Encryption industry is favored by venture capitalists but there is a risk of “bubble”

China Daily.com, November 25. According to the British “The Economist”, the Hong Kong office of the cryptocurrency exchange FTX is more than physiological needs. Food and wine are placed around tables equipped with six screens each. Company owner Sam Bankman Fried said that with luck, he can sleep on a bean bag next to his desk for four hours a night. He believes that there is no difference between breakfast and dinner, only the stores that provide takeaways are different.

His unease reflects the non-sleeping cryptocurrency market, but it also reflects the rapid growth of the two-year-old company. In October 2021, FTX announced a US$420 million financing, with a valuation of US$25 billion. Just three months ago, investors valued it at US$18 billion. The financing involves top institutions in the investment field, including the world’s largest asset management company BlackRock, the US$170 billion Canadian pension fund OTPP, and Singapore’s sovereign fund Temasek.

The grand occasion of FTX’s financing shows that investors have a growing appetite for crypto startups, especially those that are creating future blockchain tools. In the first nine months of 2021, these startups received 15 billion U.S. dollars in venture capital investment, which is five times that of the entire year of 2020. In the third quarter of 2021, a record 12 crypto unicorn companies with a valuation of more than US$1 billion were born. This exciting era reminds some venture capitalists of the Internet era, but they are not sure if the party is like in 1994 or 1999.

One factor that triggers capital flows is the growing demand for digital currencies by individual speculators. This situation is affecting venture capital institutions to support encrypted wallets and exchanges. Matt Burton of the venture capital firm QED said that investors will also bet that as regulation becomes clearer, the legislature will take it more seriously, which will stimulate the need for crypto tax advisors, analysis agencies and The needs of asset custody companies. Hot indicators such as the Bitcoin price (which touched a record $69,000 this week) are exciting.

The encryption industry is constantly expanding. Blockchain startups are promoting new forms of financial services (decentralized finance), digital ownership (non-fungible tokens, or NFTS) or incentive models (such as in games where users can earn cryptocurrency while playing). So far this year, non-financial product companies have raised US$2 billion, up from US$31 million in 2020. Four-fifths of venture capital is in the early stage.

The most attractive is the entry of new investors. Successful crypto companies are reinvesting cash in newer companies. The most well-known is Coinbase Ventures, the investment arm of the largest cryptocurrency exchange in the United States. It has completed 24 transactions in the past quarter. On November 5th, FTX and other companies jointly launched a game fund worth $100 million.

 

Encryption industry is favored by venture capitalists but there is a risk of "bubble"
Screenshot of “The Economist” report

 

Investors in the mainstream financial sector with strong financial resources have also joined in, including well-known venture capital funds such as Facebook and Skype’s early investors Andreessen Horowitz (Andreessen Horowitz). The aggressive Japanese group SoftBank had six crypto-related investment transactions in the previous quarter. There are also some hedge funds and asset management companies involved. In the past three months, these investors completed 15 rounds of more than $100 million in investment, accounting for two-thirds of the total venture capital.

Shan Aggarwal, head of Coinbase Ventures, said that this craze is reminiscent of the Internet boom in the 1990s, when investors invested in companies that would form the foundation of the network economy. In one aspect, the current era is even more impressive: Although the Internet bubble was mainly formed in Silicon Valley, the “Bitcoin” boom is not only in the United States ($3 billion raised this quarter), but also throughout Asia (this quarter financing 1.4 billion U.S. dollars) and Europe (1.1 billion U.S. dollars in financing this quarter). In Africa and Latin America, encryption “unicorns” are also running forward.

However, whether the encryption industry will be as successful as today’s technology giants is still unknown. It’s just in its infancy now. The revenue of cryptocurrency companies in 2021 is equivalent to 16% of the total financing of fintech companies and 3% of the total financing of start-up companies. Large-scale transactions have pushed the average size of the investment round to 21 million U.S. dollars, which is three times that of 2020, but the median value of 4 million U.S. dollars is considered very small.

Some valuations seem silly: In September of this year, the blockchain-based fantasy football game Sorare completed a financing of US$680 million, valued at US$4.2 billion, equivalent to 22 times its sales, higher than Facebook The price-to-earnings ratio at the time of listing. All this shows that some investors will make money like bandits, while others will lose money. For better or worse, there will be more sleepless nights in the future.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/encryption-industry-is-favored-by-venture-capitalists-but-there-is-a-risk-of-bubble/
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