99% of Crypto Tokens to Vanish: A Fund Manager’s Dire Prediction

What to know:

There’s never been a more opportune moment to invest in crypto hedge funds, or so claims Chris Solarz, the chief investment officer of digital assets at Amitis Capital. This firm specializes in a fund of funds, which allocates capital to various money managers. 🌟

“This is the golden age for crypto hedge fund investing,” declared Solarz, who once managed nearly $8 billion at Cliffwater, in an interview with CoinDesk. “It’s an alignment of the stars. This beta, this secular tailwind… blockchain as a whole has such potential. At the same time, the money manager universe is so scarce that I feel like I’m shooting fish in a barrel being able to pick the winners.” 🎯

Crypto markets are still in their infancy, allowing money managers to resurrect trading strategies from 35 years ago in TradFi, when hedge funds were just emerging, Solarz noted. 📜

In 1990, only 127 hedge funds existed, managing roughly $39 billion; by 2024, those numbers had ballooned to over 10,000 funds managing $5 trillion in assets. In other words, the sector became fiercely competitive — and outperforming the market became a Herculean task. 💪

Solarz’s thesis posits that the crypto sector (with roughly 1,650 hedge funds managing $88 billion in assets) is currently 10 times less competitive than traditional markets. This allows money managers to dust off and readapt 20-year-old strategies that ceased to be effective in TradFi over a decade ago due to commoditization. 🕰️

“I meet 20 managers [in crypto]… 19 out of 20 don’t deserve to be running money,” Solarz quipped. “A lot of them are young and have never managed money before. They’ll say ‘We’re investing in bitcoin, ether and solana.’ And I’ll say, ‘Well, why am I paying you 20% for that?’ … When I pay 20% to a manager, I don’t want them to give me stuff that I can just do myself or buy in an ETF form.” 🤷‍♂️

The crypto sector is likely to continue presenting asymmetric opportunities to money managers until the technology is fully integrated into the financial sector, according to Solarz. Nobody says they work for dot-com companies anymore, because every firm is a dot-com company. At some point, people will stop talking about crypto as something separate from the rest of the financial system, so the reasoning goes — possibly when bitcoin catches up to gold in terms of market capitalization, which Solarz thinks could happen within the next 10 years. 🌐

No altcoin season

There are three large categories of funds that Solarz considers for allocation: venture funds (which provide capital to startups), liquid directional (funds that bet on market movements), and liquid market neutral (which aim to make money regardless of market moves). 📊

When evaluating liquid directional funds, Solarz focuses more on the manager’s process and risk management than on specific theses they may espouse. What’s their investment strategy? Is it repeatable? How do they think about macroeconomics? Then he feeds performance data into models that determine how much value the manager is adding. 📈

“It’s easy for me to avoid the big losers. It’s always hard to pick the winners,” Solarz admitted. “If something seems fishy or I don’t think they have a true investment process, it’s easy to pass on, but there’s always a little bit of luck involved as well to be the best out performer every single year.” 🍀

That process needs to be rigorous, because the days where all cryptocurrencies rise together — the fabled altcoin seasons — are over, or so he says. The crypto ecosystem now boasts approximately 40 million tokens, by Solarz’ count, and he expects 99.99% of them to eventually go to zero. “There’s only 100 that are worth talking about,” he said. 🚫

The crypto market will need an injection of at least $300 billion to sustain current prices over the next three years, Solarz argues, due to the massive token unlocks that are scheduled to weigh down the top 100 tokens. The size of the liquid token market for hedge funds is around $30 billion, Solarz noted, and retail traders have moved on to memecoins. In other words, there’s currently nobody to buy up all of that supply. 💸

“This is the overhang. This is why there can’t be an altcoin bull market in general for some time,” he said. 🐻

Market neutral strategies

Historically, five times more money has gone into crypto VC funds than into all of the crypto liquid funds combined, Solarz said, because venture investing makes it easier to hide mark-to-market losses from investment committees. This dynamic is one of the reasons why Amitis sees more opportunities on the liquid side. Solarz has allocated capital to 14 funds so far. Of these, three are VCs, four are liquid directional, and seven are liquid market neutral. 📊

“This is a little bit glib, perhaps, but at the institutional level, they’re really trying not to lose money, while at the family office, we’re trying to compound returns,” Solarz said. “If there is a venture capital opportunity that seems incredible … I will consider investing, but the hurdle rate is so much higher if you’re locking up money for 10 years.” 🏦

Market neutral strategies are still very profitable, Solarz said. For example, traders were able to arbitrage the price of cryptocurrencies on South Korean exchanges back in December when President Yoon Suk Yeol declared martial law, creating a regional crisis. South Korean investors sold their assets in a panic, but the rest of the world did not, creating disparities in price that funds were able to exploit. 🌍

Another popular strategy involves benefitting from the funding rates associated with perpetual contracts. Institutional investors often short a cryptocurrency while gaining spot exposure to it at the same time; this allows them to remain perfectly market neutral while they collect interest on the perps, which can sometimes reach 30% annualized. That same strategy is deployed on spot bitcoin exchange-traded funds (ETFs) and the CME Group bitcoin futures. 📉📈

“That’s what they’re doing in this category, they’re doing variations on this, and it’s still very profitable, double-digit returns and in a consistent manner,” Solarz said. 💰

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2025-03-26 20:58