99% of Crypto Tokens Are Going to Zero: Fund Manager

There’s never been a better time to allocate money to crypto hedge funds.

That’s according to Chris Solarz, the chief investment officer of digital assets at Amitis Capital, a firm which runs a crypto-focused fund of funds — meaning a fund that specializes in allocating capital to various money managers.

“This is the golden age for crypto hedge fund investing," said Solarz, who used to be responsible for almost $8 billion in allocations at investor advisory firm 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 so new that money managers are able to run the same trading strategies that they used to 35 years ago in TradFi, when hedge funds were only just emerging, Solarz said.

Only 127 hedge funds existed back in 1990, managing roughly $39 billion; by 2024, those numbers had skyrocketed to over 10,000 funds managing $5 trillion in assets. In other words, the sector got way more competitive — and it became much harder to outperform the market.

Solarz’s thesis is that the crypto sector (which counts roughly 1,650 hedge funds managing $88 billion in assets) is currently 10 times less competitive than traditional markets, to the point that money managers are able to dust off and readapt 20-year-old strategies that stopped working 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 said. “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 keep presenting asymmetric opportunities to money managers until the technology is completely 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 looks at for allocation: venture funds (which provides capital to startups), liquid directional (funds that bet on whether the market will go up or down) and liquid market neutral (which earn to make money regardless of market moves).

When looking at liquid directional funds, Solarz is more interested in the manager’s process and risk management than specific theses they may espouse. What’s their investment strategy? Is it repeatable? How do they think about macroeconomics? Then he plows performance data points 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 said. “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 counts 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, because of 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 take advantage of.

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.