Coin News

Major Bitcoin mining hardware producer Bitmain today announced that it may launch a “hard fork” in August. Labeled a “contingency plan,” the announcement is a response to the upcoming user activated soft fork (UASF), as defined by Bitcoin Improvement Proposal 148 (BIP148) — and the wipe-out risk that comes along with it.

After an initial 8 megabyte proposal, Bitcoin Classic, the Hong Kong roundtable consensus, Bitcoin Unlimited, and SegWit2x, this marks the sixth time the Chinese mining giant has announced support for a hard fork in the space of two years.

Here’s what their latest proposal looks like.

Hard Forks, Coin-Splits and Altcoins

On August 1st, a segment of the Bitcoin community will activate the BIP148 UASF. These users and miners will only accept Bitcoin blocks that signal support for Segregated Witness (SegWit), the protocol upgrade proposed by the Bitcoin Core development team. If, at that point, a majority of miners (by hash power) does not signal support for SegWit through BIP148, Bitcoin’s blockchain and currency could split in two: a coin-split.

Now, with Bitmain’s hard fork announcement, it seems there could be a third part to the split … sort of.

Bitmain refers to its announced hard fork as a “UAHF” or User Activated Hard Fork. While perhaps a clever play on UASF, this is not a very accurate term because the “contingency plan” will actually be very explicitly activated by Bitmain — and Bitmain alone.

Moreover, use of the term “hard fork” is questionable in this context as well. Originally, at least, the term referred to a change to the Bitcoin protocol that makes previously invalid blocks or transactions valid. But for it to be a change to the Bitcoin protocol, it arguably at the very least requires the Bitcoin ecosystem to follow these new rules. Under Bitmain’s own stated condition this wouldn’t be the case, at least not to the full extent. 

Rather, the “UAHF” will only be launched in response to a successful BIP148 UASF. It is thus more or less assumed that not everyone will adopt the new rules, which indeed seems likely. Technically, at least, Bitmain’s “hard fork” would be better described as the creation of an entirely new coin that shares a common history with Bitcoin.

For purposes of this article, Bitmain’s version of Bitcoin will be called “Bitmain’s Bitcoin.”

Bitmain’s Bitcoin

So what. specifically, will Bitmain’s Bitcoin look like?

Bitmain announced it will create Bitmain’s Bitcoin exactly 12 hours and 20 minutes after the UASF activation, though this is configurable. At that specific point in time, under Bitmain’s new rules, a block must be included in the blockchain that’s bigger than one megabyte. This will automatically “split” the chain — or create a new chain depending on how you look at it. All existing full Bitcoin nodes would reject this block and ignore this chain, and would continue to follow the chain adhering to Bitcoin’s current consensus rules. 

From that point on, Bitmain will first mine on Bitmain’s Bitcoin chain privately for three days. After these three days, Bitmain will “officially” launch Bitmain’s Bitcoin to the public if three circumstances are met. 

First off, the BIP148 UASF must have been successful enough to have gained significant hash rate. Second, there must be strong market demand for Bitmain’s Bitcoin. And third, the non-BIP148 side of the split must not be doing great, comparatively.

Then, if launched, Bitmain’s Bitcoin will accept bigger blocks. The statement mentions an initial limit of up to 8 megabytes, though this is slightly ambiguous as the same blog post mentions there will be “no hard-coded consensus rule” at all. The hardware manufacturer does add that miners should impose a “soft limit” of less than 2 megabytes, which is really more like a recommendation. Additionally, Bitmain writes that there will be a new protocol limit on “sigops,” which, in short, should counter some potential attack vectors on bigger blocks that could otherwise significantly slow down propagation times. 

For the longer term, Bitmain lays out a “future roadmap” that includes a version of Segregated Witness, Extension Blocks, Bitcoin NG, Lumino, Schnorr signatures, Weak Blocks, and Bitcoin Unlimited-inspired base block size increases up to almost 17 megabytes in two years. Overall, this “future roadmap” part of the announcement does not seem very concrete yet, however. 

