So you want to start or invest in an ICO / Blockchain / Crypto Fund? Part II/II: How does the industry invest in blockchain?

This post reflects my personal views on the current crypto fund market.

Like anyone working in Fintech VC, I have been trying to make sense of the recent cryptocurrency craze. In part 1 I highlighted the challenges faced by crypto fund managers around pre-trade, execution and post-trade, and here in part 2 I aim to provide my view of the current crypto fund landscape. I may be wrong, but thought it would be great to share this, and gather your feedback. PLEASE LET ME KNOW IF YOU HAVE ANY COMMENTS. As always, I am very happy to have a chat or share notes, just email me at

So if you have read my previous post you saw that starting a crypto fund is quite challenging — but not impossible. When I first wrote my post on My Token / ICO / Blockchain Capital Markets Landscape I thought there were just two types of crypto funds: ones investing in equity, and others in tokens. Well, it’s not as binary as that.

From Satoshi to Polychain. From Reddit to Forbes.

In January 2009, Satoshi Nakamoto mined the first block of bitcoin, rewarding him with 50 bitcoins. Even after the last few days of bitcoin meltdown, 50 coins are worth a healthy $150k+. The second Bitcoin user was Hal Finney who received 10 bitcoin from Satoshi. From that point, and until about 2013, a Bitcoin holder would most likely be a super early adopter of technology and/or a fan of Bitcointalk or other obscure internet forums.

In February 2013 Coinbase reported $1m of bitcoin transactions in a single month, priced around $22 per coin. In summer 2013, the Winklevoss Twins announced their plan to launch the first Bitcoin ETF, leaving institutional investors amused. Look, it’s not their fault; at the same time you had the burst of Mt. Gox and the FBI’s shutdown of Silk Road. Bitcoin was not cool.

Then China discovered Bitcoin. China is known for its love of gambling and for its love of new regulations. In the fall of 2013, Chinese investors discovered Bitcoin mining and exchanges and they loved both a bit too much. The results? Prices went through the roof and new regulation stopped the party. Sound familiar?

Following the Bitcoin boom in 2013, VCs were just starting to rave about Bitcoin related companies. Many thought that Bitcoin was just about to become mainstream, and about $1bn of funding was poured into Bitcoin / Blockchain companies between 2013 and 2015. The problem was that Bitcoin adoption was slower than expected; the Bitcoin price was somewhat flat, and more importantly for investors there was no major M&A. Bitcoin was dead for VCs.

End of 2015, VCs fall in love with Blockchain - “the technology underlying Bitcoin”. More precisely, investors were getting excited for applications of private blockchains in financial services, and massive consortia deals gave birth to Digital Asset Holdings and R3. Blockchain was tipped to revolutionise the Oracle database and bring trade execution to T+0.

Nevertheless, few savvy investors saw the decentralisation light.

The first crypto fund was Exante - the Malta based outfit launched in 2013. Around the same time Grayscale (now part of DCG) was launched to manage the Bitcoin Investment Trust (BIT). In 2014, Daniel Masters launched Jersey based GABI, while Naval Ravikant and Joshua Seims started MetaStable - a macro strategy fund based in San Francisco. Shortly after, Pantera Capital launched its crypto fund backed by Ribbit Capital, Benchmark and Fortress and until fall 2016 these five funds formed the majority of institutional investment. At the same time some high frequency trading shops like DRW Cumberland Mining launched their OTC and market making arms, but none formally started crypto funds. Meanwhile, the founders of Hudson River Trading, quietly launched a bitcoin research & development group in NYC named Chain Code Labs.

Then came Polychain.

Polychain headed by Coinbase hire #1 Olaf Carlson-Wee, raised $5m from 30 investors in September 2016, and sparked further VC interest when they raised another $10m from USV, A16Z. I remember having a coffee with a friend in December ’16 who tried to explain to me Polychain’s token investment strategy: “It is a bit like investing in URL addresses back in 1997. Most of the names will be worthless, but some will actually be used by the community and their value will increase exponentially.” I went home and bought some Ethereum - just in case.

