The Chaos of Cryptocurrencies Shakes Hedge Funds in Their Worst Year Since the 2022 Crash

SadaNews - After years on the sidelines, hedge funds specialized in cryptocurrencies entered 2025 hoping to achieve a real boom.

New regulatory frameworks, support from the White House, and billions of dollars from institutional capital were supposed to pull the cryptocurrency market from marginal status to mainstream. However, this year has revealed instead the harshness and intolerance of this market, even to professionals whose strategies were designed specifically to benefit from volatility.

The Deterioration of Cryptocurrencies

By the end of November, funds betting on price direction—designed to profit from the significant price moves of Bitcoin and other major cryptocurrencies—had declined by about 2.5%, marking their worst trajectory since the sector’s winter in 2022, when many suffered losses exceeding 30%, according to "Crypto Insights Group" data.

As for fundamental strategies and large investments in alternative cryptocurrencies, where fund managers adopt long-term views based on the assets themselves as the foundation for investment and then the market and macroeconomic conditions regarding blockchain networks and cryptocurrencies, they dropped by about 23% following major downturns. In contrast, only market-neutral funds, which do not track market trends and maintain hedged investments targeting small and consistent price differentials, managed to achieve tangible gains, rising by about 14.4%.

The surge in Bitcoin prices at the beginning of 2025 provided ample price movement, although a significant portion of it came in the form of large spikes during periods of low liquidity. These rapid movements made it difficult for many funds to bolster their investment positions or exit them smoothly.

At the same time, institutional inflows—via exchange-traded funds and structured products—reshaped the trading landscape. Wall Street firms bolstered their presence in the cryptocurrency markets, tightening spreads and undermining previously profitable arbitrage opportunities. The returns from classic trades, such as spot and futures arbitrage, known as basis trading, have shrunk significantly. What once generated monthly returns exceeding 10% has quickly diminished or disappeared altogether.

Paul Howard, a manager at the market-making firm "Wincent", stated: "Investors are using structured products that provide downside protection, which reduces volatility and increases the erosion of the ability to generate market-beating returns, known as alpha returns."

Hedge Funds and Their Role in Cryptocurrency Trading

Hedge funds in cryptocurrencies remain a specialized and fragmented sector. While a few major players manage large sums, most remain small in size. Total assets across active strategies that respond quickly to market changes and liquid strategies that choose easily tradable assets are estimated to be between $12 billion and $15 billion, according to "Crypto Insights Group", while the average size of a typical fund does not exceed about $30 million.

Even before the crash in October, many funds were struggling. Alternative cryptocurrencies failed to rebound during last summer's speculation, new token launches lacked significant momentum, and demand from retail investors remained weak. An index tracking the performance of alternative cryptocurrencies fell to its lowest level since the collapse during the COVID pandemic in 2020.

Then, on October 10, one of the fastest asset liquidation events in the short history of cryptocurrencies occurred. Just days after Bitcoin reached a new record high, the promise from Donald Trump’s campaign of imposing 100% tariffs on Chinese goods led to a price drop of 14%. Within hours, investment positions relying on leverage worth about $20 billion were wiped out.

For Thomas Kladyk, managing director at "Forteus", the asset management arm of "Numeus", chaos erupted while he was on an airplane. He said: "I was about to board a flight from Asia to Europe. I was monitoring some managed accounts, and midway through the flight, everything began to collapse."

The Volatility of Donald Trump

Yuval Reisman, founder of "Atitlan Asset Management", clarified that this year has been characterized by what he described as "Trumpian volatility", adding: "We are seeing erratic surges linked to politics and regulation."

Funds that track price trends, which take long or short positions based on expected price movements using discretion-based insights or quantitative models, saw most of their gains for the year evaporate during a single afternoon of trading. Meanwhile, quantitative models focused on alternative cryptocurrencies—which were already struggling with low liquidity—suffered what several managers described as a "total wipeout".

The damage was not limited to prices. Cracks appeared in the infrastructure of the cryptocurrency market. Liquidity vanished, collateral was disrupted during trading, and risk management systems lagged. Seasoned experts who experienced the "FTX" and "Terra Luna" crises noted that the scene looked familiar and even more shocking in a market that is expected to be safer and more mature.

Kladyk stated: "Trump's tweet may have triggered a risk-off sentiment, but it is not responsible for an 80% collapse in some cryptocurrencies. The problem was poor collateral management, leading to successive waves of liquidation in a market suffering from liquidity shortages after the exit of major market makers."

Mean-reversion strategies for alternative cryptocurrencies have been the most affected, which bets on the fading of short-term price distortions. During the October crash, dozens of tokens plummeted by more than 40% within hours, exceeding the capacity of these models to withstand.

Limited Investment

Katzper Schafren, founder of "M-Squared", a multi-manager fund based in Malta under "Monterra", explained: "Our exposure to these strategies was relatively limited, and we have since completely exited those that relied excessively on the depth of alternative cryptocurrency order books."

The "M-Squared" fund fell 3.5% in October—its worst month since November 2022 and the worst ever since opening up to external capital earlier this year—but it rebounded to record a gain of 1.6% last month.

Neutral funds that do not track price movements held up better, ending October at an increase of about 2%. However, these strategies have limitations as they require strict controls, advanced infrastructure, and continuous oversight, which are costly elements that cannot be easily scaled.

Bohumil Vosalick, CEO of "319 Capital" registered in the British Virgin Islands, stated: "Those who were prepared—with precise collateral allocation across platforms and ready systems—managed to achieve overall returns ranging between 1% and 3% in less than an hour." His fund recorded a gain of 1.5% in October and 0.4% in November, bringing net returns since the beginning of the year to about 12.2%.

Cryptocurrency Infrastructure

The crash clearly highlighted the slow maturation of cryptocurrency infrastructure. Trading links malfunctioned, market makers withdrew, and order routing systems failed. With the absence of trading halt mechanisms or centralized clearing, losses were exacerbated.

Peter Kusa, head of growth at "Sigil Fund", remarked: "In general, we are definitely seeing less liquidity and higher volatility after October 10." The "Sigil Core" fund, focusing on alternative cryptocurrencies, saw a decline of 6.73%, its worst performance since the 61% drop in 2022. In contrast, its neutral fund that does not track price trends, "Stable", rose by 11.26%. By the end of the year, many funds reduced their exposure to alternative cryptocurrencies and shifted towards decentralized finance, where fragmentation and returns still provide investment opportunities.

Decentralized finance funds and yield-focused funds achieved gains of about 12%, which is a good result in a challenging year, but they remain constrained by technical challenges and limited capacity.

Schafren concluded: "Some market participants may not return with the same strength anytime soon. This will inevitably lead to a reordering of the rules of the game."