Here is Why Venture Capitalists Are Spending Millions in Blockchain Startups
Was cryptocurrency just a fad? Bitcoin’s rising price made some crypto millionaires suddenly less than two years ago. Then the value of coins plummeted and never recovered. Projects have been canceled, jobs have been lost, and the enthusiasm of 2017 has gone off. Is it possible that the technology isn’t all that it’s talked up to be? Venture Capitalists argue that this is nonsense. Short-term volatility in cryptocurrency markets doesn’t matter to them because the decade-old technology has always been a long-term gamble on the future of finance. According to Meltem Demirors, chief strategy officer for CoinShares, crypto research, and investment tool supplier, conflating the market for digital currencies with investment in digital currency projects is a mistake. According to her, the latter is still a “big and extremely active market.”
Indeed, venture capitalists continue to pour money into blockchain startups. Venture Capitalists have invested roughly $334 million in blockchain ventures in the first three months of this year, according to PitchBook, a financial data, and analytics business. The largest deal involved Figure, a company that uses blockchain technology to make home equity loans, which announced a $65 million funding round in late February. So far this year, total investment had lagged behind that of last year, when a record $5.5 billion in venture capital was invested in blockchain startups. However, the sum raised so far in 2019 is on track to match the financing level of 2017, when just over $1 billion was raised.
What occurred last year? The enormous flood of VC could reflect part of the same irrational excitement that swept speculative investors in late 2017 and early 2018 when coin prices skyrocketed. The distinction is that these venture investments were long-term bets on enterprises rather than short-term bets on the price of a token rising. And some of them were quite risky wagers. According to PitchBook, eight of the top ten largest VC deals for blockchain businesses occurred in 2018. Bitmain, a Chinese mining chipmaker, has funded over $1.3 billion on its own.
Coin prices have fallen in the past for crypto-focused VCs. However, according to Niraj Pant, a venture capital firm, Polychain Capital, the business is much more solidly entrenched. Pant says that during the previous slump in 2015, it “felt like everything was extremely lifeless, and we weren’t sure if the market would rise back up.” “Right now, it feels like there’s still a lot going on.”
However, blockchain technology still faces significant technological challenges that prevent it from being used broadly. As a result, venture capital firms have placed large bets on several brand-new blockchain systems whose designers promise to fix this problem. Dfinity and Hedera Hashgraph, two smart contract systems, raised more than $100 million in investment last August. In October, Algorand, a blockchain technology created by MIT professor Silvio Micali, raised $62 million.
However, no topic is more popular among VCs than so-called decentralized finance. Any financial service that does not rely on traditional financial institutions to act as trusted intermediates falls under this umbrella. The advent of new loan businesses based on the Ethereum-based stablecoin Dai has recently sparked a surge in interest. According to Fred Wilson of Union Square Ventures, these applications don’t require big transaction volumes; thus, they could take off shortly. “I believe blockchains will scale in the next few years, allowing mainstream consumer applications to be built,” Wilson predicted. “But [decentralized finance] is a fantastic place to hang out until then.”