- Venture capitalists are used to the risk of traditional tech investments and that is why they have been so forward-thinking when it comes to investing in crypto
- Grayscale was the first institution to offer an alternative investment opportunity to the broader public
- VCs like A16Z, Morgan Creek and Greylock Partners are way ahead of the game when it comes to investing in crypto
Venture capitalists are known for having very strong risk appetites. As many will point out, it takes just one win for them to cover all their other losses. This large risk appetite is what makes them the perfect fit for the crypto world. They likely already understand the technology and have the capital necessary to invest, so why not? There have been several different ways in for those interested in investing in crypto over the past few years, and this article will go through a few ways that are more accessible to the public.
A venture capitalist (VC) is a private equity investor who funds companies that have high growth potential in exchange for an equity stake. Venture capitalists’ investment comes in the form of providing funds to aid business expansion or providing capital for a new-born startup to kickstart business operations.
A venture capitalist by nature is open to risking their money for projected high returns. At the same time, they diversify their risk by investing in a portfolio of stocks which increases their chances of ending up profitable in the end. However, since it became common for traditional startups to fail, most venture capitalists have now become more receptive to considering alternatives in their investment decisions. Instead of pooling all funds in traditional stocks, they are now looking at capitalizing on a new type of stocks to widen and diversify their portfolio.
Private Funding for Crypto Companies
Many venture capitalists are already making big moves into the digital asset terrain, exploring the underlying technology guiding Bitcoin investment. Although the market was a little down, 2019 saw over 2 Billion in private funding for crypto and blockchain-based startups. In fact, they are making a change in the direction of traditional VC funding and finding possible ways to help revamp the capital funding space to meet the best opportunities out there.
The influx of institutional players into the blockchain and cryptocurrency industry has made a huge difference in fueling mainstream adoption for crypto. This has, in turn, made blockchain and cryptocurrency investments more attractive and lucrative options for VCs.
Over the years, many players have seen the potential that lies within blockchain technology and the cryptocurrency sector at large. This has seen the likes of JPMorgan issuing its dollar-backed cryptocurrency. While Goldman Sachs recently purchased one of the most well-known and largest exchanges on the market, Poloniex.
Venture Capitalists like Andreesen Horowitz (A16Z), who ranks as one of the biggest Venture Capitalist firms has redesigned their investment approach to apportioned 20 percent of their venture funds into crypto assets. This was necessary to seize the high returns associated with crypto investing while taking note of the underlying risk.
Tracking Crypto Performance With Investment Trusts
The cryptocurrency space has evolved within the past decade, the community has since been waiting on the Securities and Exchange Commission to approve Bitcoin-related Exchange-Traded Funds (ETFs). With that taking forever, an approved ETF would have been a great way to attract more institutional players into the cryptocurrency sector.
Pending the approval of an ETF, there is an alternative investment route for interested parties to make high-returns investing in Bitcoin and other cryptocurrencies. This is the creation of an investment trust. Grayscale was the first institution to take advantage of this opportunity. The Grayscale Investment Trust debuted as The Bitcoin Investment Trust on 25th September 2013.
By being a Bitcoin Investment Trust, it provided an avenue for accredited investors to gain exposure to digital assets and take advantage of its ‘high-return’ potentials. In 2019, Grayscale received approval from FINRA for eligible crypto stocks to trade publicly. This made the services of Grayscale available to retail investors.
The idea of a Bitcoin Investment Trust works in the same way as SPDR Gold ETF which gives an investor the privilege to own shares and gain exposure to the underlying asset without having to buy and hold the gold directly. Similarly, a Bitcoin Trust lets a venture capitalist access crypto assets without buying these crypto-assets directly.
The Grayscale Bitcoin Investment Trust gives venture capitalists the privilege to make an early investment in a crypto stock under the marker “GBTC”. The venture capitalist has the privilege to make high returns when they resell in the secondary market at a premium. Grayscale’s GBTC is currently traded on the OTCQX exchange.
Though Grayscale was the pioneer in launching a Bitcoin Trust Fund, other institutional players aren’t that far behind. Bitcoin One Tracker debuted in 2015 in the United States, offering U.S based venture capitalists an excellent investment opportunity of buying into an exchange-traded note (ETN). Bitcoin One Tracker made headlines in 2018 when many venture capitalists fought to seize the opportunity in expectation for higher returns.
This mode of investing could allow a venture capitalist or a private investor to access digital assets in the top 10 categories or streamline their investment to include only a group of privacy-focused cryptocurrencies. This presents them with profitable investment options to streamline their investment strategy in the best interests of their individual investors.
Launching a Crypto Fund
There is one highly anticipated alternative to Grayscale’s Bitcoin Trust Venture that is emerging. This is where investors looking at exploring investment opportunities in the space set up their own fund. This involves pooling large amounts of funds from investors and then carving out a percentage for investing in promising crypto and blockchain projects.
This investment could be spread across viable startups, existing digital assets in the top 10 rankings by market cap, or investing them in initial coin offering that has potential high returns.
A16Z venture capital has already launched an investment product in this angle, by allocating 20% of their portfolio to a liquid asset like cryptocurrencies. This new model of venture capitalism creates the ability to assemble a large base of investors who are necessarily interested in investing in targeted crypto assets.
The Bottom Line When Investing in Crypto
Crypto assets have historically outperformed traditional stocks in recent years, and the future still looks very promising. The high return potentials of cryptocurrencies are likely to attract more interest from venture capitalists to explore alternative options in the form of crypto / digital assets. VCs like A16Z, Morgan Creek and Greylock Partners are already setting worthy precedence for other venture capitalists to follow.