Cryptocurrencies have had a wild 2018.
Take bitcoin for example. Barely a year from its close to $20,000 high in 2017, the cryptocurrency now sits at $3,700, posting double-digit swings that continue to make volatility a hallmark characteristic of the virtual currency. Ten years after the issuance of Satoshi’s cryptocurrency, its potential remains just as elusive today.
Are cryptocurrencies suffering from distracted potential?
Alex Marquez was thrilled when he first encountered crypto. From 2013 to 2014, Marquez and his team of colleagues at USAA began studying the investment opportunities for cryptocurrencies and blockchain companies.
“When we first got into it in 2014, IBM’s research facility was literally right around the corner from my house,” said Marquez. “I would walk across the street and we would spend half a day with IBM Research talking about the projects that they were doing with blockchain at that point of time.”
Marquez invested in Coinbase on behalf of US financial services company, United Services Automobile Association (USAA) at a $400 million valuation in early-2015. He put some of his own money in as well. It’s been five years since and cryptos have come a long way, but so has Marquez’s view on them. He acknowledged that the hype has distracted a lot of the potential he first saw in the technology.
“The original thesis (for cryptos) was that you didn’t have to have all these fiat currencies all over the globe. You have one uniform digital currency and basically trade it, so it’s not logical or common sense to think that you should have hundreds and thousands of cryptocurrencies. I think the value has been distracted because of all the cryptos and ICOs that were issued has zero value and intentional purpose,” said Marquez.
According to ICOdata, there were 1234 ICOs in 2018, or 1.4 times more than the previous year. The amount raised has also risen. About $7.5 billion was raised in 2018, compared to $6.2 billion the year before. But where ICOs have really shifted things is in VC fundraising.
ICOs are changing the venture fundraising landscape
Since 2017, ICOs have delivered at least 3.5 times more capital to blockchain startups than VCs. In a Crunchbase report, the amount raised by ICOs from 2017 to the first two months of 2018 was 32 per cent – remarkable considering how recent ICOs are as a development.
All this is on top of the record $2 billion dry powder that Southeast Asian venture capital investors are already accumulating today.
What that means is – startups don’t just have access to lots of money. They have the benefit of fundraising from multiple sources, some of which require less governance than the more traditional route of a VC firm.
“Founders today are on the winning end because now they get to choose,” said Will Klippgen, managing partner of Singapore-based seed investor, Cocoon Capital. “The wonderful thing about that is if you’re a founder, you can choose to raise at ridiculous valuations from anonymous people.
Klippgen added that he tends to pass on the blockchain startups when hunting for portfolio companies. The frothy valuations have nothing to do with it.
“I just see so much irrelevance in some of their developments,” said Klippgen. “I have not seen one single blockchain company that makes sense so far. Sometimes you see founders who can do amazing stuff but are drawn to trendy stuff like blockchain. We think they’re wasting their time in many cases because they can do many other things.”
While global regulators have made headway to encourage the use of blockchain, their efforts are patchy at best. Some jurisdictions are more progressive, others less so. But the complexities further compound when the use of blockchain intersects an overarching global framework like GDPR.
Marquez, who currently heads Experian Ventures said increasing scrutiny around online identity and “the right to be forgotten” is making the future case for blockchain slightly problematic.
Blockchain promises ironclad security by memorialising data on the chain. But what happens if GDPR requires you to remove an online identity after it’s been placed on the blockchain?
“You could argue that’s in direct conflict with the providence of blockchain because you technically can’t remove any data that’s been memorialised on the chain,” said Marquez. “There have been some options of taking that identity information off which will make it compliant with GDPR, but then – what’s the point of using blockchain at all?”
The VC investment case for blockchain
Blockchain is not short of optimists. Money speaks.
According to a Diar report citing Pitchbook data, blockchain firms have raised almost $3.9 billion in VC capital globally in 2018, a 280 per cent jump from 2017. The number of deals and median deal value is also rising. Deal count has doubled, while median deal size has grown by over $1 million since last year.
Closer to home, Asian VC heavyweights are beginning to pay attention to blockchain as well.
South Korea’s largest VC, Korea Investment Partners (KIP) made an undisclosed investment in TEMCO, a blockchain-based supply platform. Temasek-backed, Vertex Ventures invested in Binance, a global cryptocurrency exchange.
In November, Singapore-based Quantum Energy Asset Management and Pundi X, a blockchain developer announced a $100-million blockchain fund for 2019.
Kenrick Drijkoningen, founding partner of blockchain-focused fund, LuneX Ventures likens dismissing blockchain to dismissing the Internet.
“Let’s not forget that this technology is still only 10 years old and it takes time to build out the required infrastructure and applications,” said Drijkoningen. “The Internet disrupted traditional content businesses, while crypto and blockchain is set to disrupt much larger and often more regulated industries.”
“Our job is to separate the wheat from the chaff,” said Drijkoningen. “Any early days technology comes with a good dose of hype, experimentation leads to discovery of viable business models.”
Earlier this year, LuneX Ventures launched a $10-million fund focused on blockchain. The Golden Gate Ventures-backed fund has two portfolio companies in the bag – a crypto options exchange and a crypto custody solution. According to LuneX, the fund targets services around the broader blockchain ecosystem such as custody, KYC/AML, SaaS solutions, wallets, and analytics startups.
Drijkoningen added that deal flow is strong and expects to add another ten companies to its global portfolio. Valuations are reasonable too, due to the market cynicism around blockchain.
“This is driven by the wariness and lack of industry understanding from traditional VCs. This is something we’re looking to fill. There’s quite a bit of education involved in the fundraising process but the people more familiar with the industry clearly recognise the value we bring as a dedicated fund,” said Drijkoningen.
“Anyone saying it’s all hype clearly has not done their homework.”