Early Investing

The Smart Money Strategy for Surviving Crypto Winter

The Smart Money Strategy for Surviving Crypto Winter
By Andy Gordon
Date April 24, 2019

“Winter is here” for watchers of a certain addictive TV show. But in cryptoland, it’s the beginning of the end of winter. In 2018, initial coin offerings fell off a cliff. Cryptocurrency prices plunged. The Securities and Exchange Commission muddied up the space and is subpoenaing dozens of crypto companies while refusing to issue clarifying guidelines.

But the smart money was unfazed. Venture capital (VC) firms specialize in making early bets, and they rang up record-sized investments in 37 blockchain deals, almost three times more than they did in 2017. And crypto prices are trending up in 2019.

I’m not surprised. It aligns perfectly with a warning I made over and over again last year: Don’t mistake price as a proxy for progress. Behind the scenes, I said blockchain technology was advancing. The infrastructure was being built one brick at a time. Developers were working to improve transactional speed, security and more.

Much of this activity was backed by some of the most forward-thinking and successful VC investors in Silicon Valley, including (in order of most deals invested in) Andreessen Horowitz, General Catalyst and Union Square Ventures.

Coinbase raised the most amount of money last year from these VC investors. It received $300 million at an $8 billion valuation from Tiger Global Management and other top investors, including none other than Serena Williams (showing that tennis isn’t the only game where she likes to go for the big shot). Coinbase is the biggest U.S. cryptocurrency exchange. It’s expanding into other countries. And it’s now offering crypto-to-crypto trades.

Goldman Sachs-backed Circle clocks in with the second-biggest deal, a $110 million Series E raise led by General Catalyst. Circle acquired U.S. cryptocurrency exchange Poloniex last February and several months later bought SeedInvest, a startup portal we work with closely. Circle operates an app-based peer-to-peer payment network using blockchain technology and is also one of the leading players in the over-the-counter market for bitcoin trading. It’s now teaming up with SeedInvest to help popularize what I think will become the next massive application of blockchain tech: the tokenization of assets. Its first tokenization initiative will be startup equity.

Then there are Dfinity’s two 2018 deals: the early one for $61 million (from Andreessen Horowitz and Polychain) and a bigger one later in the year for $102 million (from the same two VC firms plus nine others) at a $1.8 billion valuation. Founder Dominic Williams says his team is building a smart contract blockchain that’s faster and more scalable than Ethereum. He calls it the “Internet Computer,” a blockchain-based, decentralized and nonproprietary network to run the next generation of mega-applications. Dfinity says it has tested its network to the point where it can finalize software computations in less than five seconds. Bitcoin takes 3,600 seconds, and Ethereum takes 600.

There are lots of ways to slice and dice the risks and upside of these investments. Coinbase seems like one of the safer investment opportunities. It’s hard to imagine the crypto space without exchanges. I suppose users could choose exchange-traded funds (ETFs) as a more convenient and secure way to gain exposure to cryptocurrencies, much like gold-based ETFs gave gold enthusiasts another way to gain exposure to the yellow metal. But it seems unlikely.

As for Circle, it’s one of the first companies to enter into the tokenized asset space in a serious way. Circle is counting on legal and collaborative issues getting straightened out. There’s no guarantee things will get resolved, but if they do, it could dominate a limitless space. Almost everything can be tokenized.

The same could be said of smart blockchains. If Dfinity’s technology is the real deal, it would immediately kick Ethereum and other smart blockchains to the curb. It’s a classic technology bet with a potentially huge payoff.

There are numerous risks with these investments. That’s to be expected with early-stage investing. But the price of bitcoin in the crypto winter of 2018 wasn’t one of those risks. As the price of bitcoin fell and sentiment turned negative, the smart money ramped up its blockchain investments.

And now that prices are rebounding, observers have kinder things to say about the crypto space. But price is not a proxy for progress. It wasn’t last year, and it’s not this year. The smartest venture capitalists get it. It’s time you do too.

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