What This Means for You, and What This Means for Bitcoin 

The good news is that anyone who holds bitcoins (meaning: their private keys) at the time of a split will receive coins on both (or all) sides of the chain. In other words, you will get free "Bitmain bitcoins", which you can keep, sell or spend as long as someone is willing to accept them as payment. Bitmain will even implement replay protection on Bitmain’s Bitcoin, which means that there should be no risk of accidentally spending the same (copied) coin on both chains.

From a broader Bitcoin and scaling perspective, the chances of BIP148’s success may have actually increased, due to this announcement. If Bitmain follows through on their blog post, it means the company will take hash power that could have otherwise frustrated the UASF “off the table,” to mine on Bitmain’s Bitcoin chain. As a result, there is a greater chance that BIP148 miners will claim the longest chain versus non-BIP148 miners, avoiding a coin-split on the original blockchain. Additionally, Bitmain’s blog post seems to have angered some Bitcoin users that were so far undecided, further increasing support for BIP148.

The other scaling proposal in the running is SegWit2x, which is also supported by Bitmain. SegWit2x code should, according to its timeline, be up and running before August 1st. If that deadline is met, it may or may not prevent a coin-split in the first place, depending on its compatibility with the BIP148 UASF. But since this proposal has been mostly developed in private, the status of this project — as well as its (in)compatibility with Bitmain’s “contingency plan” — remains largely unclear.

And of course, in the end, it's possible that neither BIP148, nor SegWit2x, nor Bitmain's Bitcoin will gain much traction. Status quo could prevail, in which case not much would change at all.

Major Bitcoin mining hardware producer Bitmain today announced that it may launch a “hard fork” in August. Labeled a “contingency plan,” the announcement is a response to the upcoming user activated soft fork (UASF), as defined by Bitcoin Improvement Proposal 148 (BIP148) — and the wipe-out risk that comes along with it.

After an initial 8 megabyte proposal, Bitcoin Classic, the Hong Kong roundtable consensus, Bitcoin Unlimited, and SegWit2x, this marks the sixth time the Chinese mining giant has announced support for a hard fork in the space of two years.

Here’s what their latest proposal looks like.

Hard Forks, Coin-Splits and Altcoins

On August 1st, a segment of the Bitcoin community will activate the BIP148 UASF. These users and miners will only accept Bitcoin blocks that signal support for Segregated Witness (SegWit), the protocol upgrade proposed by the Bitcoin Core development team. If, at that point, a majority of miners (by hash power) does not signal support for SegWit through BIP148, Bitcoin’s blockchain and currency could split in two: a coin-split.

Now, with Bitmain’s hard fork announcement, it seems there could be a third part to the split … sort of.

Bitmain refers to its announced hard fork as a “UAHF” or User Activated Hard Fork. While perhaps a clever play on UASF, this is not a very accurate term because the “contingency plan” will actually be very explicitly activated by Bitmain — and Bitmain alone.

Moreover, use of the term “hard fork” is questionable in this context as well. Originally, at least, the term referred to a change to the Bitcoin protocol that makes previously invalid blocks or transactions valid. But for it to be a change to the Bitcoin protocol, it arguably at the very least requires the Bitcoin ecosystem to follow these new rules. Under Bitmain’s own stated condition this wouldn’t be the case, at least not to the full extent. 

Rather, the “UAHF” will only be launched in response to a successful BIP148 UASF. It is thus more or less assumed that not everyone will adopt the new rules, which indeed seems likely. Technically, at least, Bitmain’s “hard fork” would be better described as the creation of an entirely new coin that shares a common history with Bitcoin.

For purposes of this article, Bitmain’s version of Bitcoin will be called “Bitmain’s Bitcoin.”

Bitmain’s Bitcoin

So what. specifically, will Bitmain’s Bitcoin look like?

Bitmain announced it will create Bitmain’s Bitcoin exactly 12 hours and 20 minutes after the UASF activation, though this is configurable. At that specific point in time, under Bitmain’s new rules, a block must be included in the blockchain that’s bigger than one megabyte. This will automatically “split” the chain — or create a new chain depending on how you look at it. All existing full Bitcoin nodes would reject this block and ignore this chain, and would continue to follow the chain adhering to Bitcoin’s current consensus rules. 

