As of Dec. 1, venture capital has poured more than $27 billion into cryptocurrency and blockchain start-ups — and that’s before institutional bloker NYDIG announced it had raised a unicorn round of $1 billion on Tuesday (Dec. 14) and Crypto Bank Anchorage said Wednesday it raised $350 million.
That gave them valuations of $7 billion and $ 3 billion respectively.
The FTX exchange that has been pasting its name on sports stadiums around the country is looking for $1.5 billon, for a $32 billion valuation.
Venture capital is pouring into crypto at record rates, and it’s not hard to figure out why. The cryptocurrency industry broke into the mainstream in 2021. About 13% to 16% of Americans own or have used crypto, according to the best studies.
But where is it going, and where should it go?
Finance vs decentralized finance
Major banks like JPMorgan Chase — whose CEO, Jamie Dimon was a loud crypto skeptic — are offering wealthy clients crypto investment options, and hedge and investment funds like Blackrock are jumping in.
More than half of the 100 largest banks have invested in funding rounds for crypto and blockchain companies and firms. Citigroup announced in November it was hiring 100 new digital assets staffers. Standard Chartered, Citigroup, Goldman Sachs, JPMorgan Chase and BNP Paribas have each invested well over a quarter of a billion in the industry.
The same thing is happening in payments. After a flirtation with Ripple, Wells Fargo recently partnered with Stellar on remittances, and has started settling forex transactions with HSBC on a blockchain platform. Earlier this year, PayPal revealed it was building a new crypto unit and in October payments firm Stripe announced it was also building a crypto team. And shortly after stepping down from the helm of Twitter, Square CEO Jack Dorsey changed the name of his payments firm — an early crypto entrant — to Block, emphasizing its crypto focus.
And Facebook (now Meta) finally dove into payments, adding Paxos stablecoin payments to its 2-billion-customer WhatsApp messaging service — you know, the same thing that its Libra (now Diem) project tried that got the world’s financial powers that be in a terrified uproar.
Showing Them the Money
Valuations are also up substantially in crypto, with the median rising from about $12 million in 2020 to $35 million so far in 2021
Calling the industry’s 2021 funding record “extraordinary,” in a year-end recap, Pitchbook Editor-in-Chief Alexander Davis said that “the crypto scene gave new meaning to investor exuberance.”
Crypto VC fundraising is also booming, with 89 mega-funds — with at least $500 million in capital — raising nearly $100 billion.
And VCs aren’t just investing in crypto at a record pace. The broader FinTech industry that includes crypto saw nearly a quarter of a trillion dollars — $244 billion to be precise — in exits in the first three quarters of 2021. On Dec. 15, Pitchbook described it as cramming “a decade’s worth of exits into nine months.”
What to Buy
So where should that money be going?
Non-fungible tokens (NFTs) are setting the world on fire and the sector is still in its infancy. There are also wide-open fields that DeFi-based firms are looking at, such as gaming, personal identity credentials and — if Meta CEO Mark Zuckerberg is right — metaverse.
Then there’s infrastructure and services, which everything from new decentralized finance, or DeFi, protocols to businesses with any shipping needs will require.
On the banking side, its fairly clear that crypto custody and payments — particularly behind-the-scenes interbank settlements — are important areas. But the same applies to customer-focused platforms. After years of fighting crypto payments, banks have woken up to the fact that they’re behind the curve on an industry segment that could join tech giants in pulling a lot of their retail clients into services that have grown from point-of-sale payments to include loans and small-scale investing.
To say nothing of the fact that Anchorage — which just raised $350 million, you’ll recall — is now a federally chartered bank. And a lot more crypto companies want that license. Then there’s Mastercard and Visa, which need to protect their payments business, and thus need companies that can provide support in this field. Mastercard’s October purchase of top blockchain intelligence firm CipherTrace is an example.
Business services and consulting has jumped into crypto in a big way, from the big four accounting firm like Deloitte and PwC to IBM, Mastercard and Visa, and plenty of others are offering consulting services.
But more broadly, investors need to keep focusing on ways blockchain technology is moving into — and transforming — everything involved in supply chains. The TradeLens shipping platform tracking cargo around the world has been an early success, bringing a majority of the world’s shipping onto the platform, along with a growing number of ports operators. Created by Maersk and IBM has been an early example of what blockchain can accomplish. But everything from produce to gemstones have been growing its use for years.