The current Bitcoin (BTC) bull market has been fueling another major boom in blockchain or distributed ledger tech (DLT) startup deals.
Coinbase Ventures had launched back in 2018, which was during the extended cryptocurrency bear market that lasted from early January of that year to well into 2019. After the BTC price had surged to nearly $20,000 in December 2017 from only around $1,000 in January 2017, the flagship cryptocurrency crashed to a low of below $4,000 in December 2018.
As a digital asset trading platform, that short-lived momentum was actually good for Coinbase’s business (in the long-term). However, the decision to establish a cryptocurrency-focused VC company had less to do with the BTC price than what the market fervor had meant for innovators.
Shan Aggarwal from Coinbase noted that the company “recognized in early 2018 that there were a ton of new startups that were leveraging blockchain technology.”
Coinbase Ventures thought that they would be able to take advantage of the long run by investing in the crypto and blockchain space, Aggarwal revealed. And soon, the digital assets company would become one of the sector’s most active investors, with major deals supporting CryptoKitties developers, stablecoin creator Terra and digital currency exchange Bitso.
Coinbase Ventures has been a key part of a transformative movement that has been repeating itself in certain ways ever since the first Bitcoins were mined around 12 years ago. Whenever the BTC price reaches new all-time highs, companies naturally start increasing their investments.
Blockchain or crypto startup deals also usually gain a lot of momentum after the Bitcoin starts rising.
But after the Bitcoin mania had subsided in early 2018, venture capital investors had still been allocating funds into crypto and DLT firms or initiatives. In 2018, these types of funding activities totaled $2.8 billion across almost 400 different deals (the highest funding amount on record, according to Pitchbook data). A similar development has followed a relatively smaller BTC price increase during mid-2019.
Andreessen Horowitz‘s Chris Dixon has said that this type of activity may be described as the “crypto price-innovation cycle.” It works or starts when Bitcoin and other digital currencies appreciate in value, “sensational” news reports and media coverage follows, business owners and developers take a lot more interest, and then VCs step in to make investments in these projects.
During the last month, Bitcoin has managed to surge dramatically and it’s currently trading at well over $56,000 at the time of writing. But the key question now is how long will this rally last and what major impact might we see on startups. Most investors are probably hoping that history will repeat itself.
Paul Veradittakit from Pantera Capital has predicted that we’re going to see “a lot of entrepreneurs coming into the space.”
Momentum keeps on building in the crypto space at an unprecedented rate. The dramatic surge in Bitcoin has also coincided with the best-performing quarter for crypto and DLT startups since the end of 2018, totaling $702 million during Q4 2020, PitchBook data confirmed.
Since October of last year, the BTC price has more than tripled, from below $11,000 to over $57,000 (before correcting very slightly).
Because many of the products of DLT startups are intimately or closely linked to the value of various virtual currencies, the rise of Bitcoin, Ethereum (recently surpassed the $2,000 mark) and other digital assets could improve the overall outlook for those startups even more, Veradittakit argued.
Traditional VC companies seem to be quite eager to increase their exposure to the blockchain ecosystem now. A16z introduced its second crypto-asset fund with $515 million during 2020. Union Square Ventures intends to allocate 30% of its recently finalized $251 million fund to cryptocurrency firms.
Prominent investors Polychain Capital, Pantera, Pithia and Blockchain Capital have each secured funds valued at over $100 million in order to make investments in blockchain and crypto startups (since 2018).
Public investors may soon have the option to get in on this action as well. Coinbase has announced plans for a direct listing, and competing exchange Bakkt is set to go public via a $2.1 billion SPAC merger with VPC Impact Acquisition Holdings.
The unprecedented surge in the BTC price has been supported by increased interest among institutional clients and an overall wider access to the crypto-assets markets that was not possible before.
Retail investors are now able to purchase cryptocurrencies via Robinhood and PayPal, which has removed the requirement for consumers to maintain accounts via dedicated virtual currency exchanges.
The BTC price continues to set new all-time highs, which has led to some analysts comparing the market to the Tulip Mania of the 1600s. However, these arguments no longer have much of a foundation because major players like Elon Musk’s Tesla have now acquired $1.5 billion worth of Bitcoin and will accept the crypto as payment.
Other well-known organizations that have also joined include the endowments of Harvard and Yale, along with Square, which revealed in October 2020 that it had acquired $50 million in Bitcoin (which is now worth over $250 million).
Aggarwal from Coinbase added:
“The infrastructure that existed [in 2018] was really, really nascent. There’s been tremendous progress in developing core infrastructure for crypto.”
Those improvements have led to much more scalable, economical and faster digital asset transactions.
Decentralized finance (DeFi) is another major emerging sector that has managed to gain many new users and investors. These individuals and organizations are aggressively betting that traditional banking solutions may be securely offered via blockchain or DLT-based platforms.
Steve Jang from Kindred Ventures notes that DeFi was “a nascent, unsure thing a few years ago” but he argues that “now it’s much more established.”
BlockFi, a fast-growing digital assets platform, has become one of the most-funded startups in the crypto space after acquiring $50 million in capital in 2020 via a round led by Morgan Creek Digital Assets along with Valar Ventures, Winklevoss Capital and others.
Non-fungible tokens (NFTs) or digital collectibles launched on blockchain platforms like Ethereum have also become quite popular during this historic bull market.
CryptoKitties developer Dapper Labs had also become really popular after the 2019 launch of NBA Top Shots, which is a game that uses NFTs to store tradeable video clips from basketball games—basically like trading digital cards.
The Ethereum-powered online game has seen users spend large amounts of money on purchasing memorable game highlights.