Crypto Liquid Funds Face 70% Losses, Shift to Quality Tokens

Crypto liquid funds have experienced significant losses this year, with some investors reporting declines of up to 70%. This downturn has led liquid fund investors to focus on a smaller set of high-conviction investments, prioritizing fundamentals over momentum. The first quarter of 2025 saw a challenging environment for financial markets, including crypto, due to broader economic uncertainties and policy changes. This turbulence has particularly affected altcoins, with many liquid funds that heavily invested in Solana in 2024 seeing their returns dragged down.

The shift in strategy is also influenced by the changing expectations of institutional investors. With bitcoin now easily accessible through ETFs, active managers are often instructed not to hold it, leading investors to seek exposure beyond bitcoin or ether. This has skewed perceptions of fund performance, as bitcoin is often used as the default benchmark. However, some investors argue that bitcoin's role as digital gold is fundamentally different from DeFi tokens, which resemble equity investments. This distinction is crucial for understanding the performance of liquid funds.

Not all liquid funds have been equally affected. Directional strategies, which bet on token price movements, have taken the biggest hit, especially in portfolios heavily weighted towards altcoins. In contrast, market-neutral and delta-neutral strategies have fared better due to their focus on arbitrage, yield, and other low-risk trades. These strategies have generally maintained steady returns, often around 1% to 2% per month.

In response to the poor performance in the first quarter, liquid fund managers are now concentrating on tokens with strong fundamentals, such as cash flow, usage, and value accrual. This shift involves narrowing exposure to fewer, higher-quality assets. Some funds are also exploring listed equities with crypto exposure, aiming to diversify their portfolios. The trend towards quality tokens is expected to continue, especially with increasing regulatory clarity in the U.S. This shift is part of a broader evolution in the liquid side of crypto, which is not only changing but also expanding.

The focus on quality tokens is evident in the strategies of firms like M11 Funds, which is preparing to launch a second liquid vehicle, the M11 Crypto Core+ Fund. DeFi and a select few Layer 1 tokens remain in focus for funds like DeFiance Capital, which prioritizes tokens with actual value accrual and fundamentals. This trend is supported by recent investments by venture capital firms in LayerZero and Layer3, indicating a move away from the old playbook of quick flips towards real business building.

The flexibility to invest in liquid tokens is becoming a priority for some investors. Hypersphere's latest venture fund has an open mandate to go up to 100% liquid if needed, positioning it to catch mini-cycles in sectors like AI agents. Overall, the liquid market is becoming more attractive than private markets, with venture fund returns being weaker and deal quality declining. This shift suggests that the crypto liquid fund industry may follow the traditional finance model, where hedge funds are significantly larger than venture funds.