This year is breaking records for capital inflows from VCs into blockchain startups. The reason is the ongoing bitcoin rally. But has the rise in the value of cryptocurrencies alone boosted risky financing? Perhaps there are other hidden reasons for this interest?
The first quarter of 2021 was favorable for financial flows in the blockchain industry. In the past 3 months alone, 129 startups invested $2.6 billion, which is $300 million more than cryptocurrencies received during the entire previous year.
Elon Musk and Michael Saylor lead by example
Celebrate the 3 largest blockchain companies that raised $1.1 billion in funding:
- cryptocurrency wallet operator Blockchain.com;
- BlockFi, a cryptocurrency lending company;
- blockchain game developer Dapper Labs.
- According to Cointelegraph Research’s report on venture capital, Americans are the most invested in blockchain and crypto startups. This skew has been observed since the emergence of cryptocurrencies until now. However, the U.S. is not a country where legislation is most conducive to this kind of preference.
Jehan Wu, the founder of Kinetic, succinctly explained the growing interest in venture capital investments: “There is no more compelling reason [to invest in cryptocurrency – author’s note] than the example of people like Elon Musk, Michael Saylor and the ‘panic’ flow of institutional money pouring into the market. Venture capital businesses must actively invest in cryptocurrency, otherwise, they risk missing out on the best opportunity for profit within a few decades.”
The driving force that attracts financial flows to blockchain startups is their potentially high profitability. According to the same Cointelegraph Research report, investments in blockchain have yielded more returns than traditional capital allocation options over 3 time periods: 1, 3, and 5 years. Thus, cryptocurrencies are an example of a good asset for investment portfolio diversification.
Given the multiple growths of financial flows directed in the form of investments in crypto startups in 2021, the share of venture capital in them is expected to slightly decrease. By the end of 2020, such investments occupied about 1% of the market. During the previous bitcoin rally in 2017, this figure was twice as high.
Its decline can be attributed to two main factors: the two-year dominance of the bear market and the coronavirus pandemic. Taken together, this resulted in blockchain-focused venture capital funding dropping 13% between 2019 and 2020. At the same time, investment in traditional areas increased by more than 18%.
What’s attracting investors in 2021?
Since the advent of the crypto market, it hasn’t stopped being compared to the Internet technology market of 1990-2000. Breakthrough industries like e-commerce and social networking were also emerging then. Those who saw the promise of e-commerce in time created Amazon and eBay. Now no traditional store in the world can compete with these giants. Social media has surpassed the world’s largest print and television media outlets in terms of audience reach.
This is also the culmination point for blockchain, which is now positioned as a technology capable of influencing global business processes. And, of course, to bring profit to those who will be the first to risk investing in the promising market.
To early investors, ICO tokens offer the opportunity to increase income many times over after a project goes to market
The growth of decentralized finance (Defi) has had a positive impact on the investment appeal of the cryptocurrency market through, for example, steaming.
Back Kim, Investment Director at Hashed Venture Fund, notes an interesting fact: unlike traditional markets, investing in blockchain startups allows the investor to be not only a “wallet,” but also to become a direct participant in the project.
Not only large and successful crypto players are attractive to investors. The “young, but early-stage” companies also arouse significant interest.
The creators of blockchain startups themselves are also noticing increased attention.
Rob Weir, CEO of Defi Jigstack, admitted that attracting investment from venture capital was the easiest task in the initial stage. True, he also noted the need to be responsible for the impact of early investors on the value of the project’s currency once it is launched.
According to Weir, venture capitalists consolidate most of the tokens from, for example, ICOs. Which could potentially hurt the value of a project’s currency if it is dumped into the market at one time.
Supporting promising projects early on is already an established trend by 2021. Some platforms, like Launchpad, have even started offering users subscriptions. Among the services announced is accessed (for a certain period) to investments in startups before they are publicly listed on stock exchanges. The average return on such services in the market in 2020 was between 11.3% and 68.2%. This is much higher than the return on traditional investments.
The blockchain industry is becoming more and more attractive for investing capital. It is only necessary to properly assess the prospects of the project selected for investment.
The reason for this popularity is simple: the profits from investing in one startup can offset the losses caused by less successful investments.
There is no doubt that as the industry develops, the flow of cash infusions into it will grow. This presents a great opportunity for young entrepreneurs to pursue their business ideas.