From that point on, Bitmain will first mine on Bitmain’s Bitcoin chain privately for three days. After these three days, Bitmain will “officially” launch Bitmain’s Bitcoin to the public if three circumstances are met. 

First off, the BIP148 UASF must have been successful enough to have gained significant hash rate. Second, there must be strong market demand for Bitmain’s Bitcoin. And third, the non-BIP148 side of the split must not be doing great, comparatively.

Then, if launched, Bitmain’s Bitcoin will accept bigger blocks. The statement mentions an initial limit of up to 8 megabytes, though this is slightly ambiguous as the same blog post mentions there will be “no hard-coded consensus rule” at all. The hardware manufacturer does add that miners should impose a “soft limit” of less than 2 megabytes, which is really more like a recommendation. Additionally, Bitmain writes that there will be a new protocol limit on “sigops,” which, in short, should counter some potential attack vectors on bigger blocks that could otherwise significantly slow down propagation times. 

For the longer term, Bitmain lays out a “future roadmap” that includes a version of Segregated Witness, Extension Blocks, Bitcoin NG, Lumino, Schnorr signatures, Weak Blocks, and Bitcoin Unlimited-inspired base block size increases up to almost 17 megabytes in two years. Overall, this “future roadmap” part of the announcement does not seem very concrete yet, however. 

What This Means for You, and What This Means for Bitcoin 

The good news is that anyone who holds bitcoins (meaning: their private keys) at the time of a split will receive coins on both (or all) sides of the chain. In other words, you will get free "Bitmain bitcoins", which you can keep, sell or spend as long as someone is willing to accept them as payment. Bitmain will even implement replay protection on Bitmain’s Bitcoin, which means that there should be no risk of accidentally spending the same (copied) coin on both chains.

From a broader Bitcoin and scaling perspective, the chances of BIP148’s success may have actually increased, due to this announcement. If Bitmain follows through on their blog post, it means the company will take hash power that could have otherwise frustrated the UASF “off the table,” to mine on Bitmain’s Bitcoin chain. As a result, there is a greater chance that BIP148 miners will claim the longest chain versus non-BIP148 miners, avoiding a coin-split on the original blockchain. Additionally, Bitmain’s blog post seems to have angered some Bitcoin users that were so far undecided, further increasing support for BIP148.

The other scaling proposal in the running is SegWit2x, which is also supported by Bitmain. SegWit2x code should, according to its timeline, be up and running before August 1st. If that deadline is met, it may or may not prevent a coin-split in the first place, depending on its compatibility with the BIP148 UASF. But since this proposal has been mostly developed in private, the status of this project — as well as its (in)compatibility with Bitmain’s “contingency plan” — remains largely unclear.

And of course, in the end, it's possible that neither BIP148, nor SegWit2x, nor Bitmain's Bitcoin will gain much traction. Status quo could prevail, in which case not much would change at all.

Crypto Fund AG has announced the creation of a “Cryptocurrency Fund” which will invest in a variety of digital currencies such as bitcoin, ether and ripple, among others. The fund plans to launch in Q4 2017.

This would be Europe’s first ever diversified cryptocurrency fund. The fund is based on a Cryptocurrency Index which “invests in the largest virtual currencies by market capitalization and liquidity.”

This development would bring a new level of investment transparency to the digital asset class market.

“The fund will be highly diversified,” said Jan Brzezek, CEO of Crypto Fund AG. He explained that this diversification will lead to lower levels of volatility while still reaping the “high growth” benefits of new cryptocurrencies.

The fund’s goal is to raise roughly $113 million (€100 million) of assets under management during the first year with the ambitious target of $3.4 billion (€3 billion) within three years. The fund already has investors who have dedicated $11.3 million (€10 million) with an additional $11.3 million (€10 million) in transition to the pool.

The fund, headquartered in Zug, Switzerland, has already initiated preliminary discussions with the Swiss Financial Market Supervisory Authority (FINMA), the body responsible for financial regulation. Switzerland has historically had a positive track record with cryptocurrencies and their regulation. It recognizes virtual currencies as a class of assets and is currently home to a variety of bitcoin financial companies.

Not the First Attempt

This is not the first time an entity has attempted to register a bitcoin financial vehicle.

