Continued Investor Demand: A Reflection on the Crypto Industry’s Growth and Maturity
2021 has seen an explosion in cryptocurrency trading and a huge influx of institutional and private investment in the crypto space.
As of August 2021, venture capital funds had invested approximately $17 billion into cryptocurrency and blockchain companies, according to data from PitchBook. This is a record figure, surpassing the total figure for 2020.
In August alone, there have been several significant capital raises. CoinDCX—the India-based cryptocurrency exchange—raised $90 million in a Series C funding round, bringing its valuation to $1.1 billion. CoinDCX is the first Indian crypto exchange to become a “unicorn,” and this funding round came just eight months after its $13.9 million Series B raise. The Helium Network—the startup behind crypto-powered decentralized wireless networks—announced a $111 million raise in a token sale led by Andreessen Horowitz, and digital asset trading platform FalconX also reached unicorn status, following a $210 million Series C raise at a $3.75 billion valuation.
In July 2021, FTX—the Antigua-based cryptocurrency derivatives exchange which offers futures, leverage tokens and OTC trading—raised $900 million from over 60 investors. This included venture capital firms Paradigm and Sequoia, hedge funds and the private equity group Thoma Bravo. It was the largest private equity deal in the crypto industry’s history, valuing the business at $18 billion—one of the largest rounds of financing for a digital assets startup.
In May 2021, Block.one —the Peter Thiel, Alan Howard and Louis Bacon backed blockchain software firm—pumped $9.7 billion into a new cryptocurrency exchange subsidiary called Bullish Global. Even excluding Block.one’s capital injection, there was $6.2 billion of private funding in the digital asset industry in Q2 of 2021—a 90 percent increase quarter-over-quarter.
Despite a turbulent market in May and June, due to increasing scrutiny from global regulators and politicians, investor demand in the sector has remained strong. This reflects the crypto industry’s growth, mature development and unique investment opportunities.
In their infancy, cryptocurrencies like Bitcoin appeared to be the antithesis of assets that institutional investors typically invested in. However, 2021 has seen more institutions diversifying their portfolios and allocating into to a wide variety of digital assets companies. The growth potential of digital assets is now universally recognized.
According to a recent Fidelity Digital Assets study, seven in 10 institutional investors expect to buy or invest in digital assets in the near future, and over half of the 1,100 participants already owned such investments.
One factor behind this increase in capital deployment could be attributed to the movements of leading asset managers. When the likes of BlackRock and Morgan Stanley Investment Management add cryptocurrencies to their balance sheet, it sparks interest amongst the wider financial community, and financial advisors and investors begin to explore ways of gaining exposure to the market.
Private investors, like venture capital funds, have become particularly prominent forces in the crypto space. Equity-type investments have set new records with ten of the 12 largest financing rounds ever completed by firms in the crypto market occurring in 2021, totalling just under $3.9 billion.
As Xinshu Dong, a partner at venture capital fund IOSG Ventures, said: “Many see the crypto market as the one with the most growth potential, justified by a much more frictionless and transparent way of business.”
Despite regulatory debate and short-term market volatility, venture capital funds have remained unfazed. They have identified the prospect of high-risk, high-rewards.
Fear of missing out (FOMO) must also be acknowledged. Venture capital funds investing early have enjoyed significant returns. The NFT trend has arguably exacerbated this sentiment. Investors see NFTs’ potential to revolutionize arts and culture—akin to how the likes of Instagram disrupted the media sector.
According to PitchBook research, Barry Silbert’s Digital Currency Group (DCG) was the most active U.S. investor in the crypto space. DCG invested in 111 startups. Coinbase Ventures was the second most prolific, backing 79 startups, followed by Pantera Capital with 74, Blockchain Capital with 68, Andreessen Horowitz with 58 and Polychain Capital with 51.
The current total value of the cryptocurrency market is approximately $2 trillion. Both institutional investors and venture capital firms have arrived and show no sign of relenting with traditional allocators increasingly looking to gain exposure and bigger deals occurring.
Having successfully navigated the turbulence in May and June, the outlook for crypto markets is bullish. We expect more deals, large capital raises and continued investor demand. Our long-term outlook for the asset class remains bullish, and we expect to see new all-time highs for Bitcoin and Ethereum in the near future (Q4 ’21 – Q1’22).
Carlos Betancourt is the founding principal of BKCoin Capital—the digital assets hedge fund.