The first ever cryptocurrency was introduced to the world in 1990. Known as eCash, it was introduced by a company named DigiCash. Though the company went bankrupt in 1998, It created a blueprint for further evolution of the concept of cryptocurrency.
Cryptocurrency, also referred to as crypto, is a type of digital or virtual currency.
However, what differentiates it from digital transactions such as net banking or the usage of credit cards is that cryptocurrency is not regulated or maintained by any centralized authority such as a government or a bank.
It is part of a growing decentralized ecosystem, which is gaining popularity among businesses and consumers. This is because, unlike the centralized banking ecosystem, which has left millions of consumers unbanked, the cryptocurrency ecosystem has built a reputation for its accessibility and low costs.
In the last few years, the cryptocurrency market has grown significantly. As of June 2022, there are over 12,000 types of cryptocurrencies in existence. As more crypto-focused businesses launch and scale, access to crypto venture capital is also growing.
According to Galaxy Digital Research, in 2021, venture capitalists invested crypto and blockchain technology startups to the tune of over $33 billion. This figure exceeds cumulative funding for crypto and blockchain startups of all preceding years, put together!
In this blog, let us understand more about the distinct types of cryptocurrencies, the growth of blockchain, and why venture capitalists are bullish on the sector, which is continuing to attract crypto venture capital funds, despite its volatility in the last year or so.
Rise of Bitcoin
Though Bitcoin was not the first cryptocurrency to be introduced, it is the oldest surviving cryptocurrency that has seen widespread adoption. The popularity of Bitcoin has triggered several trends around it:
- Today, more entrepreneurs are building startups that make it easy and secure for consumers to invest and trade in Bitcoin and participate in the decentralized finance or DeFi economy.
- Some startups are also working on payment solutions where cryptocurrency, like Bitcoin, can be used to purchase goods, services, and financial assets, such as real estate, in an easy and secure manner. However, this is not a new concept. The first purchase using Bitcoin or BTC was made in 2010 when 10,000 BTC was used to buy two pizzas. Today, it is a whole lot easier to shop with Bitcoin, and you can also buy a many diverse products.
- Venture capitalists are betting big on startups building businesses around Bitcoin and other cryptocurrencies.
- A number of corporations are investing in Bitcoin as a financial asset, thus adding legitimacy to crypto as an investment instrument.
- While certain governments have banned Bitcoin, others have adopted it as an official currency.
Growth of Blockchain Technology
Today, it is also extremely important to understand the role of blockchain technology.
Many consumers believe it to be another type of cryptocurrency. However, this is incorrect.
Blockchain is a system where information is recorded in a way that makes it difficult, or rather impossible, to manipulate or change without all the relevant stakeholders being made aware of this instantly.
It can be described literally as a chain of blocks or ledgers containing data that are distributed over a network of devices such as computers and smartphones.
So, what is the connection between cryptocurrency and blockchain? Cryptocurrency can be securely and easily transacted using blockchain technology, where all transactions as stored on a ledger, which is accessible to those making the transaction.
Transactions using blockchain currencies are considered to be peer-to-peer transactions that can take place without the involvement of third parties such as banks.
The benefit is that the fees are extremely low, and blockchain provides a single version of truth for all the involved parties.
Popular blockchain cryptocurrencies comprise a wide range, including Bitcoin, Ethereum, Tether, and Binance.
State of Cryptocurrency Today
In November of 2021, the value of Bitcoin was at an all-time high of $69,000. As of October 14, 2022, its value has depreciated to $19,678. Other cryptocurrencies, such as Ethereum, Altcoin, Solana, and Cardano, have also experienced drops.
Hence, from a cryptocurrency market capitalization of $3 trillion in November 2021, it dropped to $1 trillion as of September 2021.
Such a drop in cryptocurrency market capitalization was preceded by reports of an upcoming recession in the United States. However, these developments have not fazed the growth of cryptocurrency and blockchain investments by venture capitalists.
In the first quarter of 2022, venture capitalists had already invested over $10 billion in crypto startups.
Companies working on solutions like Web3, non-fungible tokens (NFTs), decentralized autonomous organizations (DAO), gaming, and the metaverse, are also in the limelight for grabbing significant capital investments.
Trading exchanges/investment platforms and infrastructure were also part of the mix. Let us understand the underlying reasons for these trends.
Why Investors are Bullish on the Crypto Markets
Technological innovation is an expensive proposition. It needs to be backed by funding for large ticket sizes. Venture capitalists love to invest in startups and entrepreneurs that are fuelled by innovation and are solving problems at scale.
Operating on the Cusp of Innovation
Blockchain and cryptocurrency startups are continuously innovating and attempting to solve some of the issues faced by businesses and consumers today.
For instance, the centralized banking ecosystem that currently exists has traditionally excluded a large number of consumers.
A service as simple as owning a bank account comes at a considerable cost and is not accessible to all demographics.
