New Layer 1 solutions gained massive adoption in 2021 as crypto hedge funds were diversifying into altcoins, with 45% holding LUNA.
Ethereum alternatives and other Layer 1s gained traction and widespread adoption throughout 2021 for crypto hedge funds, a recent survey by PwC shows. Also referred to as “Ethereum killers,” these chains owe the majority of their success to the promises of faster transactions and lower gas fees.
Crypto Hedge Funds Embraced Alts In 2021
In its 4th Annual Global Crypto Hedge Fund Report 2022, PwC said that new layer-1 chains like Solana, Avalanche, Terra, and Polkadot gained massive adoption among crypto hedge funds throughout 2021. However, unsurprisingly, Bitcoin and Ethereum still accounted for the lion’s share of the market.
According to the report, 29% of crypto funds surveyed by PwC said that at least half of their daily cryptocurrency trading volume was in BTC. Notably, this is a considerable drop compared to the earlier year, when 56% of the funds had more than 50% of their daily trading volume in Bitcoin, suggesting that funds were diversifying into altcoins.
After Bitcoin and Ethereum, the top five altcoins traded by crypto funds were Solana, Polkadot, Terra, Avalanche, and Uniswap, respectively. More specifically, 51% of the surveyed crypto funds traded Solana, 48% traded DOT, and another 45% had exposure to LUNA. The report said:
“New layer-1 chains like SOL, DOT, and AVAX have been quickly adopted by crypto hedge funds in the past year. This reflects the wider adoption these chains have achieved in the market in the last 12 months due to the promises of faster transactions and lower gas fees versus Ethereum.”
This massive adoption by crypto funds partially describes the exceptional price performance of new L1s. For instance, SOL was trading at $1.5 at the start of 2021, but its price stood at $172.5 by the end of the year, a price increase of over 9,600%. Similarly, LUNA surged from $0.65 at the start of 2021 to $84.7 by year’s end and AVAX from $3.2 to $101.5.
However, it should be noted that the depegging of Terra’s algorithmic stablecoin UST, which led to the collapse of the entire ecosystem, sent the price of LUNA essentially to zero. The collapse of Terra also sent a ripple effect across the entire industry, which resulted in many major cryptocurrencies losing significant value.
PwC noted that the collapse of Terra “could become a setback for the general crypto industry in the short term.” While $102 million and $43 million worth of funds has flowed into Solana and Avalanche so far this year, capital flows into cryptocurrencies are expected to slow down in the remainder of the year.
“The case of LUNA is also a stark reminder that many cryptocurrencies are still developing and some projects are still experimental in nature. While the value of these coins can quickly rise in value, they can also just as quickly become irrelevant and completely collapse within a short span of time.”
More Traditional Hedge Funds Dabble In Crypto
The PwC report also revealed that more traditional hedge funds dipped their toes in crypto despite the tremendous volatility and market uncertainty. Of those traditional hedge funds surveyed, 38% said they invested in digital assets in 2021, compared to 21% a year ago.
Notably, most traditional hedge funds getting into digital assets are not taking much risk. According to the report, 57% of the funds have invested less than 1% of their total assets under management (AuM) in digital assets.
On the other hand, 20% of the funds have devoted between 5% and 50% of their AuM to crypto. Moreover, two-thirds of funds (67%) who invested in digital assets in 2021 said they aim to deploy more capital into the asset class by the end of 2022. John Garvey, Global Financial Services leader at PwC, said:
“There will continue to be volatility, but the market is maturing and with that is coming not only many more crypto-focused hedge funds and higher AuM, but also more traditional funds entering the crypto space.”