Report from VC Mangrove Capital says average return across 204 initial coin offerings is 1,320%.

Figure comes amid growing interest from hedge funds and investment banks in the cryptocurrency space, with over 55 crypto-specific hedge funds.

LONDON — A blind investment in every initial coin offering (ICO) to date, including those that have failed, would have generated an average return of 1,320% for investors, according to a new report.

Venture capital firm Mangrove Capital Partners claims that: "If one had blindly invested €10,000 in every ICO, including the significant number of ICOs that failed, this would have delivered a +13.2x return."

Michael Jackson, the former COO of Skype and a partner at Mangrove, authored the report and looked at data on 204 ICOs with "known outcomes" — ones where tokens are now being actively traded on exchanges or have failed since issue.

Jackson's findings highlight why many institutional investors — from hedge funds to investment banks — are now waking up to the cryptocurrency space.

ICOs explained

ICOs are a new way of funding startups by issuing digital tokens that can be traded online. The tokens are inspired by, and structured like, earlier cryptocurrencies Bitcoin and Ethereum, whose network is in fact used to launch most ICOs. These new digital currencies and sold for real money, which is used to fund the development of the startups.

The tokens or coins are usually linked to the startup in some way. Mangrove uses this analogy to describe the process:

"A music streaming service could sell subscription tokens in bulk ahead of launch and amass a customer base motivated to promote the service as soon as the product is functional, not least because the value of their tokens will rise."

ICOs have boomed in popularity in 2017, with over $2 billion raised since the start of the year. For companies looking at applications of blockchain technology, ICOs have far outstripped venture capital as the biggest source of funding. However, regulators around the world have warned that ICO investments are high risk and unproven. While some coins have exploded in value, the market is characterised by huge volatility. UBS recently said the space is in a "speculative boom."

Despite these uncertainties, many investment banks and hedge funds are starting to express an interest in investing in ICOs and cryptocurrencies.

'Hedge funds and mutual funds are assessing the crypto opportunity'

Etienne Brunet, a London-based venture capitalist who has studied the ICO market, told Business Insider: "Over the last year or so you have had crazy returns in the crypto space.

"It took institutional investors a long time to go from ‘what is this' to 'maybe we should invest,'" he said. "First, VCs were the ones interested in investing in an ICO. Now, institutional investors ranging from hedge funds and mutual funds are quickly pushing the effort to assess the crypto opportunity."

The Bitfinex cryptocurrency exchange website. REUTERS/Dado Ruvic/Illustration Hedge funds and other active investors have struggled in the post-financial crisis era amid the rise of exchange-traded funds and other passive investment schemes. Hedge funds have typically underperformed simple tracker funds in the decade since the crash.

The appeal of crypto for active investors is that they offer the promise of "alpha" — returns above market averages. Brunet, an investment executive at fund Illuminate Financial, said: "We have hedge funds that have a mandate that's a bit more open than others, and they are starting to buy coins.

"If you allocate one or two people, it's not a great expense but it can drive some alpha. And that, at the end of the day, is what they're looking for."

Autonomous NEXT, a fintech analytics firm, said in August that there were at least 55 cryptocurrency hedge funds it was aware of. Since then, Mike Novogratz, a former manager at Fortress, has announced plans to set up a $500 million for a new cryptocurrency hedge fund and San Francisco's Blockchain Capital on Wednesday announced plans to raise $150 million, part of which will go towards cryptocurrencies.

Goldman's stamp of approval

Reports emerged recently that Goldman Sachs is looking at setting up a Bitcoin trading desk. It follows a note sent to clients in August saying: "It’s getting harder for institutional investors to ignore cryptocurrencies."

Mangrove Capital Partners' Michael Jackson. Mangrove Capital Brunet describes Goldman Sachs reported interest in bitcoin as "a major milestone."

"If you are a big fund you can't just go through an exchange because the required quantity is just too large and the liquidity of the exchanges are not as high as traditional equity exchanges like Nasdaq," he said. "Institutional investors need an OTC broker to buy and sell the desired quantities of crypto."

Goldman could fulfil this role. However, there are other regulatory and market infrastructures issues, such as post-trade custody and execution, Brunet says. The regulatory position of many crypto tokens is also unclear.

Still, Mangrove's Jackson wrote in his report: "Once regulated, ICOs could fundamentally change how businesses source growth capital and profoundly impact the venture capital and investment banking communities."

Brunet said: "People think Bitcoin and Ethereum are a new asset class. For the other coins, it's still very much speculative."