However, cryptocurrency startups are attempting to make financial services such as investments and payments accessible at a much cheaper rate. They are attempting to democratize such services, thus disrupting the status quo.
Secondly, all financial assets - from stocks to commodities such as gold - undergo cycles of appreciation and depreciation, and the reality is no different for blockchain cryptocurrency.
Bringing Transparency to Traditional Sectors
On the other hand, blockchain has a whole lot of potential to transform the way business is done across a wide range of sectors, such as cyber security, insurance, supply chain management, healthcare, government, travel, infrastructure, and vaccine distribution.
This technology brings transparency, accuracy, accountability, efficiency, and speed to transactions.
For instance, food companies are leveraging blockchain technology to bring more efficiency to their supply chains. This enables them to reduce food waste and track shipments down to the second.
This is extremely valuable in a sector with high spoilage and contamination potential, which leads to food wastage and reduced profitability.
Rebuilding the Internet with Web 3.0
Blockchain technology is enabling the reinvention of the internet as we know it. The arrival of Web 3.0 solves some of the top challenges posed by the world wide web today.
For instance, the data shared by internet users via social media sites rests with these platforms, and they are free to use and distribute it.
With Web 3.0, Internet users earn tokens with monetary value based on their participation, which can be used in relevant ways.
Another issue it addresses is the invasion of an Internet user's privacy. Web 3.0 enables users to protect their online identity and confidential information.
These innovative features are attractive to blockchain-focused venture capital firms looking to enhance the value of the internet for users.
Growth of Mergers and Acquisitions (M&As)
Another growing trend is the accelerated pace at which M&As are happening in the cryptocurrency space.
From April to June 2022 alone, the ticket size of M&As amounted to $2.969 billion, which is higher than $2.541 billion from the first quarter.
Coinbase and FTX are among the top acquirers, according to Architect Partners, an M&A acquisition advisory firm.
Coinbase, which is the largest cryptocurrency exchange, is the largest acquirer of smaller startups, followed by Graph Blockchain, FTX, Yearn, and Gemini.
Going Beyond Funding
Venture capital firms are not merely throwing money at blockchain and cryptocurrency startups; they are also empowering startups with knowledge capital to navigate a range of challenges.
For instance, a venture capitalist firm Alumni Ventures, which has funded over 800 high-growth businesses, offers founders a community model enabling them to access mentorship, resource support, and networks.
Multicoin, yet another firm that has invested venture capital in cryptocurrency startups, has also established itself as a specialist in aspects such as research and analysis, deal flow, and brand-building.
They are considered thought leaders in the area of token economic models, as well as new valuation methodologies.
Challenges for Venture Capital Firms
There are many challenges faced by venture capital firms when betting on this sector. Here is a snapshot:
- While the decentralized financial ecosystem is a hotbed of innovation, it is unregulated, which can prove to be a double-edged sword.
- The second challenge is that companies will need to generate sufficient revenues for venture capitalists to recover their funding and make profits.
- The technologies involved are, at times, not fully understood by venture capital firms, which are looking to participate and not miss the trend. A lack of understanding of the potential fallouts can end a venture capital firm's engagement with the sector when betting consistently on the wrong players.
- The documentation for venture capital cryptocurrency investments can be complicated to draft due to the lack of government regulation. Due to this gap, some startups bypass this process and find other fundraising models. For instance, they may pre-sell cryptocurrency before getting into the development stage. The benefit of this approach is multi-fold. For instance, it enables founders to hold on to equity and remain in a position to make independent decisions.
Despite all challenges, venture capital firms are getting savvier about emerging technologies and related applications and solutions and playing a hands-on role in their success trajectories.
Those with a long-term perspective are more likely to benefit from their investments.
Secondly, some founders of successful cryptocurrency startups have now turned into investors, betting big on crypto venture capital investments.
For instance, the cryptocurrency exchange platform Coinbase now invests in cryptocurrency and blockchain startups.
The growth of startups building cryptocurrency and blockchain businesses has also spawned several job opportunities.
This world requires professionals with specialist skills and an in-depth understanding of its potential and possibilities to bring about a massive change in the fintech and financial services sector.
But how do you build skills in this new-age domain? Pursuing a regular bachelor's or master's degree will not equip you with the skills, knowledge, and in-depth understanding of the emerging technologies that will contribute to creating the metaverse.
It is advisable, instead, to pursue a specialized Certificate program in FinTech, Blockchain & Cryptocurrencies, which offers a mix of instructor-led sessions, on-demand curated online learning resources, and an immersive experience through real-world projects.
Those who enter the sector with the right mindset and skills will have a competitive edge and be geared to carve a niche early on.
Hero Vired is a premium LearnTech company offering industry-relevant programs in partnership with world-class institutions, such as Harvard University, Georgia Tech, and Code Academy, to create the change-makers of tomorrow.