What does the booming VC market mean for the future of cryptocurrency?

If you have followed any type of financial news in the past two years, you may see such headlines week after week, month after 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 bid for cryptocurrency. However, when every investment company raises funds and deploys funds in projects in this field, it basically ignores an important thing. Through the inspection of the early traditional venture capital, the timely comparison between the current and the early days, and the understanding of the encrypted market, we will be able to explain the implicit bets of venture capital companies on the future price of encrypted assets.

The initial phase

In order to further explore this issue, we must first review the earliest period of modern venture capital and the situation of emerging technologies and the Internet at that time. The “Dot Com” era is known for the frenzied purchases of early technology companies and the frantic surge in stock prices, 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 small and relatively new form of investment, with a total of only $7.6 billion in capital deployment (less than 5% of the market size in 2021). Even so, this small capital pool eventually became the lifeblood of the technological revolution, because nearly 70% of venture capital was invested in technology/Internet companies, usually in the later stages. This trend has not stopped. In the following years, more and more activities in the field of venture capital. From 1995 to 1999, the company’s investment increased tenfold.

What does the booming VC market mean for the future of cryptocurrency?

It is not surprising what happens next. In the five years since 1995, the stock prices of listed technology companies have risen sharply. At that time, the returns of the four largest companies exceeded 10 times, and most of them coincided with the fundraising of the largest venture capital companies.

What does the booming VC market mean for the future of cryptocurrency?

It is no coincidence that the most significant growth in the technology industry occurred when private capital poured into the industry. And it was this torrent of capital that pushed open market stocks higher and helped build the largest share of the U.S. economy.

This time it’s very different

In order to connect Internet venture capital and crypto venture capital, we must find the similarities between these two markets, and more importantly, find the differences, in order to understand the direct impact on the price of encrypted assets.

What does the booming VC market mean for the future of cryptocurrency?

1) Similarities

Emerging markets : The most obvious similarity is the closeness of the two industries and their related foundations. In many ways, cryptocurrency is an extension of the same core technology that was established twenty years ago. Similarly, these two industries also have a very common group of early adopters, because both have strong fanatics leading early expansion and have received many doubts about their long-term value.

Speculation : As mentioned earlier, the initial stage of the Internet has received a lot of attention from venture capitalists. Both industries have this similarity, because the crypto industry has recently become a leader in the flow of venture capital transactions. Relative to their valuations, historically these two industries (in their respective eras) were both high-risk and high-returns.

2) Difference

Regulatory difficulties : The financing mechanisms of encrypted assets and their respective projects make the investment situation very different, because investors are not only for equity transactions, but in most cases for token transactions, which is obvious.

In addition, there are huge differences in the asset classes that can be invested. Only venture capitalists can invest, while traditional investors, such as asset managers, mutual funds, and common stocks, cannot invest. Due to the ambiguity of cryptocurrency investment, the broad investor base that can actively participate in token and stock trading is now small.

Shorter liquidity period : founders, projects and investors can obtain liquidity faster, which also changes the dynamics of the financing cycle and the basic expectations of betting on crypto projects. The flow of capital is more free, and it is this kind of 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 financing mechanism, because projects, founders and investors are paid in the form of tokens/in-kind donations, while traditional companies use cash to pay. In addition, agreement/project performance is usually generated by token prices, not by growth indicators, because the market is more liquid and more comparable.

The dedication of admirers : The average founder and investor will eventually use Bitcoin or Ether as their base currency to measure their performance. Those agreements that have raised millions in a short period of time and strive to become unicorns will eventually allow employees to retain their base currency and continue to reinvest in projects and agreements within the ecosystem. The concentration is very high.

Long leverage

It is not surprising that these differences lead to a strange correlation when venture capital firms want to buy equity in cryptocurrency companies. When looking at the previous growth rate of any large venture capital-backed cryptocurrency company, you can quickly discover that past forecasts actually directly reflect the appreciation of cryptocurrency asset prices. Consider this example:

The traditional venture company/investor, “A+Partner”, is looking for investment opportunities in cryptocurrency. Unfortunately, they cannot buy Bitcoin or Ether because their authorization structure does not allow them to buy, but they can buy equity in organizations that focus on cryptocurrencies. They choose to invest in crypto exchanges, so they must consider the organization’s revenue and future growth. For exchanges, the entire revenue base is almost entirely derived from trading activities. High trading activity comes almost entirely from high volume, and high volume comes almost entirely from high asset prices.

Applying this idea to forward-looking investment, we can understand the top venture capital group’s vision of the future cryptocurrency asset prices, even if they do not plan to directly bet on cryptocurrencies. Even considering those traditional companies that do not plan to invest in tokens, we can still understand the logic behind the possible presentation of Bitcoin and Ethereum prices in the near future. In today’s crypto venture capital world, we can continue to evaluate the funds raised through venture capital and continue to price their expectations for the price of crypto assets.

finally

Looking back at the investment of the past 25 years and the current hot risk market, we can infer a very interesting future for cryptocurrencies. When looking at future venture capital raising and new fund deployments, we must take into account the private investors’ implicit bets on the state of cryptocurrency asset prices and what they think is the direction of the liquid market. It can be said with certainty that in the future, our industry is very optimistic.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/what-does-the-booming-vc-market-mean-for-the-future-of-cryptocurrency/
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