- Castle Island Ventures founding partners Matthew Walsh and Nic Carter saw the potential in digital assets in 2017
- Castle Island Ventures Fund II launched earlier this month with $50 million
Matt Walsh never wants to hear “I believe in blockchain, not bitcoin” ever again.
It’s a sentence that reads like nails on a chalkboard to anyone in digital assets, and it’s something that Walsh heard plenty of times when he was raising venture firm Castle Island’s first fund in 2018.
Back then, Walsh and co-founder Nic Carter left traditional finance to start Castle Island Ventures, a venture fund that invests around public blockchains.
Today, the two are running their second $50 million fund and the scene couldn’t be more different. Investor interest in digital assets is at an all-time high. Publicly traded companies and traditional financial institutions are starting to put bitcoin on their balance sheets, something that was unheard of in 2018. Massachusetts Mutual recently purchased $100 million in bitcoin, Square invested 1% of total assets into the digital token and Morgan Stanley now owns more than 10% of micro strategy equity. Even the oldest US bank, BNY Mellon, is taking interest in the asset class.
It’s a far cry from the retail-driven rally of 2017 that ended with bitcoin plummeting 65% in one month and a resounding “I told you so” from long-time crypto-skeptics. Memories of that ‘great crypto crash’ have doubters bracing for a second bubble burst. But cryptocurrency bulls are confident that institutional investors getting involved in the space will be the driving force carrying digital assets higher.
In an exclusive interview with Blockworks, Walsh described how he ended up in the digital asset space at just the right time.
The early days
Castle Island Ventures founding partners Matthew Walsh and Nic Carter are two that saw potential in digital assets early on. The Fidelity veterans made the move from traditional finance to full-time crypto in 2018.
“I joined Fidelity right out of business school,” said Walsh. “When I left with Nic, we were managing a fund under the venture side, but I actually started my career in the corporate strategy group.”
While on the corporate strategy side, he worked on scenario planning, which is a project that attempts to predict the ways current systems may be disrupted in the future.
In late 2014, Walsh teamed up with former Fidelity head strategist Peter Jubber on a digital asset disruptive scenario project. The cryptocurrency space was just starting to expand into the mainstream, and Walsh was eager to learn about what blockchain technology could do for financial services. The team put together a scenario called Frictionless Capital Markets.
“Frictionless Capital Markets basically said, ‘What if bitcoin, or things like it on blockchains, allowed for any asset in the world to move in a frictionless, peer-to-peer manner?’” said Walsh. “The thought experiment was what would the financial services industry look like in a world where intermediaries don’t matter as much?”
Fidelity senior leadership took an early interest in the project and started to invest in blockchain research and development, Walsh said.
“There was a lab team formed and they started tinkering around with mining experiments and putting Bitcoin in cafeterias,” he said. “Over the years, we started to look at private blockchains and test different things. I think we had a list of about 45 different use cases for the technology, and we were just experimenting and trying to figure out if they would stick.”
Fast forwarding to big opportunity
Fast forward to 2017, and it started to become very clear that there was a big custody opportunity with bitcoin, Walsh said.
“There were clearly Fidelity customers that were yearning for Fidelity to hold their crypto assets for them, instead of holding them themselves or holding them with a startup,” he said. “So we started to work on what became Fidelity Digital Assets.”
In the cryptocurrency world, 2017 is marked as the year when digital assets became significant within the global financial system. Ethereum gained traction, bitcoin became increasingly valuable and legacy financial institutions hinted that they might be starting to come around to the idea of digital assets.
“I am very lucky that I was in the right place at the right time,” said Walsh.
Around the same time, Walsh’s interest in developing real-world uses for digital assets moved him to the venture capital side of Fidelity. There, he teamed up with Carter, who served as Fidelity’s first crypto asset analyst. The two were certain that blockchain technology would continue to expand and improve.
“We decided that this was a huge entrepreneurial opportunity for us to potentially leave to start our own early stage venture fund,” said Walsh. “We really wanted to focus on the seed-stage equity opportunities in this space that we thought would come about.”
In 2018, Walsh and Carter left Fidelity to launch Castle Island Ventures. They moved from Boston’s financial district and opened an office in Cambridge, Mass., to start what would definitively not be a crypto hedge fund.
“The gap that we saw in the market in 2018 was a lot of the funds were focusing on tokenized projects, as opposed to some of the early stage equity players,” said Walsh. “Being a small fund, we thought that the sweet spot for us was those early stage deals where you can write a $250,000 check up to a $1 million check into a first round.”
Castle Island’s first venture capital fund launched later in 2018 with $30 million, but finding investors wasn’t easy.
“When we were raising Fund I, people were openly hostile towards bitcoin even being something that was worth spending time on,” said Walsh. “People said ‘I believe in blockchain, but not bitcoin,’ which is just a crazy thing to say.”
Crypto is cool again
Today, the sentiment surrounding digital assets could not be more different. All types of investors are piling in, with everyone from corporate VC’s to macro legends vying for a bite at the apple.
Digital assets exchange Kraken, whose most recent valuation could exceed $20 billion, launched Kraken Ventures, a venture capital fund to invest in early-stage fintech and cryptocurrency startups, earlier this month.
Google Ventures-backed crypto wallet startup Blockchain.com raised $120 million in funds from “macro investors” seeking digital asset exposure, the company announced earlier this month. Top investors include hedge fund managers Louis Bacon and Kyle Bass, signalling that traditional investor interest in crypto is gaining momentum.
Earlier this month, private equity veterans Glenn Hutchins, James Hutchins and Travis Scher launched a venture capital digital asset fund with high-profile investors including Paul Tudor Jones and Josh Harris. The fund has raised around $72 million so far.
Walsh and Carter announced the launch of Fund II earlier this month with $50 million. Their strategy has remained largely the same as Fund I: they will continue to focus on pre-seed and seed-stage companies. Fund II also plans to target 20 startups, although with slightly larger investment allocations than Fund I.
Fund I invested in 20 startups, including BlockFi, ErisX, River Financial and Casa. It closed earlier this month but set the foundation for Castle Island’s second venture.
“The sentiment around institutional adoption for bitcoin as an asset has accelerated tremendously,” said Walsh. “Bitcoin is now firmly established with capital allocators and we’re really excited to be backing generational entrepreneurs.”