Bitcoin’s sharp decline of over 20% this past week took crypto liquid funds by surprise, despite the commodity later rallying back on certain fronts. According to fund managers, the impact of Bitcoin’s decline was less from any particular event and more so because of the swiftness of the shift in sentiment, as indicated by rising fear gauges and heavy spot sales. Similar stress dynamics have recently emerged in discussions of Bitcoin market volatility and broader crypto fund performance analysis.
Several managers described January as a period of overcrowded trades spilling over from traditional finance into crypto. When those positions unwound, contagion spread quickly. The outcome revealed underlying structural weaknesses that have persisted from previous liquidation events, causing certain high-conviction names to fall further in a matter of days.
A rolling bear market under the surface
However, although Bitcoin seems to capture all the attention, many fund managers believe that the true story can only be found below the surface. Cosmo Jiang of Pantera Capital has argued that the markets for non-bitcoin tokens remained in a bear market effectively since the end of 2024. He referred to the situation as a ‘rolling bear market’ in altcoins.
The recent selloff accelerated due to increased stress on global risk assets. The traders who invested in precious metals sold their crypto to raise capital. Jiang noted that software stocks were down more than Bitcoin in a similar risk-off scenario. He reiterated that the crypto market does not operate in isolation. In the long run, price follows fundamentals, and companies with better fundamentals would be able to perform better when the market stabilizes.
Other managers framed the downturn as a necessary reset. Large parts of the crypto market, they said, lack sustainable utility and will not survive long term. This shakeout may look painful now, but it could open long-term opportunities for disciplined liquid funds that focus on quality rather than hype.
Strategy matters more than direction
The present crypto liquid funds‘ performances vary widely. According to industry observers, the funds are performing based on the design of the portfolios and not on the direction of the markets. The funds with concentrated portfolios of liquid, revenue-generating assets are recovering faster from volatility spikes.
Multi-strategy funds are still generating alpha through rotation in relative value trades, volatility arbitrage, and DeFi yields. Directional strategies are flat for now, whereas market-neutral funds are reporting small gains. Quant-based strategies and DeFi are generally well-suited for these types of market environments, which often rely little on the appreciation of assets.
Funds that rely on leverage from an altcoin market rout have experienced the greatest difficulties. Instead, crypto-natives with solid risk controls, which have effectively de-risked at the right time, have performed better. There are still some high-conviction funds that are up year-to-date, investing in scarce, quality assets, even if this results in extreme short-term movements on their positions.
No broad alt season in sight
Most managers believe that the possibility of a general altcoin rally soon is meager. Instead, they are hoping to achieve sector-specific price movements driven by underlying investment fundamentals. Funds are increasingly investing in revenue-generating tokens, yield plays, and credit vehicles that have limited directional risk.
Derivatives-heavy approaches also attract interest, as they aim to capture volatility and funding spreads rather than bet on price trends. Managers increasingly argue that repeating a 2021-style altcoin cycle represents a losing strategy in today’s market.
Is crypto losing its edge?
Some investors say crypto no longer sits at the center of innovation capital. Instead, attention now focuses on artificial intelligence, robotics, semiconductors, and energy. If crypto does not find another major case outside of trading, lending, or stablecoins, it may face difficulty regaining its prior prominence.
Yet active builders continue, and opportunities continue, particularly for skilled managers. The difficult environment drives consolidation, closures, and strategic shifts. Some also envision a future crossover between venture and liquid strategies, with crypto managers investing in related technologies.
External perspectives on the sector from organizations like the International Monetary Fund, as well as a study from Hedge Fund Research, discuss a similar pattern of consolidation and strategy developments.
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