In July 2013, Cameron and Tyler Winklevoss filed to establish the first cryptocurrency Exchange Traded Fund (ETF), the Winklevoss Bitcoin Trust, with the United States Securities and Exchange Commission (SEC). A bitcoin ETF would allow investors to invest in bitcoin without actually owning the digital asset. This would have radically increased the accessibility of bitcoin and brought a flood of new investors to the decentralized currency.

However, just earlier this year, the SEC ruled against the establishment of the Winklevoss Bitcoin Trust due to the lack of regulation that occurs on bitcoin markets. However, the SEC did note that as bitcoin continues to emerge from its nascent form, more regulated markets could appear, thus “the Commission could consider whether a bitcoin ETF would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”

Though this initial attempt in the U.S. was unsuccessful, Crypto Fund AG appears to have more promise in moving forward. Zug, Swtizerland, often called “Crypto Valley,” has proven to be a strong foundation for the stable regulation of digital currencies. Additionally, the Cryptocurrency Fund has key advantageous differences from the Winklevoss ETF.

“Unlike the Winklevoss ETF, which was rejected by the SEC, we use the regulated and proven Swiss fund structure according to the Swiss Collective Investment Schemes Act (CISA), where the asset manager, the fund management company and the custodian bank are legally separate from each other,” said Brzezek. Additionally, unlike the Bitcoin Investment Trust, it will not be listed on an exchange and will “exclusively target qualified investors.”

The company is led by CEO & co-founder Jan Brzezek, Dr. Tobias Reichmuth, and Marc Bernegger. Brzezek previously served at UBS working in the Asset Management division.. He is joined by Reichmuth and Bernegger two fintech specialists who have founded SUSI Partners AG and usgang.ch, respectively. They are advised by MME Legal, a law firm specializing in blockchain technology and ICOs.

Crypto Fund AG has announced the creation of a “Cryptocurrency Fund” which will invest in a variety of digital currencies such as bitcoin, ether and ripple, among others. The fund plans to launch in Q4 2017.

This would be Europe’s first ever diversified cryptocurrency fund. The fund is based on a Cryptocurrency Index which “invests in the largest virtual currencies by market capitalization and liquidity.”

This development would bring a new level of investment transparency to the digital asset class market.

“The fund will be highly diversified,” said Jan Brzezek, CEO of Crypto Fund AG. He explained that this diversification will lead to lower levels of volatility while still reaping the “high growth” benefits of new cryptocurrencies.

The fund’s goal is to raise roughly $113 million (€100 million) of assets under management during the first year with the ambitious target of $3.4 billion (€3 billion) within three years. The fund already has investors who have dedicated $11.3 million (€10 million) with an additional $11.3 million (€10 million) in transition to the pool.

The fund, headquartered in Zug, Switzerland, has already initiated preliminary discussions with the Swiss Financial Market Supervisory Authority (FINMA), the body responsible for financial regulation. Switzerland has historically had a positive track record with cryptocurrencies and their regulation. It recognizes virtual currencies as a class of assets and is currently home to a variety of bitcoin financial companies.

Not the First Attempt

This is not the first time an entity has attempted to register a bitcoin financial vehicle.

In July 2013, Cameron and Tyler Winklevoss filed to establish the first cryptocurrency Exchange Traded Fund (ETF), the Winklevoss Bitcoin Trust, with the United States Securities and Exchange Commission (SEC). A bitcoin ETF would allow investors to invest in bitcoin without actually owning the digital asset. This would have radically increased the accessibility of bitcoin and brought a flood of new investors to the decentralized currency.

However, just earlier this year, the SEC ruled against the establishment of the Winklevoss Bitcoin Trust due to the lack of regulation that occurs on bitcoin markets. However, the SEC did note that as bitcoin continues to emerge from its nascent form, more regulated markets could appear, thus “the Commission could consider whether a bitcoin ETF would, based on the facts and circumstances then presented, be consistent with the requirements of the Exchange Act.”

Though this initial attempt in the U.S. was unsuccessful, Crypto Fund AG appears to have more promise in moving forward. Zug, Swtizerland, often called “Crypto Valley,” has proven to be a strong foundation for the stable regulation of digital currencies. Additionally, the Cryptocurrency Fund has key advantageous differences from the Winklevoss ETF.

