Three bear markets, three different lessons

The crypto fund industry has experienced three distinct bear periods since its formation in 2017. Each one was different in character, caused by different factors, and taught the industry different things. Understanding all three gives you a much better framework for evaluating how a fund might behave in the next downturn than looking at any single period in isolation.

The improvement from 2018 to 2022 is notable. In 2018, funds lost almost exactly as much as Bitcoin (-72% vs. -73%). By 2022 funds lost significantly less than Bitcoin (-42% vs. -64%). The gap represents real improvement in risk management practices across the industry. More funds were hedging, more were using derivatives, and more had risk frameworks that reduced exposure during drawdowns.

But the 2022 and late-2025 numbers also reveal something important: the industry’s biggest bear market vulnerabilities are not market risk. They are counterparty risk and liquidity risk. The funds that got destroyed in 2022 mostly failed because of Luna exposure, FTX exposure, or leverage. In late 2025, the October 10 crash caused cascading liquidations in thin liquidity, which hit strategies that depended on orderly markets (mean-reversion, basis trades) much harder than directional strategies.

The 2018 crash: the original wipeout

The 2018 bear market was straightforward (in hindsight). Bitcoin peaked near $20,000 in December 2017, driven by the ICO boom and retail speculation. It then crashed 83% to approximately $3,200 by December 2018. The total crypto market cap fell from roughly $800 billion to under $130 billion. It was a classic bubble bursting.

For crypto funds, 2018 was devastating. The average fund lost approximately 72%, nearly identical to Bitcoin’s decline. Most crypto funds at the time were long-only or long-biased, with limited hedging capability. The derivatives markets (especially perpetual futures) were still immature. Options markets barely existed. There were few tools to hedge, and even fewer managers who knew how to use them.

The fund closure rate was severe. An estimated 100+ crypto funds shut down during and after the 2018 bear market. Many had launched in late 2017 at the peak of the ICO frenzy, raised capital from retail or high-net-worth investors, and were underwater within months. Without performance fees (due to high-water marks) and with declining AUM, they could not cover operating costs. The industry was roughly halved.

The lesson from 2018: in the absence of hedging tools and risk management infrastructure, a crypto fund is just leveraged beta. The surviving funds from 2018 became the core of what is now the institutional crypto fund industry. Many of them, including Pantera Capital and several others, are still operating today and have since-inception track records that benefit enormously from having started investing at 2018-2019 lows.

The 2022 bear market: when infrastructure failed

We covered the 2022 bear market in detail in our drawdowns article, so we will focus here on the aspects specific to fund performance measurement.

The average crypto fund returned -42% in 2022, compared to -64% for Bitcoin. That 22-percentage-point gap is meaningful. It means the industry, on average, captured roughly two-thirds of Bitcoin’s downside rather than all of it. For an allocator, losing 42% is still painful, but it is substantially better than losing 64%. The funds that contributed most to that downside protection were the growing number of market-neutral and quantitative strategies that barely existed in 2018.

The 2022 performance data has a major caveat: survivorship bias. The funds that reported December 2022 results are, by definition, the ones that survived. Three Arrows Capital, which lost everything, is not in the year-end averages. Alameda Research is not in the averages. The dozens of smaller funds that shut down mid-year without reporting final NAVs are not in the averages. The true industry return including dead funds was worse than -42%.

What separated the survivors from the casualties was primarily operational risk management, not investment skill. Pantera Capital sold most of its Luna position before the collapse. Funds that kept assets diversified across multiple custodians and exchanges avoided total loss on FTX. Funds that ran moderate leverage could meet margin calls. The common thread among the failures was excessive concentration, excessive leverage, or excessive counterparty trust. Investment strategy mattered, but operational discipline mattered more.

Late 2025: the bear nobody expected

2025 was supposed to be the breakthrough year for institutional crypto. Bitcoin hit record highs. The White House was publicly supportive. Institutional capital was flowing in through ETFs and structured products. And yet, by multiple measures, it was the worst year for crypto hedge funds since 2022.

The numbers tell a complicated story. Bitcoin ended 2025 up significantly for the full year, so how did funds lose money? The answer lies in timing and strategy.

Directional funds that bet on price movement were down approximately 2.5% through November, their worst performance since 2022. Fundamental strategies with heavy altcoin exposure were down roughly 23%. The CFR Crypto Fund Index returned -7.2% in Q4 2025, underperforming Bitcoin’s -7% for the quarter. Only market-neutral strategies posted positive annual returns, up approximately 14%.

What went wrong? Several things compounded on each other.

The October 10 crash. A political tariff announcement triggered a sudden 14% drop in Bitcoin, but the real damage was in altcoins, where dozens of tokens fell 40%+ in hours. This was one of the fastest liquidation events in crypto history. Market makers pulled out, trading infrastructure strained, and order routing systems failed. Funds running mean-reversion or altcoin arbitrage strategies were hit hardest because the prices they expected to revert simply kept falling.

