• Crypto native and traditional VC firms alike are investing in the space en masse
  • Opinions are split on whether this is just what the industry needs or if the dollar flood is a little too frothy

With more than $3 billion in venture capital funding this month alone, there is no shortage of cash in the crypto space. 

In the first nine months of 2021, crypto startups raised more than $15 billion in venture funding, nearly five times the total amount for 2020, according to data from CB Insights

“Early-stage rounds (seed/Series A) dominate the dealmaking, capturing almost 80% of deals in 2021 YTD,” Anand Sanwal, CEO and co-founder of CB Insights, wrote in a recent note. 

So far in November 2021, the largest crypto venture fund ever — $2.5 billion — launched, over $500 million was invested in a mining infrastructure company and Gemini secured $400 million, valuing the exchange at over $7 billion. 

“Investors like Coinbase Ventures are also bursting onto the scene — the VC arm was by far the most active blockchain crypto investor with 24 deals in the quarter,” Samwal wrote. 

The money isn’t only coming from crypto-native firms, either. Traditional VC groups, from Sequoia Capital to Bill Ackman’s Table Management, are beginning to enter the space, and experts are not surprised.  

“Venture capital is a great way for institutional investors to invest in crypto without in fact investing in crypto,” said David Tawil, president of ProChain Capital. “They get the exposure to the asset class in some way, but they don’t have to deal with the issues of the regulatory environment and compliance issues and risk related issues of Bitcoin or Ethereum and so on.” 

Venture capital everywhere

It is no surprise that crypto projects are seeing an increase in funding given the broader success of venture capital investments in recent years, Tawil said, pointing to endowment funds. 

“A limitless number of endowments clocked over 50% returns for the year, and the overwhelming majority of the outsized gains was attributable to venture capital-related investments,” Tawil said. “So although at some point, you would think that there would need to be a rotation, at least for now, it seems that there’s continued investment in venture capital in terms of leading the way for portfolio gains.” 

There has also been a significant increase in the number of protocols and projects in the digital asset space seeking funding, Samwal and Tawil agreed. Tawil admitted that with so much money in the space and so many new projects, there are inevitably going to be companies or tokens that don’t succeed, but overall, he is confident that the VC trend will continue for some time. 

“I believe that this technology is revolutionary, it has a crazy growth trajectory,” Tawil said. 

“Crazy, like parabolic — in terms of what it is going to do for the world, how much revenue it’s going to generate. It’s going to take revenue away from other business lines — older line businesses, and so on — but there’s a ton of value to be generated.”

Others are less certain that the funding is being directed towards the best areas of the market. 

“People are trying to put hundreds of millions of dollars into projects that have no product, no roadmap — just a general idea they wanna figure out with like, $1 to $2 [million] in funding,” Meltem Demirors, chief investment officer at CoinShares wrote in a Tweet on Monday. 

David Pakman, a managing director at CoinFund thinks these seed and early-stage funding rounds are just what many companies in the digital asset space need. Over the last 18 months he has seen many projects develop with the support of small rounds, and now they are ready for larger investments. 

Companies that were once largely overlooked are now “getting real revenue, and they’re accelerating rapidly — basically, they hit product-market fit,” he told Fortune Magazine

Tawil is confident that even a bear market, which some experts have been calling for in recent months, will not dissuade venture money from entering the space. 

“The VC money and the VC investment is probably going to grow even while cryptocurrencies themselves may swoon or may just stagnate,” he said.

“That begs the question of how there could be such dislocation in terms of pricing trajectory? You would think that things would stagnate on the VC side if they would stagnate on the cryptocurrency side, but if they’re not, then clearly there are different dynamics driving each one of those markets.”

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  • Blockworks
    Senior Reporter
    Casey Wagner is a New York-based business journalist covering regulation, legislation, digital asset investment firms, market structure, central banks and governments, and CBDCs. Prior to joining Blockworks, she reported on markets at Bloomberg News. She graduated from the University of Virginia with a degree in Media Studies. Contact Casey via email at [email protected]