Immutable Capital Partner: What does the influx of VCs into the crypto market mean for cryptocurrencies
Immutable Capital partner Zaheer Ebtikar recently posted on Deribit to discuss the accelerated influx of venture capital funds into the cryptocurrency market, and what does this mean for the crypto industry?
“___ closed another fund at a price of ___ billion U.S. dollars because it seeks to continue investing in the world of cryptocurrencies and Web3”
If you have followed any type of financial news in the past two years, you are likely to see such headlines every week and every month. On the surface, this type of investment and capital allocation is clearly a signal of value for a new industry and reiterated the strong pursuit of cryptocurrencies. However, whenever an investment company raises and deploys funds for a project in this field, it basically ignores a big story. Through the early research of traditional venture capital, the comparison with that era, and the understanding of the crypto market, we will be able to explain the implicit raise of the future of crypto asset prices by venture capital companies.
Early stage venture capital
In order to explore this topic further, we must first review the early days of modern venture capital and the emerging technologies and Internet landscape at that time. The “.com” era is known for the retail buying frenzy of early technology companies and the crazy stock surge, especially in the open market, but few people attribute this craze to venture capitalists, the earliest proponents of these new technologies.
In the mid-1990s, venture capital was a relatively small and relatively new form of investment, with a total investment of only US$7.6 billion (less than 5% of the market size in 2021). Even so, since nearly 70% of venture capital is invested in technology/Internet companies, this small amount of funds eventually became the lifeblood of the technological revolution in the later stage. This trend has not stopped, because in the following years, as the investment in the company increased by 10 times from 1995 to 1999, there was more and more activity in the field of venture capital.
What happened next was not unexpected. In the next five years from 1995, the prices of listed technology companies have risen sharply, because the four largest companies at that time all received more than 10 times the return, most of which were completely related to the financing of the largest venture capital company. at the same time.
It is no coincidence that the most significant growth in technology occurred in an era when private capital flooded the industry, but this capital frenzy pushed open market stocks to high levels and allowed the largest part of the US economy to be established.
This time is different
In order to link Internet venture capital and encryption venture capital, we must find the similarities between the two markets, and more importantly, find the differences in order to understand the direct impact on the price of encrypted assets.
Source: Bloomberg agency
- Emerging markets: The most obvious similarity is the proximity of the two industries and their related foundations. In many ways, encryption is an extension of the same core technology built 20 years ago. In a similar way, these industries also have a very common group of early adopters, because both have strong enthusiasts leading early expansion, and there are people who are skeptical of their long-term value.
- Speculation: As mentioned earlier, the Internet received a lot of attention from venture capitalists in the early days. Both industries have this similarity, because the crypto industry has recently dominated venture capital transactions. Relative to their valuations, they seem to be two high-risk and high-return industries in history (in their respective eras).
- Regulatory difficulties: The financing mechanism of encrypted assets and their respective projects makes the investment situation very different from before, because investors are not only targeting equity transactions, but in most cases also targeting token transactions, which is obvious. In addition, there is a huge difference in the types of assets that can be invested, because only venture capitalists can invest, not traditional investors like asset management companies, mutual funds, and general public stocks. Due to the lack of clarity in crypto investment, there are now fewer investors who can actively participate in token and equity transactions.
- Shorter liquidity period: The faster way for founders, projects and investors to obtain liquidity has also changed the dynamics of the financing cycle and the basic expectations of betting on crypto projects. Capital flows more freely, and it is this capital flow that stimulates the development of new enterprises in the ecosystem.
- New valuation paradigm: The introduction of a new monetary system has also changed the fundraising mechanism, because projects, founders and investors pay in tokens/in-kind donations instead of cash from traditional companies. In addition, agreement/project performance is usually generated by token prices rather than growth indicators, because the market is more liquid and comparable.
- Cult belief: The average founder and investor will eventually use Bitcoin or Ethereum as their own base currency to measure their performance. The agreement that raised millions in a short period of time and strives to become a unicorn will eventually allow employees to retain their base currency and continually reinvest in projects and agreements within the ecosystem. The concentration of faith is extremely high.
Not surprisingly, these differences actually lead to strange correlations when venture capital firms want to buy equity in crypto companies. When looking at the previous growth rate of any large venture capital-backed cryptocurrency company, you will quickly find that past forecasts are actually a direct reflection of the appreciation of crypto asset prices. Consider this example:
The traditional venture capital firm/investor “A+ partner” is looking for investment in cryptocurrency. Unfortunately, A+ partners cannot buy Bitcoin or Ethereum because their authorization does not allow them to buy, but they can buy equity in institutions that focus on encryption. They choose to invest in cryptocurrency exchanges, so they must consider the income of the institution and future growth. For exchanges, the entire revenue base is almost entirely derived from trading activities. High trading activity comes almost entirely from high trading volume, and high trading volume comes almost entirely from high asset prices.
Applying this idea to forward-looking investment, we can understand the top venture capital group’s imagination of the future price of crypto assets, even if they do not plan to directly bet on cryptocurrencies. Even considering traditional companies that do not plan to invest in tokens, we can still understand the logic behind them and what the prices of Bitcoin and Ethereum might look like in the near future. In today’s crypto venture capital world, we can continue to take stock of funds raised through venture capital and continue to price their expectations for the price of crypto assets.
Looking back at our investments over the past 25 years and our current state of the hot venture capital market, we can infer a very interesting result for the future of cryptocurrencies. When we consider future venture capital raising and deployment of new funds, we must consider these private investors’ implicit bets on the state of crypto asset prices and what they think is the direction of the liquid market.
It is safe to say that in the future, the situation in our industry looks very optimistic.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/immutable-capital-partner-what-does-the-influx-of-vcs-into-the-crypto-market-mean-for-cryptocurrencies-2/
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