While crypto certainly wasn’t new last year, it did enjoy a record-breaking 2021 in terms of newly minted unicorns and venture dollars invested into the space.
Venture funding in the crypto space hit more than $21 billion in 2021, far surpassing the $3.7 billion invested in 2020, according to Crunchbase numbers. That level of funding also helped birth more than 30 new unicorns—companies valued at $1 billion or more—last year in the industry, about three quarters of all unicorns created in crypto.
Those who follow the industry do not expect to see a slowdown in 2022 as the financial exchanges’ ecosystems continue to get built out.
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“Crypto is one of the most exciting investment areas right now because in some ways the entire stack is being built simultaneously,” said Nino Marakovic, CEO and partner of Sapphire Ventures, which has invested in several crypto companies such as FalconX and Taxbit. “From apps, to infrastructure, to protocols, we are seeing developer and entrepreneur activity across the board.”
In a space stil as emerging as crypto, it can be hard to spot the next new thing 12 months away—who had heard of DAOs at this time last year?—but those in the industry do think there are several aspects of crypto worth watching concerning the future of venture investing in crypto.
Infrastructure and compliance
Just like any growing industry, as crypto gets larger, more regulatory compliance is needed to both foster consumer confidence and build a system of checks and balances for large companies and institutions orchestrating it.
According to numbers from Coinbase, back in the first quarter of 2018, 80 percent of crypto transactions were driven by retail investors with a volume of $66 billion traded. Fast-forward to the first quarter of last year, which saw 72 percent of all transactions related to large institutional participants, and traded volume hitting $327 billion.
When numbers start to get that large and you start dealing with those types of financial institutions, a bigger watchful eye comes along.
Companies that help give analysis of blockchain data and crypto transactions to institutions and governments like New York-based Chainalysis and Los Angeles-based Blockdaemon, which helps manage nodes and payment rails, likely will continue to see interest from investors as compliance protocols are built out around crypto.
“Anything that helps power the infrastructure that surrounds transactions in crypto,” Siddiqui said.
The other adjacent area that large institutions now dealing in crypto may look at are analytics platforms that help provide correlations between crypto and its performance to more traditional asset classes, said Jordan Nof, co-founder and managing partner at Tusk Venture Partners, where he invests in crypto companies.
“I think you’ll see different applications that give you an analytical perspective of how diversified an investor you are,” he said. “I’m sure this is already on the road map for some of the bigger companies.”
While crypto hedge funds and insurance companies already have built-in-house tools with similar capabilities, such analytics could come from companies more situated in the crypto space or even startups.
Siddiqui said a company like FTX—which sits in Telstra Ventures’ portfolio—could eventually get into that realm and others could also build out “Bloomberg-like” analytics.
Finally more clarity?
Of course, further investment in crypto hinges on one thing: clearer regulation.
This past year saw uncertainty hang over the industry at times as China made crypto transactions illegal and there was chatter of further government regulations in the U.S. Despite those clouds, more large institutional investors and traditional venture capital firms entered the space at a breakneck speed.
Investors anticipate 2022 could be the year regulations are made more clear, not just in the U.S. but globally, as more and more people look to transact in crypto.
“I do think you will see more clarity across the globe,” said Matt Zhang, who recently announced the launch of Hivemind, a $1.5 billion fund focused on investing in crypto infrastructure, blockchain protocols and virtual worlds.
“I think regulation is healthy,” he said. “Clarity is the key. You just can’t have people guessing what will happen next.”
Yash Patel, a general partner at Telstra Ventures who invests in crypto on the consumer side, agreed more clarity could come from bodies such as the Securities and Exchange Commission this year. He added companies in crypto such as FTX are doing a lot of education and outreach and it will be up to those in the space to collaborate with government bodies to come up with smart solutions to regulations in the industry.
“I think you need to take a very thoughtful approach to this,” he said.
Illustration: Dom Guzman
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