Even as the crypto market begins 2020 with renewed positive sentiment, one question still looms large over the industry: what is to come of crypto-focused investment funds. Prominent venture investors, from Andreessen Horowitz to Union Square Ventures, have publicly acknowledged the need for crypto-focused funds. Andreessen Horowitz built a separate entity and team dedicated solely to crypto, raising $300mn in the process, while Union Square took a different approach, allocating portions of their current venture fund into six distinct crypto-focused funds, such as Placeholder VC. Through the 2018 bear market, prominent crypto funds, like the ones aforementioned, remained well-funded and continued to invest across the board, albeit more conservatively after it became clear that retail exuberance for crypto assets had subsided. In 2019, these same investors proceeded to invest more aggressively, taking advantage of cheaper prices afforded to them by the closing of crypto funds that had performed poorly during 2018. As the industry had lost liquidity, those that remained well-funded spotted the market inefficiency and took advantage.
Now, as the tide begins to revert back to the positive sentiment of 2017, these prominent crypto funds are well-positioned to capitalize on the next bull market, similarly to their predecessors in 2016 (Many of the foremost funds today, ironically, did not exist in 2016, a byproduct of the market’s volatility.). As crypto prices revived in 2019, outperforming other public markets, institutional interest has begun to renew, as signaled by the entrance into the space of Fidelity Asset Management and the Intercontinental Exchange (the parent company of NYSE). These two traditional behemoths, along with now enhanced custodial services offered by Coinbase and their rival firm Gemini (who recently partnered with State Street), have paved the way for increased liquidity into the sector from institutional investors.
While some continue to wait on the sidelines, numerous institutional investors across Asia and the US have confided that crypto’s inability to die, highlighted by its increasingly efficient (in terms of scalability and privacy) technology stack, signals that the industry is likely to undergo another boom-bust cycle. Their sentiment is that once crypto-based applications become adopted, by either consumers or enterprises, speculators will slowly and then quickly rush back into the market, re-creating another bumpy bull market, until prices are so out-of-whack again that another bear market returns. When questioned further about the boom-bust cyclical nature of crypto markets, institutional investors pointed to other technology companies outside of crypto, such as Tesla, Beyond Meats, and biotechnology stocks. Whether a result of low-interest rates, human’s ‘increasingly-increasing’ technological proficiency, or a combination of other unknown factors, volatility in public, early-stage technology investments is unlikely to disappear anytime soon.
While many crypto funds are venture-only, in that they shy away from the public markets, several select crypto funds have taken a hybrid ‘venture-hedge fund’ approach. For example, Multicoin Capital is well-known for its positions in the public and private markets, as they tend to hold all positions (public and private) for at least the medium-term, if not the long-term, and publish frequent reports on their investments in an attempt to persuade other investors to follow their lead. While Multicoin’s approach has been successful, another successful approach has been undertaken by CircleFund. CircleFund, one of the only Asia-based crypto funds with the same compliance standards as the aforementioned US-based funds, employs a slightly different approach to Multicoin’s, approaching the public markets with a quantitative strategy, as opposed to a longer-term, thesis-driven strategy. Quantitative strategies, if executed correctly, have the potential to severely outperform thesis-driven strategies in public markets, as shown both in crypto and in other public markets.
Despite this difference, both funds have more similarities than distinctions, as both significantly outperformed their peers, and both have leveraged that performance to build global teams, with Multicoin entering Asia and CircleFund entering the US. The future of crypto funds is likely best highlighted by these two funds: a global, adaptive approach to both the public and private crypto markets. Even the partners at venture-only funds preach the benefits of exposure to public cryptos, as most continue to passively manage public cryptocurrencies in their spare time. As the crypto market continues to grow, it is likely all current crypto funds will benefit, but, undoubtedly, those with the strongest past performance and corresponding brand will compound their growth the most.