Can Asset Managers Survive the Crypto Winter?

Crypto asset managers across Europe and the US manage billions of dollars worth of digital currencies. Grayscale alone has more than 600,000 Bitcoin under management. Due to its massive scale, the crypto asset management industry plays an important role in the growth of the crypto ecosystem. Amid the recent crypto winter that resulted in a market cap dip of more than $2 trillion, the value of global digital assets under management (AUM) has plunged.

In November last year, the value of crypto AUM stood at around $65 billion, compared to $39 billion during the first week of June 2022. Unlike traditional mutual fund and hedge fund industries where ‘asset diversification’ plays an important role in balancing the portfolio of clients, crypto asset managers rely heavily on the performance of a selected set of digital assets. A consistent rise in outflows from crypto investment products since the Luna crash has raised concerns over the sustainability and survival of many crypto asset management companies.

“Many smaller crypto funds and asset managers will face existential issues after the latest downturn as they don't have enough assets under management to survive. I expect many niche strategies funds focusing on DeFi and small-cap tokens will disappear as they couldn‘t protect investors from the actual downturn,” Marc P. Bernegger, the Co-Founder of the Crypto Fund AltAlpha Digital, said.

Darkest Crypto Phase

Cryptocurrencies have witnessed several corrections in the past few years. However, a market that differentiates itself from other traditional financial markets has followed a similar correction pattern this time.

“In the first half of the year, the correlation of bitcoin with US technology stocks reached a record. The 40-day correlation coefficient between cryptocurrency and the Nasdaq 100 tech index has reached almost 0.66. According to Bloomberg, this is the highest figure since 2010. A similar correlation with the S&P 500 also hit a record. And, little has changed in the current downturn,” Maria Stankevich, the Chief Business Development Officer at EXMO, said.

Jason Deane, an Analyst at Quantum Economics, believes that the recent spike in institutional outflows from crypto investment products in one of crypto’s darkest phases is not surprising at all.

“I’m not the slightest bit surprised at the current outflows since these are entirely normal in any adverse market anyway across most asset classes of course. However, since crypto is still seen as speculative and 'risk-on' it follows that this process would be exaggerated. Institutional results are measured in fiat terms, so managers will act with a view to mitigating any fiat losses as a primary driver. Fear and greed as decision-makers work on an individual as well as fund manager level,” Deane said.

“The institutional outflow doesn’t come as a surprise since the bear market for Bitcoin has entered its 'deepest and darkest' phase, with even long-term holders who had toughed it out until now coming under extreme pressure. The market, on average, is barely above its cost basis, and even long-term holders are now being purged from the holder base. Moreover, digital-asset investors have been partially spooked by crypto lender Celsius Network Ltd. pausing withdrawals,” commented Styliana Charalambous, the Head of Investments & Market Research at Pure.

Dominance of Bitcoin

With a market cap of almost $400 billion, Bitcoin is still the most valuable cryptocurrency in the world. Analysts believe that the crypto asset management firms which are more focused on Bitcoin than other digital currencies will have a better chance to survive the crypto winter.

“I think many altcoin investors will clean their portfolio and allocate a big part of their assets into more established assets like Bitcoin,” Bernegger said while highlighting the rising crypto market dominance of BTC.

While the crypto winter has made it difficult for small crypto funds to survive, it has provided an opportunity for leading players in the asset management industry to rethink their risk management strategies.

According to Bernegger, the crypto winter will ‘consolidate' the industry. “In my opinion, the crypto correction will be healthy in the long-term as many crypto hedge funds and asset managers didn’t deliver sustainable alpha. The actual correction will lead to a consolidation of the crypto hedge fund and asset management industry,” he explained.