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Q123 Institutional Crypto Hedge Fund & Venture Report

Challenging headlines, an uncertain macro environment, and a relatively hawkish Federal Reserve has driven the broader crypto and digital assets market into a slump despite positive underlying developments. With enormous potential for the industry on the horizon and new opportunities across technologies, industries, and cultures, the long-term thesis of crypto adoption remains intact.

Executive Summary

Top cryptocurrencies fell to annual lows amid the insolvency and bankruptcy of FTX in November 2022. Followed by several months of layoffs from top companies and exchanges, the industry experienced a global reduction to its workforce and active investor participation. The failure of FTX was punishing for the industry globally as US regulators and policymakers unsurprisingly took an aggressive stance towards crypto throughout the first quarter. Widely seen by US firms as a purge on legal crypto activity in the United States, the regulatory environment in the US made it difficult for companies and funds to foresee favorable operations. The United Kingdom, Hong Kong, Israel, and United Arab Emirates all gained traction among institutionalized crypto funds in the first quarter given forward-thinking policy across jurisdictions.

Though the operational firestorm to start the year, top crypto-dedicated platforms specializing in liquid strategies consolidated fund offerings to focus on flagship products gearing up for a challenging 2023. The venture markets saw a reduction in deal volume and fundraising as raises or new funds slowed. Few new hedge funds launched amid operational and regulatory concerns in the US. Crypto-dedicated allocators were largely defensive to start the year and new allocators in the market have dwindled. Many crypto fund managers turned attention to new innovations and outlooks for 2023 as volume and volatility tickled down.

Through the first quarter, crypto sub-sectors experiencing growth in the market included Layer 2 solutions, permissioned decentralized finance for institutional participants, liquid staked tokens (LSTs)/liquid staked derivatives (LSDs), real-world-asset tokenization including precious metals and treasury securities, and non-fungible token defi integrations. Increasing interest has also consolidated around optimistic or zero-knowledge rollups, which are layered blockchain solutions expanding core crypto principles around security and privacy while advancing scaling. Decentralized Autonomous Organizations continue to scale as well as treasuries, AUM thresholds, and voter/proposal participation steadily increases.

Of active crypto-dedicated firms through Q1 2023 with an identifiable country, roughly 43.41% of firms are located in the United States. Following the United States (677) is the United Kingdom (102), Singapore (93), Hong Kong (78), China (54 firms), Switzerland (52), and Australia (40). The United States leads all fund type categorizations, including, platforms, hedge funds, and venture firms.

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