Under Trump's encryption-friendly policies, will the performance of crypto hedging funds be bleak in 2025?

After Trump took office, new regulations were introduced to support the encryption industry, and billions of dollars in institutional capital originally hoped to push Crypto Assets from the margins to the mainstream. However, this year has revealed the brutal nature of Crypto Assets, where even those professionals skilled at profiting from market fluctuations have found it difficult to survive. Crypto Asset hedge funds have had a tough year, with directional funds falling by 2.5%, while fundamental strategies and those focused on alts have dropped by about 23% as of November.

Crypto Assets Hedging Funds are expected to perform poorly in 2025.

According to data from Crypto Insights Group, as of November, directional funds aimed at profiting from the significant price fluctuations of Bitcoin and other major Crypto Assets have fallen by 2.5%, expected to record the worst performance since the winter of 2022, when many funds dropped by 30% or more. Meanwhile, those adopting a long-term, bottom-up strategy, focusing on the fundamentals of blockchain networks and tokens, as well as altcoin strategies, have experienced a decline of about 23% after significant pullbacks. Only those maintaining Hedging, targeting small, stable pricing deviations, have achieved significant gains, rising by approximately 14.4%.

Wall Street enters, narrowing the arbitrage space

With the listing of crypto ETFs, institutional funds have flowed into the cryptocurrency market through ETFs and structured products, reshaping the market landscape. Wall Street firms have further delved into the cryptocurrency market, narrowing the spreads and weakening the once lucrative arbitrage opportunities. Traditional trading profits, such as spot-futures arbitrage (i.e., basis trading), have significantly diminished. The formerly stable double-digit monthly returns have become fleeting, and in some cases, have completely disappeared.

The October crash knocked down alts and quantitative model funds.

Even before the fall in October, many funds were already struggling. Alts have not risen like Bitcoin in previous years. New token issuances have made little progress. Retail demand remains sluggish. The index tracking altcoin performance has fallen to its lowest point since the pandemic crash in 2020.

Subsequently, on October 10, one of the fastest liquidation events in the history of Crypto Assets occurred, triggering a 14% fall in Bitcoin prices. In just a few hours, nearly 20 billion dollars in leveraged positions vanished.

According to the expected price trend, directional funds that use subjective judgment or quantitative models to conduct long and short operations have wiped out most of their earnings over the past year in just one afternoon. The quantitative models focusing on alts have already been under pressure due to insufficient liquidity—experiencing what several fund managers referred to as a “total collapse.”

The mean reversion strategy for alts has been hit the hardest, as they bet on the strategy that short-term price fluctuations will ease. During the crash in October, dozens of tokens plummeted by 40% or more within hours, overwhelming these models.

The encryption infrastructure has developed cracks.

The losses go far beyond price fluctuations. The infrastructure of Crypto Assets has developed cracks. Liquidity has completely vanished. Collateral has been frozen during the trading process. The risk management system has also failed to respond in a timely manner. Veteran players from FTX and Terra Luna have stated that this event feels familiar—it's even more shocking in a market that should be safer and more mature.

This crash highlights the slow development of the infrastructure for Crypto Assets. Trading connections were interrupted, market makers withdrew, and order routing systems failed. The lack of circuit breakers and central clearing further exacerbated the losses.

Only those investors who are well-prepared and have their collateral reasonably allocated across exchanges can survive and profit.

Many funds are turning to DeFi

By the end of the year, many funds have reduced their investments in alts and turned to decentralized finance (DeFi), as the decentralization and high yields of DeFi still create investment opportunities. The increase in DeFi and yield funds is about 12%, which is quite a good performance in such a difficult year.

However, due to the severe injuries, some market participants may not be able to return to the market with the same intensity quickly.

Under Trump's crypto-friendly policies, will the performance of crypto hedging funds be bleak in 2025? First appeared in Chain News ABMedia.