2020 was a tumultuous year for the blockchain venture capital (VC) landscape, with considerable uncertainty brought about by the pandemic. In the face of such challenges, the resilience of the sector has been impressive.
While overall funding volumes to the sector may have fallen from 2019 levels, the caliber of investor speaks volumes regarding interest in blockchain and cryptocurrencies.
Institutions and global corporations are increasingly investing in crypto and blockchain projects, a signal from incumbents that they fear being phased out of the market without adopting blockchain technology.
Institutional inflows into the crypto sector
Two of the largest crypto funding rounds in 2020 were led by major multinationals, with Microsoft backing Bakkt in a $300 million Series B round in March, and PayPal supporting Paxos in a $142 million Series C round this December.
2021 has started off with a bang, with Elon Musk announcing Tesla’s $1.5 billion investment in bitcoin (BTC), and BNY Mellon, America’s oldest bank, announcing it will hold, transfer, and issue cryptocurrencies on behalf of its clients. With these institutional strides, it’s no surprise that bitcoin is continually hitting its all time high after trading below $10,000 this time last year.
While institutional inflows into the sector are a net positive in terms of broadening access and adoption of crypto, it is important that these institutions are brought into the crypto economy the right way.
We cannot let institutions override the democratic ethos of crypto that so many have worked so hard to develop, and instead, should work together to bring the decentralized nature of crypto to a bigger target market through institutional on-ramps.
Looking to 2021, a number of particular areas of focus look to be emerging for investors in blockchain. Secure and high-grade custody infrastructure which can seamlessly integrate hot and cold storage is one such area of interest.
Bitcoin and other crypto assets have exploded in interest this year among retail holders, institutional finance and enterprises alike. With firms like MicroStrategy and Square investing hundreds of millions in bitcoin as a treasury reserve asset, secure custody infrastructure will be a base product which all investors in digital assets require whether they are investing $10 or $10 million in crypto assets.
Reaching the general understanding
Projects which have strong environmental, social, and governance criteria are also likely to attract interest from potential investors.
The general movement of new and revamped blockchain protocols towards proof-of-stake like consensus mechanisms, indicates that the sector has reached a general understanding that networks need to be sustainable in the long term — a factor which investors are also paying greater attention to in light particularly of many nations making stronger climate commitments (not strong enough, but it is a start).
Blockchain-based projects which promote socially responsible change are increasingly being viewed as worthwhile ethical investments.
Ridesharing app, Mobi, which facilitates safe and affordable carpooling to reduce vehicle carbon emissions, and Ample, a machine-learning smart meter company aiming to reduce consumer carbon footprint through blockchain technology and behavioral economics, are prime examples of the type of projects which are attracting prime interest from investors.
For VC investment in blockchain to fully realize its potential, a number of challenges will need to be addressed.
Regulation is the cornerstone upon which growth can be scaled. The issue is that despite progress in the right direction — comprehensive proposals like the EU’s Markets in Crypto-assets (MiCA) framework have been announced this year — regulation continues to operate at vastly different stages across different jurisdictions, and in many cases is unclear or changes radically year to year.
Moving slowly on regulation
While it’s no surprise that authorities move slowly on regulation, it is becoming increasingly clear that a number of large players in the global financial system, such as the US, risk being left behind on crypto assets and financial technology if they do not accelerate the pace of their legislating on the sector.
A number of states in Europe and Asia are seizing the initiative to become global leaders in blockchain and crypto assets, with clear, comprehensive regulatory frameworks already in place.
Alternatively, more and more citizens may choose to decide they do not need government regulation telling them how to live every aspect of their lives and naturally migrate away from those regions who insist on exerting too much control when it is not required.
Whatever challenges 2021 may bring, the blockchain sector has more than demonstrated its resilience, and building on the exceptional year that it has had in 2020, it will be exciting to see where the investment landscape leads in 2021.