Bitcoin’s Role in Today’s Crypto Fund Portfolios

4 min readAug 21, 2023

Bitcoin’s unique role as the major and first crypto asset remains, so this week we analyze how crypto funds performed in relation to Bitcoin so far this year. As always, all data comes from the 21e6 Crypto Fund Database and can be reproduced with this database.
Authors: Jan Spörer, Maximilian Bruckner

Introduction

As Bitcoin is still one of the most relevant crypto assets, we would like to shed some light on its role in professional crypto investors’ portfolios. How did Bitcoin perform this year relative to actively managed funds? What role does Bitcoin still play for crypto fund managers?

Before we start, it is important to make sure we are only comparing the right kind of funds. For this reason, we applied the following filters before beginning our comparison:

Excluded fund of funds, VC funds, non-investible indices, and passive funds. (Using column “21e6 Strategy Classification.”)
Excluded non-directional funds. (Using column “21e6 Strategy Classification.”)
Excluded funds with blank, unknown, or undisclosed portfolio constituents. (Using column “Portfolio.”)

Figure 1: Pie chart showing that 31% of funds hold Bitcoin in their portfolios.

1. Bitcoin Outperformed Crypto Funds on Average

Directional crypto funds posted average returns of 23% in January, 2% in February, 4% in March, -1% in April, and -4% in May 2023.

Bitcoin, as per the bitcoinmonthlyreturn.com database, performed significantly better than that. In January, Bitcoin gained about 40%, almost double that of crypto funds. Funds performed roughly in line with Bitcoin in February (0%), but then again did not capture the upside in March when Bitcoin rose 23% and directional crypto funds only rose 4%.

2. Why Did Directional Crypto Funds Underperform Bitcoin in 2023 YTD

Some crypto funds were still in defensive mode after the devastating events of 2022, most notably FTX. Many funds we spoke to reported elevated cash exposure by the beginning of 2023.

Not only did the defensive positioning of crypto funds suppress returns, quantitative crypto funds also reported that they could not always profit from the relatively choppy recovery that Bitcoin underwent this year. Depending on the algorithms used by trend-following funds, these funds were not always in a position to detect and capitalize on trends this year.

Furthermore, funds had to find new banking and exchange counterparties in early 2023. After the collapse of FTX and rumors around potential instability at Binance, some funds diverted their operations away from trading and had to instead work out partnerships with new exchanges. In addition to onboarding new exchanges, funds often also had to find new banking partners, as some crypto-friendly banking institutions went bankrupt or ceased to do business with crypto companies due to a deterioration in crypto legislation in the US.

3. Another Big Reason for Crypto Funds’ Underperformance

Another reason for the underperformance of crypto funds is the relative overperformance of Bitcoin against almost all other crypto tokens and coins. Actively managed crypto funds almost always also have non-Bitcoin exposure. Only a few crypto funds only alternate between Bitcoin (or Bitcoin futures/perpetual swaps) and cash. Therefore, they were exposed to underperforming altcoins.

As we show in the analysis above, only about 31% of crypto funds have significant Bitcoin exposure.

4. The Current Exposure of Crypto Funds to Bitcoin:

We find that only about 31% of directional crypto funds with active strategies are invested at all into Bitcoin. Given this low exposure to one of the best-performing assets in the crypto asset market of 2023, it comes as no surprise that directional crypto funds underperformed Bitcoin so far.

This raises the question of why Bitcoin is so underrepresented in crypto funds’ portfolios today. Part of the reason is that some funds purposely do not invest in Bitcoin to differentiate themselves from a simple Bitcoin-buy-and-hold strategy. Investors are oftentimes looking for novel strategies and are not willing to pay management and performance fees for strategies that simply invest in Bitcoin. Our data shows that many early-stage token funds performed relatively poorly when measured against Bitcoin, even when they were fully invested.

5. Outlook

Hindsight bias and window dressing might come into play this year. This means that funds may want to increase their Bitcoin exposure moving forward. Furthermore, funds may eagerly be looking ahead at the Bitcoin halving of 2024, which is usually preceded by a rally in Bitcoin and broader crypto markets. High expectations surrounding ETF applications by large asset managers also play a pivotal role.

We thus suspect that Bitcoin exposure will increase over the next months.

Conclusion

Fiat subscriptions are still by far the most common option for providing money to a crypto fund. About 90% of the funds in our database only offer fiat subscriptions. But we can observe that larger crypto fund domiciles may adopt stablecoin funding more willingly. As crypto funds become the norm, the onramp rails are expected to follow suit.

An exception to this are regulatory environments such as the US and China, where there is still too much regulatory uncertainty around crypto investments.