Investing in early-stage ventures is inherently risky. At the same time, venture capital investors enjoy some of the highest returns of any asset class. Therefore, prominent investors such as David Swensen, the Chief Investment Officer of the Yale Endowment, allocated almost 17% of the endowment to venture capital in 2017. Investors with exposure to companies such as Airbnb have been well compensated for the risk.
One way to look at the volatility of the crypto market is to compare it to traditional venture capital. As the traditional markets for venture capital are highly illiquid, there is little to no price discovery while the companies remain private. Only when there is a new round of funding or at the time of a significant liquidity event such as an IPO, do investors discover the value of their investments. This is one of the reasons that prices appear more stable and smooth over time. If we were able to trade the shares of SpaceX from the time of inception on a daily basis, the valuation would seem significantly more volatile. We would see dramatic movements in price while the company grew and matured.
Investing in crypto is investing in a foundational technology that is still in its early stages of development and adoption. The big difference is that the assets associated with these investments are liquid and traded 24/7/365. As the supply of most of the assets is known, the big fluctuations in price are because of changes in demand. This demand can be driven by factors that are sometimes unrelated to the fundamentals of the investment. For the first time in history, we are able to see the true price volatility involved with investing in early-stage ventures. The higher price discovery does not necessarily mean there is higher risk. A lack of volatility would be surprising — it would mean that the technology is not disruptive.
Short-term price movements present great opportunities for long-term investors. Blockchain technology will transform many businesses and industries creating enormous value. We plan to capture that value over many years and through market cycles. We will continue to invest based on the fundamentals of these opportunities regardless of temporary market sentiment.
Disclaimer: This is not an offering or solicitation. This is not investment, tax, legal, financial or any other type of advice. Please perform your independent research and due diligence.