LPs and traditional VCs waking up to crypto?
Institutional investors have a fiduciary responsibility to understand the funds and assets that they invest in, underwrite the risks, and conduct proper due diligence. Even though there is consensus on how crypto projects should be evaluated and what crypto assets are worth, there is a degree of “obscurity” on the best investment strategies, fund structures, and legal handling, compared to traditional investments.
Even though traditional venture capital (VC) firms are gradually starting to diversify their portfolios, investing in more cryptocurrency and blockchain projects than ever before, this fact must be taken into consideration. If a potential capital allocator is to ask various crypto “experts” the same set of simple questions today, they are likely to get a wide variety of answers. Ultimately, this may increase the confusion and lack of confidence when making an investment in this space.
It is believed that there can be “barriers of adoption” for investors. Scepticism is one of them. The cryptocurrency industry has its share of sceptics, such as:
- The ones who consider all cryptocurrencies as competitors of fiat currencies
- The ones who see no product- market fit. Since crypto remains in the ‘infrastructure phase’, they consider the market too early for entry. They believe the value will mostly accrue towards the application layer of the new tech stack, like how it did for the Internet.
- The ones who believe in “Blockchain, not crypto”. They dismiss crypto as an investable asset class and believe that the value is in the underlying technology: the blockchain.
Investors make investment thesis: a reasoned argument for a particular investment strategy, backed up by research and analysis. Since crypto is like no other market I’ve seen before, investors are having trouble crafting a thesis that aligns with their understanding of what makes a good or bad investment decision.
Besides, starting a new crypto-focused investment division demands more than just an investment thesis. In particular, investors must also think about the right structure and subsequent implications on tax, reporting, regulations, and fundraising. there is much confusion around whether hedge fund structures or venture fund structures are the better choices for making active crypto-asset management allocations. When investing in early-stage businesses, traditional tech VCs typically pay much attention to valuation through a thorough analysis of financial data and assumptions — using traditional valuation techniques and principles.
The key challenge for tech VCs new to crypto is in understanding the mechanics of crypto-economic systems and taking upon themselves to apply the right fundamental and relative valuation techniques and principles to make investment decisions with conviction.
Blockchain technology and crypto-assets represent a remarkably complex asset class, which demand a significant amount of time to thoroughly understand. The dispersion of information makes it challenging for tech VCs to standardise a formal and traditional research process. We will continue seeing more crypto- investments from traditional VCs towards the near future but it will be a slow process, taking all these variables into consideration.
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