“Unlike the Winklevoss ETF, which was rejected by the SEC, we use the regulated and proven Swiss fund structure according to the Swiss Collective Investment Schemes Act (CISA), where the asset manager, the fund management company and the custodian bank are legally separate from each other,” said Brzezek. Additionally, unlike the Bitcoin Investment Trust, it will not be listed on an exchange and will “exclusively target qualified investors.”

The company is led by CEO & co-founder Jan Brzezek, Dr. Tobias Reichmuth, and Marc Bernegger. Brzezek previously served at UBS working in the Asset Management division.. He is joined by Reichmuth and Bernegger two fintech specialists who have founded SUSI Partners AG and usgang.ch, respectively. They are advised by MME Legal, a law firm specializing in blockchain technology and ICOs.

Since the start of Bitcoin in January 2009, we have seen the introduction of a multitude of blockchains across all kinds of areas and financial markets. Today, we can count hundreds of public blockchains that amount to a total market cap of almost $100 billion, excluding many more private blockchain installations.

Last year, we saw the emergence of precious metal-backed tokens and derivatives, entirely new asset classes representing entire ecosystems and even ETF tokens to invest into other blockchain assets. One such example is Initial Coin Offerings (ICOs) or token sales that are gaining in popularity.

The World Economic Forum is even going as far to predict that 10 percent of the global GDP will be stored on the blockchain in less than 10 years. In terms of today’s global GDP that would be $7.8 trillion.

Here a challenge arises: If we, as a community, do not find a way to connect blockchains, these $7.8 trillion will be dispersed in such a way that its true value is a lot lower.

So what is the solution? It’s one that we already saw being executed in a similar way around 30 years ago.

From Intranets to Internet

Before the invention of the TCP/IP protocol, the internet was also dispersed in many local networks, so-called intranets. These provided local efficiency over more traditional point-to-point communications (such as letters, faxes or telephone calls). The real breakthrough only came in 1973 when different intranet networks realized that they could use a unifying inter-network protocol to communicate among each other, thereby extending their reach by compatibility even more.

By dropping the requirements for an intranet to join the so-called internet to the bare minimum, it became possible to add almost any intranet, no matter how basic or sophisticated its characteristics were.

The initial adoption by users was relatively slow, as the services offered at the beginning were limited. There was one major factor, however, that eventually sped it up significantly. The same providers that were already offering mail, fax and phone services could now add internet services to their portfolios, giving them extra revenue streams. User adoption came easily, as a trust basis between the customers and these service providers was already established for years or even decades. Early adopters started, the later adopters followed.

Today, the internet spans across the entire world, and information that used to be accessible only locally is now accessible from anywhere, even from the moon. Information is stored by servers all over the world while routers create the backbone. Internet Service Providers (ISPs) give the average end-user easy and quick access to this vast database of information by opening a communication channel to their customers and to other ISPs, servers and routers.

Once the average user accesses the internet through his or her communication channel with the ISP in order to gain information from the internet, the user does not have to worry about how the information is retrieved exactly. All he or she has to do is type in the destination from where the information will be retrieved from (URL). The ISP which the user has the communication channel to does not know the exact path to the destination either. However, through the TCP/IP protocol, the request is routed through from one communication channel to another using routers, servers or ISPs, who then either know the location or continue the process. The important point is, neither one of them has to know the entire way. All they have to do is to trust the TCP/IP protocol, which has the task of delivering packets from the source host to the destination host, solely based on the IP addresses in the packet headers. Its routing function enables inter-networking and essentially establishes the internet.

Connecting the Blockchains

How does this translate into connecting blockchains? What if there was a way to connect literally any blockchain, without creating a new larger blockchain, like some companies have suggested? Creating a new blockchain would be like a large intranet, that all the other intranets would have to trust. It would be way more difficult to convince everyone. It is easier to leave everyone on their blockchain/intranet and just connect them.

With that in mind, I, therefore, suggested a Cryptographically-secure Off-chain Multi-asset Instant Transaction network (COMIT) at the end of 2016 and wrote a whitepaper about it.

