DeFi Still Hot For Intuitional Investors Despite Bear Market | by Audrey Nesbitt | Aug, 2022
According to PwC’s recent Global Crypto Hedge Fund report. 38% of traditional hedge funds are currently investing in digital assets, up from 21% a year ago and that number is expected to continue to grow.
During the recent market turmoil, the global cryptocurrency market cap fell below $1 trillion for the first time in over a year. However, it does not appear to concern some crypto hedge funds all that much. Amid the bear market, raging inflation, and fears of recession, they still keep pouring millions of dollars into DeFi.
However, unlike what we have seen before, this rise in investments hasn’t been driven mainly by professional and retail investors but instead has been led by institutional investors who have either recently joined or are strengthening their presence in DeFi.
Indeed, according to blockchain data platform Chainanalysis, large institutional transactions — those above $10m — accounted for over 60 percent of all DeFi transactions in Q2 2021, up from around 10 percent in Q3 2020.
Are crypto hedge funds and institutional investors profiting in this downturn? Why do they continue to invest? What this could mean for you? Our team has prepared unbiased, analytical answers to all these questions.
Crypto hedge funds are substantially the same as traditional hedge funds. The key difference is that crypto hedge funds specialize and invest solely in digital assets. The primary investment sectors are the store of value and DeFi.
Crypto hedge funds face numerous challenges because the cryptocurrency sector is extremely volatile, lacks regulations, and is not mature enough yet. Perhaps, as a result, they only manage relatively small funds, with an average of $58.6 million (yep, that’s considered small in this industry).
In general, the 3 main ways to invest in DeFi are staking, yield farming, and liquidity mining. Let’s take a closer look at each one of them.
The staking mechanism keeps afloat 11.55% of the total cryptocurrency market by empowering Proof-of-Stake DeFis and blockchains. The basic goal behind the PoS algorithm is to create a credible and more advanced consensus method than PoW (Proof-of-Work) while benefiting potential stakeholders.
The process is fairly simple. You, as an individual node, keep the blockchain system operating and earn incredible interest rates by supplying liquidity to any given coin. In the DeFi sector, APY can be more than 100%, and stablecoins can sometimes give up to 20%, which is quite astonishing when compared to standard banking deposit interest rates.
Overall, yield farming is very similar to staking. You lend your assets to the platform and obtain a yield reward based on the proportion of your investments. But instead of earning native token rewards, you can earn interest based on the reward percentage assigned for the pool. Your liquidity is used to give out crypto loans to others. As a reward, you get a portion of the interest of the loans.
However, yield farming is far riskier than traditional staking. It demands more thorough research and higher initial investments.
Liquidity mining revolves around liquidity pools, where users deposit asset pairs. In exchange for a share of the trading fees, users provide liquidity into these pools to preserve the system’s financial operability. The broader the pool, the less likely it is that a particular platform will be rug-pulled or damaged by other malicious activity. As a rule of thumb, the more volatile a token pair is, the more reward you collect.
Out of all three options, liquidity mining is the most knowledge-demanding one. An investor should watch multiple charts closely to determine whether it’s profitable to deposit an asset pair or not. It’s far riskier too, as rewards for the provided liquidity fluctuate intensively.
What may scare institutions and individuals alike from investing in DeFi is the massive flow of similar products and services, all claiming to revolutionize the game. So it can be pretty challenging to uncover a true hidden gem that solves a real-world problem, has a strong dev team, and will continue to build in the future.
There are a handful of successful DeFi traders and I always joked that I needed to find one to simplify the trading for me in order to get more involved in the DeFi trading space. Imagine being able to automate the assessment of the hundreds of thousands of liquidity pools available on the major DEXs (decentralized exchanges) to find the ones that are actually profitable?
Ta da!
FLUIDEFI is the most resilient DeFi investment management and execution system for professional traders and financial institutions. Financial institutions use the FLUIDEFI API to build their DeFi trading models, execute trades and provide to their traders and clients additional metrics not available elsewhere in the market.
“You are only as good as your data, and FLUIDEFI has the best data!”
One of the most well-known DeFi companies Uniswap is a decentralized crypto exchange, designed to make cryptocurrency trading easier, profitable, and more accessible.
Uniswap’s native token, $UNI, is performing well in comparison to other AMM (Automated Market Makers) tokens and is already making a comeback from the down market. Because the protocol is primarily driven by the community, Uniswap has only received $11 million in institutional funding at the moment of writing.
1inch is another decentralized exchange worth mentioning. Its main objective is to optimize trading by performing an extensive analysis of key DEXes. It primarily operates through Mooniswap AMM, the major benefit of which is reduced short-term trading volume slippage.
Despite being younger than Uniswap, institutional investors and venture capital funds have confidence in 1inch. It has raised $189.8 million in funding throughout the years and established itself as a trustworthy platform for investors.
The Balancer is a relatively new player in the AMM industry, but it has already taken aback many with its revolutionary pool balancing mechanism and advanced portfolio management algorithms. Overall the main benefit of Balancer over other similar solutions is its multi-asset pools. As of today, Balancer has raised $32.3 million in funds.
An open-source liquidity protocol Aave is a highly compatible DeFi ecosystem. Aave, being an extremely secure platform, allows you to lend and borrow peer-to-peer.
Like many other DeFi’s introduced in this article, Aave is largely managed and sponsored by the community. However, this does not preclude hedge funds from participating. Aave has raised $49 million from institutional investors and VCs.
DaaS is a relatively new form of DeFi that is yet to be extensively adopted. However, there is already a promising example on the market. Meet Cobo, a trustworthy crypto asset custodian. Sounds a bit complicated, but actually it is not. Cobo guarantees ‘military-grade’ protection to anyone who wants to store, invest in, and exchange digital assets. As a result, Cobo is trusted by over 300 institutional investors and HNWIs globally.
Obviously, most investors are in DeFi for huge returns. As of 2021, the median performance of crypto hedge funds was estimated to be as high as 63.4%. The absolute leaders were discretionary long-only funds, showing a mind-boggling 420% average performance.
You might reasonably point out that, back in 2021, the market was booming and high revenue could be simply explained by the skyrocketing prices of Bitcoin. That’s partially correct, but there are still a lot of surprising investment opportunities right now.
Abiding Investor’s Interest
In recent years, DeFI has gained an unprecedented amount of traction and trust. Even though the overall market picture remains bleak, the niche keeps attracting lots of investors.
This provides institutional investors and hedge funds a threefold benefit: it stimulates the industry as a whole, generates potential funds to work with, and expands the DeFi ecosystem with new side services.
Taking into account the previously mentioned crypto hedge fund strategies, one might argue that in the current situation, most of the funds will more likely try to search for good shorting positions. This is only partially correct and does not really apply to institutional investors.
The crypto market is full of hype-fueled startups and dubious platforms that disguise themselves as yet another “cutting-edge” solution intended to change the game and generate millions. However, we all know that when the dust settles, things aren’t usually looking so good for the companies that contain no actual value. Because of that, institutional investors perceive the down market as an excellent opportunity to discover strong real-value assets & Web3 startups.
Not to mention that the bear market is a good time to put into practice a DCA (dollar cost averaging) strategy.
In this article, we highlighted favorite DeFi investment options for crypto hedge funds and explained why they stay bullish on DeFi even though we are in a bear market. The three key reasons are: the exceptional performance of DeFi, a high level of interest in the niche, and long-term prospects especially in cutting edge WEB3 startups. Despite the market downturn, more and more crypto hedge funds will invest in DeFi and have a tremendous influence on the industry, encouraging its further development.
