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25 August 2020

Investing Like Crypto Venture Capitalists

The killer feature of cryptoassets is that anyone from anywhere in the world can participate or invest. The open nature of crypto networks has largely removed barriers that restricted early-stage investing to institutional investors like hedge funds or venture funds and allowed anyone to participate.

Still, institutional investors often have dedicated teams and industry relationships that can give them an edge. Examining the portfolios of successful investors in the space can help anyone glean insights into what may be the next big trend.

Examining the Portfolios of Crypto Hedge and Venture Capital Funds We’ve tracked down many of the top VC firms and hedge funds in crypto and recorded their liquid portfolios. This of course could miss equity investments or investments in networks that are not yet live.

Examining Portfolio Liquidity Many of the firms on this list are entirely long-term investors, while some funds like Multicoin Capital and Three Arrows Capital operate as dual hedge funds/VC funds. Regardless of the strategy, liquid tokens can provide an important advantage over traditional venture funds. Funds are able to adapt and change their thesis in real-time. As DeFi grew in popularity, many crypto funds pivoted to invest in tokens that underpinned these networks or converted out of existing token projects that have seen limited adoption.

Two of the most liquid portfolios are Pantera and DCG, in large part due to their overall size. Pantera Capital has one of the largest portfolios in crypto. As one of the older funds in the space, Pantera’s portfolio has investments from DeFi to web3 and smart contracts. Digital Currency Group (DCG) also tops the list in terms of quantity of investments with a decent number of their investments in liquid tokens.

Other notably large and liquid portfolios include: - Blockchain Capital - Fabric Ventures - Arrington XRP Capital Of all the portfolios we track, the most illiquid portfolio – most equity investments – is Coinbase Ventures. With over 50 venture investments, including Messari, Coinbase has under 10 liquid investments. Coinbase’s equity investment portfolio favors companies it may one day acquire, including multiple data providers, security platforms, and other Coinbase adjacent business lines.

The Reversal of the Equity Investment Thesis After the 2017 bull market, token investing incurred a rough reputation and investors prioritized investing in equity rounds. Top projects like OpenSea, Uniswap, and others cemented the thesis that crypto companies could be successful without a token.

This year the DeFi surge has ushered in a renewed love for tokens among investors. While some existing firms like Placeholder anticipated this trend, newer funds like Three Arrows Capital have led the charge on DeFi tokens. This isn’t to say that older funds missed out completely, but there’s a clear concentration of new funds amongst DeFi assets as opposed to Multicoin or Electric Capital with portfolios concentrated among smart contract platforms.

Moreover, due to venture investing regulations, funds like Union Square Ventures have opted to invest in various funds like Autonomous Partners, BlockTower, Polychain Capital, and Placeholder Ventures. Funds like A16Z (Andreessen Horowitz) have forgone their VC credentials in order to double down on crypto investments. The SEC limits VC funds from investing more than 20% of a fund in “high risk” categories, which tokens fall under. As the industry continues to push boundaries for finance and tech, the SEC will either get pressured to lift those limits or, more likely, funds will structure in ways that don’t limit their investments.

New Venture Capital Funds and New Narratives Perhaps this trend will repeat where new VC firms enter to allocate capital to Web3, Decentralized Governance, and NFT/gaming, or other emerging narratives. Variant, a new fund by Jesse Walden, a former investment partner at a16z, is investing in crypto companies facilitating the “Ownership Economy”. Electric Capital which recently closed a second $110 million crypto fund has stated its team is exploring opportunities in layer one protocols, DeFi, privacy, and community-owned marketplaces.

As crypto grows, more niche funds may emerge in order to differentiate themselves. Community governed fund structures like the LAO – which is working to enable retail investor participation – will surely change the dynamics of early-stage crypto investing.

In the traditional venture capital ecosystem, investments made in equity are illiquid for 3-10 years (Sometimes more, looking at you Airbnb). While platforms like Carta have improved the ability to trade illiquid stock, the market is still limited to accredited investors. Public tokens could level the playing field for anyone with access to a smartphone or computer. Hopefully, this will result in better capital allocation over time and democratize an industry that has for too long been limited to the wealthy few.

If there’s a portfolio that you want to see that we don’t have: 1. Let us know on twitter at @messaricrypto 2. Feel free to fork the screeners and modify them__ __with our metrics including Y + 10 Marketcap, DeFi assets, transaction volume, percent change vs BTC, and more. The author(s) may hold cryptocurrencies, including those mentioned in this report. See our full disclosures page for more details.

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