Cryptocurrency, Venture Capital–Despite the current depressed market prices for Bitcoin and major altcoins, crypto hedge funds turned venture capitalist are finding themselves in the midst of a potential buying opportunity. According to Bloomberg, the rush to establish cryptocurrency hedge funds throughout the bullish market of 2017 has led to an uptick in venture capital activity, with most former funds finding themselves in the role of evaluator for struggling cryptocurrency projects.
The severe bear market of 2018, which led to coin prices across the board falling more than 80 percent, left in its wake crypto startups and the Initial Coin Offerings that are struggling to pay the bills. The end result has been a landscape of depressed market valuation, potentially much lower than what most of these companies and coin projects should fairly be traded at, which presents a proverbially gold mine for well capitaled institutions.
As profiled by Bloomberg, Polychain Capital–a hedge fund turned venture capital firm–has managed to raise $175 million for a fund after holding assets in excess of $1 billion prior to the start of 2018’s bearish trend. Arca Funds, a similarly positioned cryptocurrency hedge fund that is now trying to find its way in the twelfth month of a bear cycle, is “considering taking equity stakes in struggling crypto projects.”
Jeff Dorman, partner and portfolio manager at the Los Angeles based Arca Funds, outlined for Bloomberg his company’s strategy for tackling the the bear market,
“There’s going to be a lot of opportunity in distressed buying and even activist investing. Often you can buy below even the cash value of the company.”
Previously, a clear distinction existed between the workings of hedge funds and venture capitalists, with cryptocurrency based ICOs forgoing the latter through their ability to raise funds directly investors. However, the falling valuation of crypto in conjunction with the slipping market interest has led to coin projects once again appealing to venture capitalists to fund their projects. In addition, regulatory concerns and a confusing landscape of legality has led some development teams wading into cryptocurrency to forego the ICO model in favor of the more established and conventional road.
Venture capitalists, including crypto hedge funds that have come to emulate venture investors, have presented with an extreme discount on coin projects–some of which would have been valued in hundreds of millions of dollars just a year ago. The end result is currencies being put on the investment block for pennies on the dollar, creating the potential for vast profit to be made in the midst of a bear market, at least for those willing to gamble on the risk.
As pointed out in the Bloomberg piece, the number of crypto venture funds launched in 2018 exceeded that of crypto hedge funds for the first time in years,
About 125 venture funds that usually provide capital in exchange for an ownership stake were launched last year, compared with 115 hedge funds that primarily act as investors, the first time the number has exceeded the total investment partnerships in the embryonic sector, according to Crypto Fund Research.
While newly launched crypto hedge funds fell last year after reaching their peak in 2017, the advent of cryptocurrency venture capitalists made a significant leap, owing to the reshaping landscape of the industry. ICOs, once thought of as the primary way for raising funds in the crypto space, appear to be giving ground to more conventional methods of acquiring capital, particularly when the money comes with the management advice and assistance instigated by most VCs.
Title image courtesy of BeatingBetting.co.uk