Pickaxe and shovel isolated on white background. 3d illustration
The bitcoin rally has seen the cryptocurrency climb to uncharted highs and this hasn’t just been reflected in the markets. Away from the exchanges and OTC desks setting the price of BTC, private and institutional investor interest is growing at pace. Evidence of this can be seen in the growth of crypto venture capital funds, which have raised billions of dollars in 2020.
On December 23rd, Seoul-based blockchain investment group Hashed revealed that it has raised $120 million for its first crypto fund. The firm, led by CEO Simon Kim, intends to invest in disruptive blockchain startups including base layer protocols similar to Ethereum. According to Kim, the next wave of crypto networks will mark the start of the “protocol economy,” an era in which data and value is transmitted globally by crypto networks using a shared public ledger. He predicts strong government and institutional support for this new paradigm and has had no trouble selling out the group’s first VC fund.
Investors Circle Blockchain Startups
Accredited investors are limited in terms of the crypto assets they can trade, primarily consisting of BTC and ETH via regulated brokers and custodians. Blockchain funds provide an alternative way of gaining exposure to digital assets and the ecosystem they support. As bitcoin has broken new records, surging past $22,000, some investors are looking beyond the 12-year-old cryptocurrency to bootstrapping the next wave of blockchain networks.
Data from research group The Block shows a record $900 million was invested in blockchain startups in Q3 of 2020. Investors rushed to bootstrap decentralized finance projects in particular, including those focused on portfolio management, lending, and derivatives.
Private Investors Fund Public Networks
No one knows where Bitcoin creator Satoshi Nakamoto originated, with speculation placing him everywhere from London to LA. What can be said is that the movement he started, founded on blockchain technology, has become a borderless industry that’s attracting major investment around the globe. In the U.S., Andreessen Horowitz subsidiary a16z was founded to seek out promising crypto startups, alongside firms like Pantera Capital and Galaxy Digital, led by veteran investor Mike Novogratz.
In Asia, meanwhile, Hashed is not alone in securing private investment to fund public blockchain networks. A number of cryptocurrency exchanges, including Binance and BitMax, have their own VC arms, tasked with nurturing next generation crypto companies. The symbiotic relationship often results in the same exchanges listing the native token of the projects they’ve incubated once they reach maturity.
It’s not just VCs that have sought exposure to blockchain either. Family offices and hedge funds have also taken an interest in the space. Harvard University’s investment arm is one endowment fund that has already jumped into the crypto market, joining two other investors in an $11.5 million investment in crypto company Blockstack. Yale University is also known to have made a significant cryptocurrency investment.
The Institutional Case for Crypto
Bitcoin is going through the early stages of a new asset class, from suffering early bubbles to attracting scammers with their get-rich-quick schemes. The frothiness of the market has been tempered by robust products that cater to a professional audience. Crypto is significantly more mature now than in 2017 when BTC last approached the heights it is now trading at. Today, the industry supports a healthy futures market, while enhanced options and custody have all anchored bitcoin while making it palatable to institutional investors.
Elon Musk’s flirtation with bitcoin, which has largely consisted of tweeting crypto memes to his 41 million followers, hints at a deeper interest in the digital currency. In a typically Musk-ian exchange on December 20, the Tesla CEO was encouraged by MicroStrategy’s Michael Saylor to follow his lead and convert some of Tesla’s cash reserves to BTC.
“Are such large transactions even possible?” pondered Musk, to which bitcoin bull Saylor replied in the affirmative, before offering to show Musk how.
Bitcoin’s low correlation to traditional assets has compelled some investors to rebalance portfolios that were heavy on bonds and equities, allocating a tranche to BTC. Bolder investors, however, are looking beyond bitcoin to the possibilities afforded by new blockchain protocols, where the risk-reward is higher, but so is the potential for outsized returns.
Corporations Catch the Crypto Bug
While institutional investors have been buying bitcoin, and investing in the industry that’s formed around it, companies have been trialling their own blockchain solutions. Hashed has publicly supported Kakao, responsible for developing the country’s Klatyn blockchain, and LINE blockchain, owned by Tokyo’s LVC Corporation. Big Four accountancy firm KPMG, meanwhile, has expanded its blockchain strategy, supporting Microsoft, Tomia, and R3 in developing a solution for 5G network, and filing its own blockchain patents.
Against this backdrop of corporate innovation and private investment in blockchain, VCs have seen crypto funds fill up fast. This digital gold rush has prompted a booming business in picks and shovels – the tools and apps for interacting with the next wave of decentralized protocols.