Over the years, hedge funds have primarily focused on traditional investments. However, with the increasing acceptance of cryptocurrencies, more hedge funds are looking to explore the potential of the crypto market.
Earning passive income is a hard pass for any company. Crypto assets, with their potentially higher returns, provide an attractive proposition for funds looking to generate passive income. According to BitcoinCasinos.com, 43% of hedge funds investing in crypto assets in 2023 aim to earn passive income.
The site’s financial analyst Edith Reads comments,” For a while, hedge funds have been hesitant to dive into the crypto space considering its high volatility. However, the latest figures show the change of attitude and the significant traction crypto continues to hold. In the coming years, many more funds will join the nascent market as crypto proves to be a viable alternative to traditional investment options.”
How Hedge Funds Earn Passive Income from Crypto?
Most hedge funds earn passive income in crypto by staking or yield farming. Staking involves holding crypto in a digital wallet, participating in a crypto network, and earning reward payments.
About 21% of hedge funds are using custodial staking services, while 8% use noncustodial staking. On the other hand, yield farming involves liquidating assets to DeFi and earning returns. 14% of hedge funds use the yield farming strategy.
However, 31% of hedge funds investing in crypto assets rely on asset tokenization to receive higher returns in 2023.
Why are Hedge Funds Investing in Crypto Assets?
The allure of cryptocurrency lies in its decentralized nature, which eliminates the need for intermediaries such as banks and governments. Hedge funds will continue their businesses without the pressures of high-interest rates or due payments. This, coupled with the potential for exponential growth, has attracted investors seeking to diversify their portfolios and capitalize on the digital revolution.
Investing in crypto assets brings in more passive income than investing in stocks and bonds. Over the years, crypto prices have increased significantly, leading to high returns for investors. Therefore, It’s no surprise hedge funds would invest in crypto.
Challenges Facing Hedge Funds
However, investing in crypto assets comes with its perks. The crypto market is known for its high volatility. Crypto prices experience significant fluctuations in a short period. As a result, investors may experience huge losses or significant gains. Investors must be careful to avoid the burden of heavy losses.
Regulatory uncertainties and potential security concerns also pose challenges for investors. With governments trying to control the crypto space, regulatory changes are imminent. Regulatory swings pose a considerable risk to hedge funds investments. Hedge funds will undoubtedly need to employ robust risk mitigation measures to navigate the crypto market effectively.
Despite these challenges, there is a growing acceptance and interest in cryptocurrencies among hedge funds. As the crypto market continues to mature and regulatory frameworks become clearer, more funds are likely to enter the space, seeking to capitalize on the potential for passive income.
