other hedge funds consider Bitcoin ETFs promising and are well invested. According to research from River Intelligence, 534 institutions, with more than $1 billion in assets under management, are already invested in Bitcoin ETFs. Also, more than half of the 25 largest hedge funds in the US have varying levels of exposure to Bitcoin.

River Intelligence states that 85 hedge funds have $5 billion in Bitcoin ETFs. The research also reports $2.6 billion from 405 RIAs (Registered Investment Advisors), $1.4 billion from 7 market makers, and $378 million from 18 Trusts. Also, 11 Banks have $85 million in Bitcoin ETFs, with Mutual Funds, Family Offices, and Pension Funds holding a cumulative $387 million worth of the products. The report then boldly predicts that “every person will have Bitcoin savings, and every business will have Bitcoin on their balance sheet.” 

According to Bitwise Asset Management’s Chief Investment Officer, Matt Hougan, the institutional allocations to Bitcoin ETFs are unusual. In a recent note, Hougan wrote that most professional investors take at least 6 months to evaluate crypto. He explained that professionals usually allocate a small amount to “test things out” before exposing their clients. After that, the next step is to allocate funds on behalf of a few clients who have proactively inquired about crypto, before conducting platform-wide allocations of about 1-5%. According to Hougan, the quick institutional response to crypto investments does not fit the usual pattern, and conveys some bullishness about the crypto sector.

As allocations increase, institutional involvement in Bitcoin and cryptocurrencies may birth new use cases, allowing developers to create more options for crypto use and integrate these with the traditional sector. This increased involvement could lead to increased use of digital assets for cross-border remittances, local payments, supply management, healthcare, and crypto gambling, among other applications.