Basis trade compression. The previously reliable arbitrage between spot and futures prices tightened dramatically as institutional money via ETFs and structured products entered the market. What once generated 10-20% annualized with minimal risk shrank to low single digits. Funds built around this trade saw their primary revenue source evaporate.

Liquidity fragmentation. Bitcoin hit record highs, but the price action happened in thin bursts. Institutional funds could not enter or exit positions without significant slippage. This made directional strategies unprofitable: by the time you got a position on, the move was already done, and the spread you paid to get in ate the return.

Bear market performance by strategy

The most important chart in this article. How each strategy category performed during each major bear period.

The pattern is remarkably consistent across all three periods. The more directional the strategy, the worse it performs in bear markets. The more market-neutral, the better. This is not surprising because it is literally what these strategies are designed to do. But many allocators still underweight market-neutral in their crypto allocations because the bull market returns look modest. The bear market data is the corrective.

The improvement from 2018 to 2022 is visible across every category. This is partly because the industry got better at risk management and partly because more sophisticated strategies (quant, market-neutral) grew from a tiny share of the market to a meaningful one. By 2022, market-neutral strategies accounted for 17% of crypto hedge funds, up from essentially zero in 2018. That structural shift improved the industry-wide averages during the bear market.

Bear markets as a business problem

Bear markets do not just hurt fund performance. They threaten the fund’s existence as a business. This is an underappreciated risk that allocators should understand because it affects the survivability of your investment.

High-water mark problem. Most crypto funds charge performance fees only when the fund’s NAV exceeds its previous peak. If a fund loses 50% in 2022, it needs to gain 100% just to get back to the high-water mark and start earning performance fees again. Until then, the fund earns only its management fee (typically 1-2% of AUM). For a small fund managing $50 million, that is $500K to $1M per year, which may not cover team salaries, office costs, data feeds, and compliance.

Redemptions accelerate the problem. Investors redeem during bear markets, shrinking AUM precisely when the fund needs capital to survive. A fund that entered 2022 managing $100 million might exit the year managing $30 million (50% from losses, another 40% from redemptions). The management fee on $30 million is barely enough to keep the lights on.

The shutdown decision. At some point, a fund manager facing years below the high-water mark, declining AUM, and ongoing operating costs will decide to shut down and start fresh, either with a new fund or in a different career. Roughly 15-20% of crypto funds are estimated to have shut down during or shortly after the 2022 bear market. This natural selection is healthy for the industry long term, but it is bad for the investors who were in those funds.

Why this matters for allocators: when you evaluate a crypto fund’s bear market risk, you are evaluating not just the potential for losses but the potential for the fund to cease to exist. A fund that draws down 60% and shuts down is infinitely worse than a fund that draws down 40% and survives. Survivability depends on fund size (larger funds have more cushion), fee structure (locked-in management fees matter), LP quality (institutional LPs are less likely to panic-redeem), and the manager’s personal financial situation (can they afford to work below the high-water mark for two years?).

How allocators should prepare for the next bear market

Accept that it will happen. Crypto markets will have another bear period. The timing is unknowable. The appropriate response is not to try to predict when, but to build a portfolio that can survive it. If your crypto allocation cannot withstand a 50-60% drawdown in the directional portion and a 10-15% drawdown in the non-directional portion, it is not sized correctly for your risk tolerance.

Allocate to strategies, not to “crypto.” A portfolio with 50% market-neutral, 30% quant, and 20% discretionary long/short will behave very differently in a bear market than a portfolio with 100% in a single long-biased fund. The first portfolio might draw down 15-20%. The second might draw down 50-60%. Strategy diversification is the single most effective tool for bear market protection in crypto. See our strategy comparison for the data.

Evaluate bear market track records specifically. Ask every manager: what happened to your fund in 2022? If they were not operating in 2022, what happened during the previous drawdown they experienced? How much did you lose? What was the max drawdown? How long did recovery take? Did you gate redemptions? These questions are more important than any bull market return number. Our Performance Database lets you filter by 2022 performance specifically to find managers who demonstrated genuine downside protection.

Watch for structural shifts. The late 2025 experience showed that bear market risks are evolving. The basis trade compression and liquidity fragmentation that hurt funds in 2025 are consequences of crypto’s institutionalization. As more capital flows through ETFs and structured products, the alpha landscape changes. The bear market risks of 2026 or 2027 may look different from 2022. Managers who are adapting their strategies to the new market structure will fare better than those running the same playbook that worked five years ago.

Size the allocation to survive. Whatever percentage of your portfolio you allocate to crypto, make sure you can hold through a full bear cycle (potentially 12-24 months of losses or flat performance). If you will be forced to redeem at the worst moment because of liquidity needs, portfolio rebalancing rules, or board pressure, you are better off not investing at all. The worst outcome is investing at high conviction, experiencing a bear market, redeeming at the bottom, and missing the recovery. That sequence has happened to countless crypto fund investors, and it is entirely avoidable with proper sizing and planning.

For a comprehensive evaluation framework, see our manager evaluation guide, due diligence checklist, and drawdown analysis.

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