What would such a network look like? Just like the internet, we need a stable and trustworthy backbone. In our opinion, any large blockchain provides exactly that. It can be any blockchain because, just like on the Internet, different modalities will be interconnected. For example, the initial internet never foresaw mobile app messaging services, but these have been implemented without any problems. The same will be true for COMIT, where any new blockchain can be connected to an existing one through the use of the COMIT Routing Protocol (CRP).

A user today who is using cryptocurrencies currently has to wait minutes if not hours before a transaction is accepted by the counterparty. With the adoption of payment channels such as the Lightning Network, Raiden or many others, such users can transfer assets instantly from person A to person B. If person B then opens another payment channel to person C, person A can also transfer assets to person C via B instantaneously, as long as person B provides enough liquidity.

In theory, there can be an infinite chain of participants in between person A and C, as long as they all provide enough liquidity. Again, such transactions are immediate without person A needing to know which route the assets took to end up at person C. Users can trust this system as the routing protocol ensures its correctness, plus the cryptographically secured payment channels, which will be described in the next chapter, ensures flawless functionality.

What we end up with are off-blockchain, cryptographically-secured, instant payments that can even be transferred from one asset to another via hashed time-lock contracts (those will also be described in a future post). In order for this network to have enough liquidity (in the example above person B needs to provide enough liquidity to enable a transaction between person A and person C), we introduce the concept of Liquidity Providers (LP). LPs can be seen or understood as hubs or nodes in the COMIT network that create payment channels to users, other LPs and businesses. They are a core part in COMIT, just like servers, routers and ISPs are to the internet.

Adoption of this system will be seamless, fast and will bring great benefits to all of its participants, just like the internet did. Some of the benefits of COMIT include, but are not limited to,

• open source infrastructure;

• true instant, frictionless and cheap payments for users all over the world;

• true global access without limitations to any asset or business process connected to a blockchain;

• cryptographically secure, trustless global transactions network;

• new business opportunities for companies;

• new and recurring revenue streams for banks and other liquidity providers; and

• rapid adoption based on existing networks build with new, cheap and secure infrastructure.

According to our research, over 95 percent of all the blockchains (especially the large important ones) can be connected. In a future post, I will discuss in great detail what the three requirements are for such a system to work and how it looks from a technical perspective.

Most hedge funds have had a poor start to the year. According to Hedge Fund Research, hedge fund portfolios gained only 3.5 percent in value from January to May of 2017, heavily underperforming the S&P 500 Index, which generated a return of 7 percent in the same time period.

Hedge funds are investment funds that can invest in a wide array of assets and adopt different types of investment strategies. Unlike mutual funds or pension funds, hedge funds are not constrained by regulatory requirements to primarily invest in stock and bonds and can, therefore, also invest in real estate, derivatives, and currencies, among other asset classes. This freedom of choice is what gives hedge funds a competitive advantage over traditional funds. For this ability to generate better returns, hedge funds charge a high annual management fee (usually 2 percent) as well as a performance fee. However, as witnessed in the first five months of 2017, these fees are not always warranted.

The HFRI Fund Weighted Composite Index, which is an equally weighted index that tracks the performance of hedge funds, is up only 0.5 percent in May, while the S&P 500 Index is up twice as much. Given the rise in popularity of low-cost index tracker funds and an eight-year rally in stocks, hedge funds are struggling to justify their high fee structures to investors.

Bitcoin Is Boosting Hedge Fund Returns

The start of the year, however, was not gloomy for all hedge fund managers. The funds that did outperform were those focusing on technology and currencies.

FX funds that had the foresight to gain exposure to digital currencies such as bitcoin managed to outperform their peers as well as the S&P 500 Index. The HFRI Macro: Currency Index, for example, gained 8.2 percent year-to-date.

This should not come as a surprise given the impressive rallies of digital currencies such as bitcoin and ether, which both reached numerous new all-time highs in the spring months of 2017 and generated a 190 percent and 4,900 percent return respectively since the start of the year.

Most Portfolio Managers Still Avoid Cryptocurrency

Despite the exuberant returns of leading digital currencies such as bitcoin, ether and litecoin in the past six months, the majority of hedge fund portfolio managers are still staying clear of digital currencies as an asset class.

