DeFi still hot for intuitive 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 rise.
Despite the bear market, decentralized finance is still hot for intuitive investors
During the recent market turmoil, the global cryptocurrency market cap fell below $1 trillion for the first time in over a year. However, it doesn’t seem to affect some crypto hedge funds too much. Amid the bear market, raging inflation and fears of a recession, they are still pouring millions of dollars into DeFi.
However, contrary to what we have seen before, this surge in investment has not been primarily driven by professional and retail investors, but has been led by institutional investors who have either recently joined or are increasing their presence in DeFi.
According to blockchain data platform Chainanalysis, large institutional transactions — those over $10 million — 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 From This Downturn? Why do you keep investing? What could that mean for you? To all of these questions, our team has prepared unbiased, analytical answers.
Crypto hedge funds are essentially the same as traditional hedge funds. The main difference is that crypto hedge funds specialize and invest exclusively in digital assets. The primary investment sectors are Store of Value and DeFi.
Crypto hedge funds face numerous challenges as the cryptocurrency sector is extremely volatile, unregulated and immature. Perhaps that’s why they only manage relatively small funds, averaging $58.6 million (yes, 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 of them.
The staking mechanism keeps 11.55% of the total cryptocurrency market afloat by supporting proof-of-stake DeFis and blockchains. The fundamental 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 pretty simple. As a single node, you keep the blockchain system running and earn incredible interest rates by injecting liquidity into any given coin. In the DeFi sector, APY can be more than 100%, and stablecoins can sometimes give up as much as 20%, which is quite amazing compared to standard bank deposit rates.
Overall, yield farming is very similar to staking. You lend your wealth to the platform and receive a return premium based on the proportion of your investments. But instead of earning native token rewards, you can earn interest based on the reward percentage allocated to the pool. Your liquidity is used to make crypto loans to others. As a reward, you will receive part of the interest on the loans.
However, yield farming is far more risky than traditional staking. It requires more thorough research and higher initial investment.
Liquidity mining revolves around liquidity pools where users deposit pairs of assets. In exchange for a share of trading fees, users provide liquidity to these pools to maintain the financial viability of the system. The wider the pool, the less likely it is that a given platform will be destroyed or damaged by other malicious activity. As a rule of thumb, the more volatile a token pair is, the more reward you collect.
Of all three options, liquidity mining is the most knowledge intensive. An investor should closely monitor several charts to determine whether or not it is profitable to back an asset pair. It is also much riskier as the rewards for the liquidity provided fluctuate wildly.
What might deter 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 quite a challenge to uncover a true hidden gem that solves a real problem, has a strong development team and will continue to build in the future.
FLUIDEFIⓇ
There are a handful of successful DeFi traders, and I’ve always joked that in order to get more involved in the DeFi trading space, I need to find one that makes trading easier for me. 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?
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One of the most well-known DeFi companies, Uniswap, is a decentralized crypto exchange that aims to make cryptocurrency trading easier, more profitable, and more accessible.
Uniswap’s native token, $UNI, is performing well compared to other AMM (Automated Market Makers) tokens and is already making a comeback from the declining market. Because the protocol is primarily driven by the community, Uniswap has only received $11 million in institutional funding at the time of writing.
1 inch
1inch is another decentralized exchange worth mentioning. Its main objective is to optimize trading by conducting a comprehensive analysis of the major DEXs. It is mainly operated via Mooniswap AMM, whose main advantage is the reduction of short-term trading volume slippage.
Although younger than Uniswap, 1inch is trusted by institutional investors and venture capital funds. It has raised $189.8 million in funding over the years and established itself as a trusted platform for investors.
The Balancer is a relatively new player in the AMM industry, but it has already surprised many with its revolutionary pool balancing mechanism and advanced portfolio management algorithms. Overall, the multi-asset pools are Balancer’s main advantage over other similar solutions. To date, Balancer has raised $32.3 million in funds.
An open-source liquidity protocol, Aave is a highly compatible DeFi ecosystem. Aave is an extremely secure platform that allows you to lend and borrow peer-to-peer.
Like many other DeFis featured in this article, Aave is largely community managed and sponsored. However, this does not exclude the participation of hedge funds. Aave has raised $49 million from institutional investors and VCs.
DaaS is a relatively new form of DeFi that has yet to be widely adopted. However, there is already a promising example on the market. Meet Cobo, a trusted crypto asset manager. Sounds a bit complicated, but it really isn’t. Cobo guarantees “military-grade” protection for anyone looking to store, invest, and exchange digital assets. As a result, Cobo is trusted by over 300 institutional investors and HNWIs worldwide.
Obviously, most investors are betting on DeFi to generate huge returns. As of 2021, the median performance of crypto hedge funds has been estimated at up to 63.4%. The absolute performers were long-only discretionary funds, with an astounding average performance of 420%.
You could reasonably point out that the market was booming in 2021 and the high earnings could be explained simply by Bitcoin’s skyrocketing prices. That’s partly true, but there are still a lot of surprising investment opportunities out there right now.
Remaining interest of the investor
In recent years, DeFI has gained an unprecedented level of traction and trust. Even if the general market picture remains bleak, the niche continues to attract many investors.
This offers institutional investors and hedge funds a triple benefit: it stimulates the industry as a whole, generates potential funds to work with, and adds new ancillary services to the DeFi ecosystem.
Considering the crypto hedge fund strategies mentioned earlier, one could argue that most funds will be more likely to look for good short positions in the current situation. That is only partially correct and does not really apply to institutional investors.
The crypto market is full of hype-driven startups and shady platforms masquerading as yet another “modern” solution that aims to change the game and generate millions. However, we all know that once the dust settles, things don’t usually look so good for those companies that don’t contain actual value. Because of this, institutional investors see the declining market as an excellent opportunity to spot strong real value assets and Web3 startups.
Not to mention that the bear market is a good time to put a dollar cost averaging (DCA) strategy into practice.
In this article, we have highlighted the preferred DeFi investment options for crypto hedge funds and why they remain bullish on DeFi even though we are in a bear market. The three main reasons are: the exceptional performance of DeFi, a high level of interest in the niche and long-term prospects, especially with innovative WEB3 startups. Despite the market downturn, more and more crypto hedge funds will invest in DeFi and have a huge impact on the industry and encourage its further development.
Audrey Nesbitt on Linkedin
@AudreyNesbitt11 on Twitter
- pwc.com
- investopedia.com
- ir.blackrock.com
- fluidefi.com
- pgimquantitativesolutions.com
- cybavo.com
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
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