Then in April ’17, Blockchain Capital raised $10m in six hours through an ICO. Almost ironically, this was the same time that Bitcoin, Ethereum and other altcoins started to rise to historical levels, driven by South Korean and Japanese regulations and low interest rates... The total market cap of crypto coins hit $112bn on June 12th ’17, and about a month later, Olaf appeared on the cover of Forbes just 12 months after launching his fund. Yes I know. Cool.

Founder of Polychain Capital on cover of Forbes. 12 months after launch of the fund.

Everyone wants to be a crypto hedge fund manager. Hello GDAX. Goodbye Bloomberg.

From summer ‘17, every VC, HF and money manager started to ask their analysts and associates questions like “Where can I get Bitcoin? What is an ICO? I want to buy tokens - how does it work?”. Until this point, most of these investors associated the word ‘token’ with slot machines and family trips in Atlantic City.

The following months were a turbulent time for Bitcoin with the Segwit discussion, and SEC letter, but that did not stop wannabe crypto fund managers. 15 crypto funds were founded in July ‘17 according to Forbes, that total now 55 according to Autonomous Next. Some bearish Bitcoiners like Marc Cuban (yes the same who thinks Bitcoin is a bubble) started to seed these newly found crypto hedge funds like 1Confirmation. Meanwhile the pioneer crypto funds like Polychain and Metastable received major interests from top VCs and other investors. Today, Polychain now has $200m+ of AuM and is backed by Sequoia, MetaStable raised from Sequoia and A16Z among others and Pantera is launching four new funds, including one dedicated to ICOs.

What about the other investors you may ask. Well it’s complicated.

You have classic VCs still solely interested in equity, seeing tokens as just a fad, or being restricted by their LPs, or all of the above. You have HFT hedge funds that have mined Bitcoin for the past 4 years, and now starting to trade cryptocurrencies for fun. You have Long-only funds — similar to ETFs — that solely focus on providing an exposure to people who do not want to buy directly on an exchange. You have algo/quant/trading shops being setup everyday by ex-bankers / high school students and crypto genius’ with one aim — creating alpha out of candlesticks. You have specialised crypto funds investing solely in ICOs and existing cryptocurrencies. You have crypto companies launching their own funds (like Blockstack and Tezos) to grow their community. And finally — my favourite cats, VC funds able to invest in both equity and tokens. Why are these my favourite? Well, the last group are able to leverage their knowledge from non-token firms to token firms, and can add governance with equity checks.

All of these funds are summarised in the landscape below:

My crypto fund landscape

I will publish an updated version with detailed information on each investor group if I reach 500 fans for this post.

The end of VCs?

Some people say VCs will be disrupted at their own game. I don’t agree. I think a major opportunity has already arrived for early stage investors. As Kavita Gupta from Consensys Capital stated “There is still value to due diligence, and even if two PhD kids have sold tokens based on a brilliant white paper, they still have to figure out how to deliver a company. That’s not necessarily something they have experience doing.”

ICOs solve the issue of funding for open source technology. But founders need support building a team, advice on growth and guidance on how to support their community. As Yann Ranchere discussed in his post, it will be interesting to see how the company behind protocols develop their vision, through diversification, building on-platform etc..

In my view, VCs can have a major impact on companies long before an ICO; helping them assemble teams, build products, improve communications. Post-ICO, VCs will continue to work with companies and they will be able to divest their tokens after a few years — on a similar schedule to traditional vesting. Hedge funds, day traders and others market participants will provide liquidity to investors, users and founders.

What’s next? Wall street is coming.

Today the market is very volatile, mainly due to the lack of clarity around crypocurrency regulations, but a new regulatory framework may take 12–24 months before release. When this is done, it will allow the launch of more mainstream products like ETFs. In the meantime, this is great news for algo / quant crypto funds as they thrive of uncertainty. However, a major risk for these investors lies around the operational nuances of post-trade, custody and security, on top of to their ability to pick miss-priced tokens.

How about institutional money?

Well, regulation needs to be clearer before we see leading investment banks launching crypto products or blue chip hedge funds allocating resources to cryptocurrencies. However, there will be a phase of trial (and error) by hedge funds, coupled with modest money inflow.

Financial services is changing, and professional investors find themselves centred in the debate of a decentralised future.

Thank you for reading my post.

Don’t forget to share with friends and your bitcoin early adopters colleagues.


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