Cryptocurrencies, Blockchain and Venture Capital

It’s no secret that the blockchain and cryptocurrencies sector has grown exponentially in recent years. Just to give a few numbers we have that the total market value of cryptocurrencies is around 2 trillion. At the same time in 2019 Bitcoin was named the best performing asset by Goldman Sachs which together with Morgan Stanley have recently started to offer access to the crypto market to their clients. This has caught the attention of investors in the last decade.

Basically, what used to be a novelty is no longer, and cryptocurrencies and blockchain technology are not only on everyone's lips but also in the wallets of many.

Venture capital funds are certainly not standing by watching; the blockchain technology and the cryptocurrency market represent an impressive innovation engine with an infinite number of applications, stimulating the interest of different types of investors including venture capital firms.

What are cryptocurrencies and what is blockchain technology?

Cryptocurrencies are a product of computer science, and this makes its vocabulary hard to be understood. The way it works is not user-friendly yet, despite efforts to make it a mainstream exchange method. So, let’s explain in simple words what it means.

Cryptocurrencies are virtual or digital currency that is meant to be a medium of exchange. Although similar to the real-world currencies, it differs from the fact that it does not have any physical embodiment. The most relevant feature is that they operate independent from a bank or a central authority. Instead, they operate in a decentralized manner through what is known as blockchain technology. Bitcoin and Ethereum are the well-known cryptocurrencies, but in the last years thousands of new cryptos have been created.

What makes it special and advantageous with respect to traditional currencies? First, there are little or no transaction costs differently from transaction made between banks. Second, you have 24/7 access to your funds, which means users are not dependent on banks to conclude their transactions. Also, there is no limits on withdrawals or purchases and no paperwork is required as compared opening a bank account. It also facilitates international transactions that usually take hours when banks are involved.

Some disadvantages are that payments typically do not come with legal protection. So, if you want to dispute a purchase made, there is not a process to follow as when you make the payment with credit card. This is connected to the fact that different from traditional transactions with banks, these transactions are not reversible. Unfortunately, the anonymity has attracted ill intended persons to use cryptocurrencies as means for deceiving others.

Despite these problems, the impressive growth of the crypto industry in the last decade has attracted the attention of investors. Today there are at least 18 crypto-based companies with unicorn status

As a matter of fact, many VCs did not miss to finance what’s is probably one of the biggest innovations since the internet. Let’s get a closer look at the data.

VC insights

The data provided by highlights that in the period that goes from 2009 to the first quarter of 2021, VC funds have closed 1238 all over the world with blockchain and crypto related industries for a total funding value of 11.3 billion dollars.

The number of deals as well as the funding amount have been rising increasingly from 2010 on, going from 1 deal for 8 million dollars to 294 deals for 2.78 billion dollars of funding amount. In 2019 and 2020 the number of funding amount decreased to an average of 1.75 billion dollars while 2019 has been so far the year with the highest number of deals: 303.

What about the current year? In the first quarter of 2021 cryptocurrency and blockchain related businesses have received more funding than in the whole 2018. 2021 in fact totalizes until now 116 deals for 3.05 billion dollars as an evidence of the strong interest of VCs in this sector and of its incredible growth. Considering the investment stage, we have that 96,92% of the deals are either Seeds or Series A/B. From 2009 to 2021 62% of the total deals are seeds with an average deal size of $3.11M. It then follows series A with 27.38% of the total deals and an average deal size of $11.9M, while Series B represent 7.51% of the total with an average deal size of $35.5 M. Who are the big players (top investors) in the industry? If we make a ranking by number of deals last year (2020) we have:

  1. Coinbase Ventures: Coinbase's own venture capital section investing in early-stage cryptocurrencies and blockchain startups.

  2. Pantera Capital: First U.S. institutional asset manager focused exclusively on blockchain.

  3. Andreessen Horowitz: One of the biggest Venture capital firm in the world with $16.6B in assets under management across multiple funds including a dedicated crypto fund.

  4. AU21: founded in 2017 with the mission of backing the most promising blockchain entrepreneurs and providing founders with resources and connections to succeed.

  5. Hashkey Capital: VC that invest in and deploy fintech and blockchain for the benefit of the digital asset ecosystem.

  6. Paradigm: investment firm focused on supporting the great crypto companies, protocols, and currencies of tomorrow.

  7. Borderless Capital: Invests in category-leading businesses leveraging Algorand technology. (Algorand is an open-source, decentralized blockchain network)

  8. Kenetic Capital: Invests in equity of Series A / B Blockchain Technology companies.

  9. Castle Island Ventures: venture capital firm focused exclusively on public blockchains

  10. Fenbushi Capital: first and most active blockchain-focused venture capital firm in Asia

The most important venture capital funds in the sector are all except Andreessen Horrowitz funds exclusively focused on blockchain and cryptocurrencies. Furthermore, Coinbase Ventures was the most active by number of deals from 2019 to 2021, demonstrating the engagement of cryptocurrency companies in financing their own eco-system.

Where does the money come from?

Geographically, the bulk of investments in cryptocurrency and blockchain related businesses come from the United States and Asia, which compete for first place. Asia accounts for 35.38% of total deals and the US for 38.85%. Europe has much lower numbers with 18.33% of total deals.

Although the US still accounts for most of the deals, looking at the variation from previous years we can conclude that the deal activity in the sector is shifting from US to Asia and in particular China.

Most relevant deals of 2021

From 2019 the overall number of deals is 1238! Focusing on 2021, here there are some of the most relevant financing rounds concluded.

  • Bitso: Mexican Bitcoin exchange that facilitates the use of Bitcoin as a mechanism for substantially improving the efficiency of the economic flow. The company aim to significantly decrease the costs and increase the speed of transactions. 5/05/2021- Series C- $250M

  • Paxos: parent company of the bitcoin trading service itBit, is a financial technology company delivering blockchain solutions for global financial institutions. 29/04/2021- Series D - $300 M

  • Dapper Labs: marketplace that offers digital collectibles built on the blockchain. 30/03/2021 – Series E- $305M

  • Chainalysis: blockchain analysis company. Chainalysis provides compliance and investigation software to banks, businesses, and governments around the world. 26/03/2021 – Series D - $100M

  • software platform for digital assets and a bitcoin wallet provider, where users can authenticate and transact immediately and without intermediaries. 24/03/2021- Series C- $300M

  • BlockFi: financial services company focused on building products for cryptocurrencies. BlockFi’s offerings include interest-earning accounts, low-cost USD loans secured by crypto and zero-fee trading. 11/03/2021 – Series D- $350M

  • Taxbit: cryptocurrency tax software platform and accounting firm enabling widespread adoption with real-time tax automation, support, and compliance. 3/03/2021- Series A- $100M

The future of Cryptocurrencies

Cryptocurrencies are expected to change the way people do business forever. With companies such as PayPal, Mastercard and Visa adopting crypto to allow users transact using different protocols, it seems more real they will become the most viable way of payment.

The possibility of paying employees with crypto is a concrete example of the benefits that business can take from using these currencies, mainly for companies that must handle a payroll in different countries. The possibility to do cross-borders transactions with minimal (or no) fees and avoiding other fees from changing currency is now a reality that brings benefits for both employees and employers.

On the other hand, we must consider the environmental concerns that is related to sector. In fact, the system used to validate cryptocurrency transactions and the mining itself has a major impact on the environment, this factor could lead to the spread of doubt and insecurity in the crypto and blockchain market, limiting its diffusion and development.

Therefore, for the future we can expect either a revolution without precedents in the financial field or a colossal disaster for multiple investors that have amassed a fortune from the growth of crypto in recent years.