The Funding: Crypto liquid funds respond to the bitcoin crash

Bitcoin’s sudden 20%+ crash this week — even though prices have since partially rebounded — caught multiple crypto funds off guard, their managers said. “I don't think anyone really thought that this much capitulation would happen this quickly,” said Zaheer Ebtikar, founder and CIO of Split Capital. Across conversations, the common thread was how fast everything unraveled rather than any single clear trigger: sentiment flipped quickly, fear indicators jumped, and heavy spot selling triggered a cascade of liquidations.

“Many TradFi themes became significantly overstretched and overcrowded during January. The resulting sharp unwind transmitted contagion to crypto markets, which continue to grapple with severe, unresolved structural issues stemming from the October 10 liquidation event,” said Ray Hindi, co-founder and managing partner of L1D AG.

A 'rolling bear market' beneath the surface

The latest volatility is part of a trend that has been building for months, according to Cosmo Jiang, general partner at Pantera Capital, who oversees the firm’s liquid token strategies. He said the non-bitcoin token market has effectively been in a bear market since December 2024, describing this year so far as a continuation of a “rolling bear market” across much of the altcoin market.

Jiang said the selloff accelerated as stress spread across risk assets, forcing traders who had rotated into precious metals to sell crypto to meet margin calls. He added that the weakness is not unique to crypto, noting that software stocks have fallen even more than bitcoin in the recent risk-off environment. “Eventually price always follows fundamentals,” Jiang said, arguing that stronger crypto teams, products and business models should ultimately outperform.

Hindi said the downturn also reflects a broader cleansing process. “Large parts of the crypto markets are structurally destined for zero and that’s ultimately healthy,” he said, arguing the shakeout helps purge excess and forces real utility to emerge. In the meantime, even high-conviction assets are being dragged lower by sentiment and macro pressure, making the move look like a classic — if painful — correction that could create “a generational opportunity for the right liquid funds,” according to Hindi.

Performance is diverging sharply

How crypto hedge or liquid funds perform increasingly comes down to strategy design rather than a single market narrative, according to Andy Martinez, founder and CEO of Crypto Insights Group. He said fundamental, thesis-driven managers have concentrated portfolios in liquid, revenue-generating tokens, which have tended to rebound faster during volatility-driven selloffs.

Managers that are outperforming are running broader, multi-strategy playbooks, rotating across relative value, volatility arbitrage and DeFi yield as opportunities appear, Martinez said. Early 2026 performance reflects that dispersion: directional strategies are down roughly 2% on average, while market-neutral strategies have produced small positive returns in the range of 0.5% to 1%, Martinez noted. Quant and DeFi strategies have been well-positioned for the recent volatility and are likely to perform well this year, said Kenneth Heinz, president of Hedge Fund Research. The environment remains challenging, with outcomes increasingly driven by portfolio construction, risk management and execution rather than broad market direction.

Hindi said the weakest results have typically come from funds that relied on a leveraged altcoin season returning. Some of the strongest performers, by contrast, have been crypto-native managers running rigorous fundamental processes, funds operating at the intersection of crypto and traditional markets, and a smaller group that de-risked at the right time.

“We're drawn to fundamental, conviction-driven approaches, while remaining much less interested in high-frequency active trading or market-neutral setups,” Hindi said.

He added that several high-conviction managers are positive year-to-date, focusing on “high-quality assets,” which are “inherently scarce, so they periodically become highly consensus-driven, leading to sharp short-term volatility during broader unwinds. That's simply the price to pay for generating durable, long-term alpha.”

No broad alt season in sight

Expectations for altcoin outperformance remain muted, with most investment managers describing a shift toward selective, fundamentals-driven investing. Joscha Kuplewatzky of Wintermute Ventures said the market is likely too late in the cycle for broad altcoin outperformance, arguing any rallies are more likely to be short, sector-specific bursts unless retail participation returns.

Mathijs van Esch of Maven 11 and Ebtikar of Split Capital said funds are increasingly focused on revenue-generating tokens and clearer value accrual, while Hindi argued relying on a repeat of the 2021-style altcoin cycle is now “irresponsible and a losing strategy,” with the market moving toward “idiosyncratic alpha” driven by differentiated selection.

That shift is reshaping strategies. Managers pointed to growing interest in yield and credit strategies with limited directional exposure, as well as derivatives-heavy approaches designed to capture volatility and funding spreads. The defining factor, Hindi said, is no longer strategy labels but whether managers have a genuine edge through deep crypto-native research and experience across both crypto and traditional markets.

Is crypto losing its shine?

Crypto is no longer the obvious first stop for new capital, several investors said. “The truth is, crypto is like the third or fourth prettiest girl at the party at this point. It's not the hottest industry out there anymore,” said Jack Platts of Hypersphere Ventures. He pointed to rising interest in artificial intelligence, robotics, semiconductors and energy, adding that crypto is unlikely to regain its former momentum without a breakout application beyond stablecoins, lending, trading or gambling. “I think the past year has been the death of web3,” he said, arguing growth may slow unless new sectors like DePIN succeed.

But there are still plenty of founders building, and there will still be money made in crypto, Platts said, even as investors increasingly look to other technologies and new areas of opportunity.

The tough environment is speeding up changes across the fund landscape. Many expect consolidation, closures and strategy shifts ahead, with Cosmo Jiang anticipating meaningful consolidation after a challenging year. “We will seek to take advantage of that,” he said. Kuplewatzky expects greater overlap between venture and liquid strategies, while Ebtikar said the era of crypto-only funds may be fading as managers expand into adjacent sectors. Indeed, Multicoin Capital co-founder Kyle Samani stepped back from the firm this week after nearly a decade in crypto to explore other areas of technology, including AI, longevity, and robotics.

Crypto hedge fund performance by strategy

Source: Crypto Insights Group

Crypto hedge fund results split sharply in 2025 depending on how funds were positioned, according to Crypto Insights Group data shared with The Block. Funds that bet on prices going up or down (known as directional strategies) struggled, falling about 11% overall. Within that group, fundamental long/short funds, which generally pick tokens based on research and market narratives, had the toughest year, dropping more than 31%, while quant directional funds, which use trading models and signals to take market bets, managed about 12% gains.

By contrast, market-neutral funds, which aim to make money without relying on the market going up, had a strong year, gaining about 14.6%. These funds typically use arbitrage and hedged trades, for example buying and shorting related assets at the same time, to capture price differences rather than market direction. Even asset-specific neutral strategies stayed positive last year, with bitcoin market-neutral up 5.7% and ether market-neutral up 3.6%.