Whether or not we are at the early stages of another CryptoBoom is to be determined. But one thing is clear – major VC and Hedge Funds alike are already positioning themselves and preparing to deploy capital accordingly. Simultaneously, blockchain technology is getting better, network effects are taking hold, and Crypto is moving up the S-Curve. Venture is now shifting into Crypto, it’s time to place your bets!
A decade ago, an anonymous computer scientist named Satoshi Nakomoto and a band of brothers known as Cypherpunks launched the now famous Bitcoin cryptocurrency. With the launch of Bitcoin, Satoshi et al began unsettling the guardians of the financial establishment (ie. Jamie Dimon) who have famously labeled it a fraud and predicted its death hundreds of time (see the Bitcoin Obituaries). But Bitcoin has not only survived, it has grown in scale and seen 1,000s of copycats, all claiming to be better, faster, more secure, etc. Bitcoin started a movement, and here are 10 years later looking at the beginning of not only a new asset class and potentially financial system if Crypto innovations continue to scale.
While Bitcoin remains number one, there are still many opportunities within the space for building exchanges, core infrastructure, wallet technology, and ‘decentralized’ financial institutions. That’s why Venture Capitalists and Hedge Funds alike are raising huge funds, changing their organizational structure, and preparing the masts for the next wave of Bitcoin and other Crypto technologies.
Venture Capital goes Crypto Capital
Venture is becoming Crypto, and vice versa.
Andreesen Horowitz, one of the most prominent and recognizable Venture Capital (VC) firms has restructured their entire corporate model, rescinding their VC exemptions to become a financial advisor. The main motivation for the move is to expand their ability to invest in Cryptoassets sans limit, assets which would otherwise be limited to 20% of their VC portfolio under SEC regulations. Now they can go big and invest across asset classes (Cryptoassets and currencies, private companies, public companies) and not have their purview be limited by asset class.
@A16Z – as they are known in the Twittersphere – have gained notoriety for making early-stage bets in companies like Airbnb, Pinterest, Slack, and a host of enterprise companies.
They have had their share misses; perhaps the most recent notable flop would be their $12mn Series A in Cryptokitties at the peak of the Ethereum-boom in early 2018. But these misses are part of their model and are more than made up for by their massive gains on some of the above-mentioned companies. Despite their controversies as a firm – and there are many – they deliver where it matters most to their LPs (Limited Partners), exponential ROI (return on investment).
Clearly, they see the big opportunity to scale their returns in the Cryptoassets class. Despite flops like CryptoKitties, they have made very successful Crypto bets in companies like Coinbase and Polychain Capital. As a result, they will look to place massive amounts of financial and human capital behind more Crypto companies who could be 1 of the 15 that they look each year to continue to drive returns for their recently announced $2bn fund.
And of course, VCs like A16Z and others will likely continue to buy up Bitcoin itself. Peter Thiel’s Founders Fund famously made a fortune on Bitcoin in the last runup, and there will undoubtedly be more VCs using their venture dollars to get into Bitcoin, which itself has the ability to produce asymmetric returns as a standalone asset.
On the other side of the coin, you had many hedge-fund managers begin to open funds in the early stages of the last Crypto boom in 2015-16. One example is Mark Yusko with Morgan Creek Capital Management who started Morgan Creek Digital Assets in 2014 as a way to gain exposure to the Crypto market. In its current format, the fund contains a mix of 10 Cryptocurrencies, predominantly Bitcoin; however, institutional investors can invest fiat currency directly into the fund to gain exposure, they are not required to invest cryptocurrencies directly and have the hassle of managing/securing those digital currencies/assets.
Similar to the founders of Andreesen Horowitz (Mark Andreesen and Ben Horowitz), Mark Yusko has built his reputation on a series of unconventional views that have eventually led him towards exponential returns. In this case, his origins as a hedge-fund manager with Tiger Asset Management led him to be introduced to Bitcoin through a former colleague, which led to the creations of Pantera’s Bitcoin Fund and then Morgan Creek’s own Bitcoin Infrastructure Fund. These funds returned even more X than A16Z’s VC Funds.
As opposed to targeting the LP audience like A16Z, Mr Yusko is targeting the broad finance/fund manager community, many of whom generally hold the view that Bitcoin is a fraud:
What’s the thesis for future returns in Crypto?
The S-Curve – a traditional barometer for measuring innovations – and crossing the Tipping Point on the curve towards an exponential adoption rate. The Tipping Point in the Crypto context is where one or more protocols will become dominant, and a new wave of financial applications will be built on top of those protocols. These are exactly the types of situations that Hedge Funds like to traditionally identify, and now that blockchain technology and Crypto protocols are readying for the mainstream consumer, we expect to see many more Funds like Morgan Creek launch, using traditional discipline and risk-weightings in the brave new world of Cryptoassets.