Hedge funds eye crypto volatility after Tesla shelves bitcoin payments amid ESG concerns

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Bitcoin volatility

Crypto hedge funds remain well-placed to capitalise on bitcoin’s volatile price moves, after Tesla CEO Elon Musk’s decision to suspend bitcoin payments sent the coin’s value plummeting this week.

Musk tweeted on Wednesday that the electric car maker would no longer accept bitcoin for its products due to concerns over the currency’s environmental impact.

The world’s foremost cryptocurrency dropped more than 13 per cent to USD49,150 on Wednesday on the back of Musk’s memo – its single-biggest slide this year – with ether and doge also falling.

Though some directional quantitative hedge fund managers, particularly those that rely on slow-and-steady trend-following signals, have struggled this week, arbitrage-based options strategies – who have already had a stellar 2021 – have welcomed the volatility, said Ankush Jain, CIO and co-founder of Aaro Capital.

“We try to capture some of the downside in moves like this, which is what justifies a true hedge fund,” Paul Frost-Smith, CEO of systematic crypto arb hedge fund Argentium, told Hedgeweek. “We must expect significant swings in prices as this market develops out of nascency and is particularly sensitive to the views of both the prophets and the sceptics, with such a relatively high number of retail investors.”

“Higher volatility improves the opportunity set for the arb operations, and allows us to make use of various correlation trades,” said Anatoly Crachilov, CEO of London-based Nickel Digital Asset Management, which runs a number of crypto strategies across the hedge fund, multi-strategy and long-only spectrum.

The use of fossil fuels to power bitcoin’s computer-driven mining process has come under closer scrutiny amid the currency’s stratospheric rise in recent times.

In March, Robert Furdak, ESG chief investment officer at Man Group, warned the current cryptocurrency boom is on a “collision course” with the growing drive for sustainable investing.

Musk tweeted that while cryptocurrency is “a good idea on many levels”, it “cannot come at great cost to the environment”, pointing to the “rapidly increasing use of fossil fuels for bitcoin mining and transactions, especially coal, which has the worst emissions of any fuel”.

Musk said Tesla would not be selling any bitcoin, and plans to use it for transactions “as soon as mining transitions to more sustainable energy.” He added: “We are also looking at other cryptocurrencies that use <1 per cent of bitcoin’s energy/transition.”

Industry participants have pointed to the rapidly-evolving mining process, which seen sustainable power expanded, particularly among the slew of alternative cryptocurrencies. Recent stats from the Cambridge Center for Alternative Finance suggest some three-quarters of miners now use some form of renewables in their energy mix, while 39 per cent use exclusively green energy.

“The most notable environmental alternatives to bitcoin are third-generation protocols that are secured using the ‘Proof-of-Stake’ method – solana, ethereum, polkadot – estimated to be 99 per cent more energy-efficient than ‘Proof-of-Work’, which is what bitcoin relies on,” Jain explained, noting most hedge funds are diversified beyond bitcoin in other less energy-intensive projects.

He added: “We view the recent announcement as a short term hit to bitcoin’s price, and not so reflective of its longer-term fundamentals. However, the ESG topic has indeed provided a good opportunity to highlight the benefits of investing in other cryptoassets aside from bitcoin.”

Crachilov acknowledged that the ESG focus on bitcoin mining is a “critical consideration” for many institutional investors, adding Nickel Digital is exploring the potential launch of a dedicated green-focused bitcoin fund, which would buy and hold only those coins mined using exclusively renewable sources of energy.

He told Hedgeweek the fund would trade at an “ESG premium” to the regular bitcoin price, in turn creating a “consistent financial incentive” for miners to move to renewable sources of energy – a strict qualifying factor for miners’ ability to sell their newly minted coins at a premium.

He said more newly-launched protocols will increasingly rely on energy-friendly Proof-of-Stake and other alternatives, describing it as a “natural evolution” of the digital assets ecosystem.

“Miners are in the constant search for cheapest form of energy – their main expense line – and renewables such as solar, wind, and geothermal power stations are increasingly the cheapest source of electricity available,” Crachilov added.


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Hugh Leask
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Editor, Hedgeweek