Bitcoin has surpassed $15,000 for the first time since a 2017 surge that ended with a crash. This time, investors such as billionaire hedge fund manager Howard Morgan are seeking to ride the cryptocurrency wave.

The digital currency has more than tripled from the pandemic-induced low it struck in March, when global financial markets were shaken by the coronavirus crisis, to trade at $15,400 by Friday afternoon.

Bitcoin’s stunning climb in recent weeks resembles the sharp rise in late 2017, which sharply reversed the next year and caused a chill in bitcoin’s price that lasted well into 2019. This volatility, combined with uneven global regulation and episodes of fraud, has left some investors deeply sceptical.

But an increasing number are dipping their toes, lured by the potential of high returns and encouraged by the growing presence of large trading firms from traditional markets.

Mr Morgan, the co-founder of hedge fund Renaissance Technologies, said a bet on a little-known cryptocurrency trading firm had far outstripped his gains from Medallion, RenTech’s highly successful employee-only internal fund. Mr Morgan said his investment into Connecticut-based crypto hedge fund BlockTower had done “substantially better” than his earnings from Medallion in the past two years.

But he added: “I might make twice as much with crypto, but I sleep a little better with traditional hedge funds.”

Line chart of Price in US dollars showing Bitcoin has shot higher this year

BlockTower was set up in 2017 by former Goldman Sachs employee Matthew Goetz and former Susquehanna options trader Ari Paul. The founders of the company said they employ traditional hedge fund strategies and trade using options as well as in cash markets. They declined to disclose their performance or assets under management.

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Cryptocurrency-focused hedge funds have outperformed their traditional peers this year. Funds investing in equities and other assets returned 3.2 per cent between January and the end of September, compared with the 63 per cent in the same period for firms focused on digital currencies, according to data provider Eurekahedge.

But returns are volatile. Bitcoin prices collapsed in March, causing what was called a “bloodbath” among funds focusing on digital assets. Overall, crypto assets lost 26 per cent in the course of the month, according to data provider HFR.

Bar chart of HFR Cryptocurrency Index, % change showing Cyrpto returns are highly volatile

Like many others, Mr Morgan experienced turbulence in March. Out of his five bets on crypto hedge funds, “some worked, some didn’t”, he said. A hack of one of his cryptocurrency exchange accounts also led to a $50,000 loss, and he highlights fraud and a lack of regulation as key risks.

But he remains positive about the prospects for bitcoin. “I’ve been involved with hedge funds and quantitative trading for a long time and I felt that the notion of crypto as a trading vehicle was interesting,” Mr Morgan said. “I thought I would take a crack on finding out if it can be effectively traded and then see what happens in a year or two.”

Cryptocurrency trading has moved closer to the mainstream in recent years. In August, Fidelity Investments launched its first bitcoin fund for wealthy investors. RenTech disclosed earlier this year that Medallion would start to dip its toe into cryptocurrency trading, using futures provided by CME Group. Another hedge fund veteran Paul Tudor Jones, a sceptic turned cryptocurrency enthusiast, recently said bitcoin’s rally this year was just in its “first inning”.

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Large trading firms that dominate markets such as US Treasuries have also entered the scene. Joshua Younger, an analyst at JPMorgan, estimates that about 80 per cent of price quoting activity is carried out by high-frequency trading firms, a similar figure to US government bond markets. This is bringing some stability to the market, the analyst said.

“The past few months saw the first real stress test for the cryptocurrency market, and the results were mostly positive,” Mr Younger wrote in a research note in June. “Rather than a store of value, cryptocurrencies have traded more like risky assets like equities — a significant change relative to the prior couple of years.”

Via Financial Times