Cryptocurrency Investment Themes and Trends

A Proposed View of the Future

Crypto Investment Themes and Trends

As the blockchain space matures, we are increasingly seeing investment from established private capital investors into the space. As shown on Figure 1, the deals are getting larger too, with several players completing rounds totalling several hundreds of millions of dollars.

Cryptocurrency Services

One of the areas in which we have seen a lot of activity — and where continued activity is expected — is in the area of cryptocurrency services. These solutions primarily include Storage & Payments solutions (e.g., Argen, Bitgo), Digital securities (e.g., Bitpanda), and networks & exchanges (e.g., Coinbase, Bakkt).

• Drivers: As assets like BTC and ETH become increasingly mainstream, a host of services that enable secure custody and trading of these assets are gaining tremendous traction. These solutions largely feature slick interfaces, smooth KYC processes, and provide a sense of trust, ensuring new users can rapidly get onboarded and start trading. The ease of use of the platform allows experts and novices alike to participate and have seen strong traction as the “hype” around crypto has grown, acting as highly effective gateways for new users into the world of crypto. As adoption amongst retail investors grows, these entry-level turnkey solutions are expected to continue to see increased activity. In fact, as shown on Figure 2: Overview of Crypto user growth, the staggering crypto user growth is illustrating the same patterns of adoption as the internet saw in its first years.
• Key areas of interest: Custody solutions and Exchanges in particular — which usually make ad valorem trade commissions — have seen large trading volumes as crypto prices have gone through spates of volatility, leading users trade in and out of cryptocurrencies. Solutions like Coinbase have seen particular success: founded by Brian Armstrong, an engineer, Coinbase listed on the NASDAQ at US$ 75B, making it “the biggest cash out in crypto history”¹. While the company has had its critics, overall this listing likely serves to cement and further legitimise the emergence of cryptocurrencies. As adoption continues to grow and a more sophisticated crypto user base forms, we can expect to see platforms that offer a broader range of more complex services — such as digital securities platforms (e.g., Eris X) — to offer substantial opportunity for expansion. Within this space we also see the emergence of new digital asset managers: firms like Wave Financial Group bridge the gap between institutional capital and the digital asset markets using liquid and tradeable private funds. They offer asset management tools to a range of clients in managed accounts. Their products include crypto index funds, high-yielding funds using crypto-derivatives to generate income and early-stage crypto hedge fund.

DeFi

Momentum towards more sophisticated blockchain apps that make up the DeFi stack is growing, as user bases become more prominent and tools mature. While the DeFi stack is not about the replace the traditional financial stack, the growth of more complex DeFi applications will continue to draw substantial investment going forward.

• Drivers: As blockchain technology matures, improves in scalability and more use cases are met, adoption has grown. Furthermore, as the bounds of traditional finance are pushed through crises like the COVID-19 pandemic — which saw unprecedented liquidity injections into the financial system — investors are looking for alternatives to traditional finance which they feel is becoming unsustainable. As a result of this momentum, DeFi projects have now raised over a US$ 500M from VC investors, as shown on Figure 4: Total Capital Raised by DeFi Companies.

• Key areas of interest: One of the areas that has attracted the most attention, as shown on Figure 5: Main areas of investment in the DeFi Landscape, has been lending. As the technology grows and increases in reliability, one of the safest ways for investors wanting to participate in the blockchain space has been to focus on collateralised loan platforms such as Maker and Compound. Furthermore, while traditional finance yields are at unprecedented lows (and even negative in certain parts of the world), DeFi lending rates — which are in the high single-digits and low teens — are highly attractive for investors. That said we expect to see champions across all other components of the DeFi stack to attract investment going forward. Indeed, players like BlockFi (Wealth Management), dYdX (derivates), and Radix (DeFi protocol) have all seen strong interest in recent months.

NFT platforms

Blockchain’s immutable nature offers the possibility to create unique digital assets and non-fungible tokens (“NFTs”). While still nascent, this area is rapidly growing and creating interesting opportunities for capital deployment. While the space is active with a range of players, it is useful to categorise them in three main buckets: (i) infrastructure, (ii) publishing, and (iii) transaction players. These categories, in particular the publishing layers can be further broken down into Collectibles, Art, Games, and Virtual World applications.

• Drivers: The NFT market can be described as bringing together aspects of entertainment, gaming, and social media into one platform. Just as other platforms (e.g., Fortnite) have replicated entertainment and community experiences in a digital world, NFTs are replicating a similar phenomenon. As users increasingly spend more of their time online and turn to web-delivered community experiences, NFTs have benefited from substantial momentum. This momentum was accelerated by the pandemic which led those unable to meet in person to congregate virtually. As shown on Figure 7: NFT sales in key categories, sales volumes for NFTs have skyrocketed in the first months of 2021. As we continue to see digitisation expand and take a greater prominence in our lives, NFTs are expected to continue to expand as an industry, through both existing and new platforms.

• Key areas of interest: The most active space for investment has so far been in the publishing layer. Collectibles in particular have received the most focus with Sports-related platforms showing enormous momentum. In addition to NBA Top Shots, other platforms such as Sorare — a football-focused NFT platform – have received investments from the likes of Accel, illustrating how the Sports collectibles NFTs are likely to be cookie-cut across various sports. In the nine months leading up to February 2021, Sorare recorded a 20x growth in sales, attaining US$ 6.5M in February alone². However, in addition to Sports collectibles, Game platforms are also likely to garner substantial interest. Game NFTs are distinct from Collectibles in that they have “utility”: users can create characters that are stored as NFTs and use them in games (e.g., role-playing games) against one another. With the gaming market being worth over ~US$ 160B and growing at roughly ~10%³, we can expect the market opportunity for these specific types of NFTs to be substantial. As AR and VR gain traction, the Virtual World NFT space is also expected to grow rapidly. Other aspects of the NFT space (e.g., broad marketplaces), have received some level of attention, though to a lesser extent than publishing layers.

References

¹ The FT, April 18th 2021 https://www.ft.com/content/ba47468b-ddb8-4740-af63-d5629ca8364e

² Mex Mersch, Fabric Ventures

³ https://www.reuters.com/article/esports-business-gaming-revenues-idUSFLM8jkJMl