The reluctance to invest in digital currencies ranges from a lack of in-depth knowledge about the asset class to concerns of liquidity and fears of cyber theft.

Louis Gargour, Wall Street veteran and founder of hedge fund LNG Capital, suggests that bitcoin is not ready yet for widespread adoption as an institutional asset class.

He told CNBC: "Bitcoin's extreme volatility doesn't sit well with managers working on a risk-adjusted return basis. Furthermore, there are valid concerns that digital currency assets can be hacked or stolen. Finally, there's a perception that bitcoin remains a niche, retail investment that does not yet demonstrate sufficient quality to be seriously considered for many reputable institutions."

On the other hand, Bobby Cho, trader at Cumberland Mining, a subsidiary of DRW Trading, told Bitcoin Magazine: "The digital currency investment landscape is changing rapidly along with the mindset of investors. A few years ago, bitcoin wasn't viewed as a viable asset class through the eyes of hedge funds.”

However, this has started to change according to Cho. “Today, Cumberland Mining works with both traditional and digital-only funds by providing institutional-sized liquidity in different digital currencies, most notably bitcoin and ethereum.”

Most hedge funds have had a poor start to the year. According to Hedge Fund Research, hedge fund portfolios gained only 3.5 percent in value from January to May of 2017, heavily underperforming the S&P 500 Index, which generated a return of 7 percent in the same time period.

Hedge funds are investment funds that can invest in a wide array of assets and adopt different types of investment strategies. Unlike mutual funds or pension funds, hedge funds are not constrained by regulatory requirements to primarily invest in stock and bonds and can, therefore, also invest in real estate, derivatives, and currencies, among other asset classes. This freedom of choice is what gives hedge funds a competitive advantage over traditional funds. For this ability to generate better returns, hedge funds charge a high annual management fee (usually 2 percent) as well as a performance fee. However, as witnessed in the first five months of 2017, these fees are not always warranted.

The HFRI Fund Weighted Composite Index, which is an equally weighted index that tracks the performance of hedge funds, is up only 0.5 percent in May, while the S&P 500 Index is up twice as much. Given the rise in popularity of low-cost index tracker funds and an eight-year rally in stocks, hedge funds are struggling to justify their high fee structures to investors.

Bitcoin Is Boosting Hedge Fund Returns

The start of the year, however, was not gloomy for all hedge fund managers. The funds that did outperform were those focusing on technology and currencies.

FX funds that had the foresight to gain exposure to digital currencies such as bitcoin managed to outperform their peers as well as the S&P 500 Index. The HFRI Macro: Currency Index, for example, gained 8.2 percent year-to-date.

This should not come as a surprise given the impressive rallies of digital currencies such as bitcoin and ether, which both reached numerous new all-time highs in the spring months of 2017 and generated a 190 percent and 4,900 percent return respectively since the start of the year.

Most Portfolio Managers Still Avoid Cryptocurrency

Despite the exuberant returns of leading digital currencies such as bitcoin, ether and litecoin in the past six months, the majority of hedge fund portfolio managers are still staying clear of digital currencies as an asset class.

The reluctance to invest in digital currencies ranges from a lack of in-depth knowledge about the asset class to concerns of liquidity and fears of cyber theft.

Louis Gargour, Wall Street veteran and founder of hedge fund LNG Capital, suggests that bitcoin is not ready yet for widespread adoption as an institutional asset class.

He told CNBC: "Bitcoin's extreme volatility doesn't sit well with managers working on a risk-adjusted return basis. Furthermore, there are valid concerns that digital currency assets can be hacked or stolen. Finally, there's a perception that bitcoin remains a niche, retail investment that does not yet demonstrate sufficient quality to be seriously considered for many reputable institutions."

On the other hand, Bobby Cho, trader at Cumberland Mining, a subsidiary of DRW Trading, told Bitcoin Magazine: "The digital currency investment landscape is changing rapidly along with the mindset of investors. A few years ago, bitcoin wasn't viewed as a viable asset class through the eyes of hedge funds.”

However, this has started to change according to Cho. “Today, Cumberland Mining works with both traditional and digital-only funds by providing institutional-sized liquidity in different digital currencies, most notably bitcoin and ethereum.”