Despite suggestions that the cryptocurrency bubble has already burst, major tech and finance firms continue to pour funds into the companies behind cryptos, while avoiding exposure to the virtual currencies themselves.
Reuters reports data compiled by PitchBook that shows venture capital investments in startups in the cryptocurrency and blockchain markets totalled $850 million in the first quarter of 2019, on course for a record annual amount for the second year running.
In 2018 the 12-month total hit $2.4 billion, around £1.8 billion and an impressive five-fold increase as large organisations including Microsoft and the London Stock Exchange Group looked to the potential of these still emerging technologies.
Jamie Burke, CEO of Outlier Ventures which has already invested in multiple blockchain-related projects, told the newswire: “There is a huge experimentation in effectively the basic plumbing for a native economic layer to the web.”
Big brands dodge the Bitcoin bubble
These major finance and tech organisations, while investing in this cryptocurrency ‘plumbing’ with the currencies’ developers, have still given a broad berth to the bubble surrounding Bitcoin and other digital currencies.
Some of the concerns behind doing so include high-profile security lapses, volatility in the value of these currencies, and an increasing amount of regulation in the cryptocurrency sector.
This is all combined with a lack of mainstream uptake of token-based currencies, which is hampering their ability to evolve into a serious rival to conventional fiat coins and notes.
Improving reach of cryptos and blockchain
Cryptocurrencies and the blockchain technology that powers them have had narrow reach until now, putting real terms restrictions on their investment value too.
Backers are now looking to broaden this reach beyond niches like trade finance, and especially to try and spur change in the way people spend and transfer money in a more general sense.
Richard Hay, UK head of fintech at Linklaters, told Reuters: “There are two dynamics at play. We can get something up and running and achieve cost savings, and also look longer term at ways of deploying the technology in more transformative ways.”
A potential way to do this could be to create a connection between cryptos and one of the biggest sectors directly linked with money – the issuing of debt.
London Stock Exchange and Banco Santander recently put a reported $20 million into a London-based startup to do just that, by commercialising blockchain technology to issue debt that could be based not on fiat currency, but on virtual coins instead.
Tokenising other investments
In a broader sense, blockchain and tokenisation have implications for other investments, assets and stocks.
There is an expectation, according to Reuters, that assets ranging from stocks to oil could be tokenised in the future, allowing them to be traded in digital form on blockchain-powered platforms.
With this potentially causing significant upheaval to traditional investment markets, it is perhaps one other reason why the biggest brands in finance and technology are putting money into blockchain at present.
If widespread disruption were to occur, having a stake in the technology causing that disruption represents a hedging strategy, and may not be driven by any particular desire to see blockchain itself prosper as a future trading platform.
How big are the deals?
Corporate venture capitalists appear to be risking relatively small amounts in crypto and blockchain investments – an average of $8 million per deal in 2018 and $6.5 million in early 2019.
However, there are also individual examples of very large investments overall, such as that achieved in December 2018 by the crypto trading platform Bakkt, which was founded by the New York Stock Exchange’s parent group Intercontinental Exchange Inc.
This raised more than $180 million from multiple investors, including the venture capital arm of Microsoft Corp, M12.
Traditional venture capitalists are also putting their faith in blockchain and crypto investments, accounting for more than 600 deals in 2018 at a record global total of $5.6 billion.
About-turns and back-outs
Some investor uncertainty may stem from the projects that have been cancelled before ever getting off the ground.
Again in December, one such cryptocurrency venture, Basis, opted to return funds to its investors rather than proceed in a climate of regulatory concerns.
In Hong Kong in early 2019, Bitmain Technologies, valued at $12 billion, cancelled its planned initial public offering following a slump in Bitcoin values.
But there is positive performance too – such as Coinbase, the cryptocurrency exchange based in San Francisco, which filed non-US revenues of over €150 million in 2018, up by 20%.
Coinbase UK chief executive Zeeshan Feroz told Reuters that nearly a third of Coinbase’s global revenues come via the exchange’s UK operations – potentially valuing Coinbase at nearly €500 million worldwide.
Although Coinbase did not confirm a global value to Reuters’ reporters, clearly there is still value in cryptocurrencies and in the broadening potential of the blockchain technology they are built upon.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.