PwC: Pension Funds, VCs Are Entering Crypto – and Driving Prices Up
Unlike Q1 of 2021, Q2 didn’t see a list of high-profile companies buying Bitcoin. However, what we did see in Q2 was a massive amount of capital being poured into crypto firms through venture capital funds.
Considering the speculative nature of the crypto industry, it is fair to expect to see a limited number of VCs and pension funds interested in the space. However, PwC’s crypto lead says that the competition is actually rather fierce, and that smaller players are being elbowed out by larger VCs.
VCs Are Passionate About Crypto Firms
In the first half of 2021, venture capital funds poured $17 billion into blockchain and crypto-focused companies. In comparison, this is more than all of the deal activity for crypto-centered firms in 2020 — by a large margin.
VC funding globally across all industries is at record highs so far this year. In the first quarter, global venture investments hit a record $125 billion. This figure is up by 50% compared to Q4 2020, and up by a staggering 94% compared to Q1 2020, according to data by Crunchbase.
During this period of inflated investments, the share of deal activity going into crypto and blockchain initiatives has also seen unprecedented growth. Data from CoinDesk reveals that while only 0.89% of the global VC funding went into crypto in the second half of 2020, this percentage has reached 5.97% in H1 of 2021.
In 2021, the crypto space also experienced some historic deals involving crypto firms, with the size and extent of one standing out beyond the others. In May, Block.one, a blockchain software company supported by billionaires Peter Thiel, Alan Howard, and Louis Bacon invested $10 billion worth of digital assets and cash into Bullish Global, a new crypto exchange.
Another memorable crypto fund of this year relates to the venture capital firm Andreessen Horowitz (a16z). On June 24, Andreessen Horowitz announced it had created the largest crypto-related fund to date, raising $2.2 billion for its much-anticipated Crypto Fund III. Around the same time, a16z hired a swarm of former regulators, arguably, to better play out the regulatory battles.
Larger VCs Are Bidding Higher Valuations
The aforementioned data unveils that venture capital funds are fairly passionate about crypto-centered firms. However, Henri Arslanian, crypto leader and partner at PwC, argues that there is even some degree of competition among VCs when it comes to crypto businesses. He added that smaller venture capital firms are unhappy.
“Let’s say they’re looking at a deal and they believe it’s worth $10 million, and you’re seeing large VCs come in and put a bid in for a higher valuation. This is happening a lot with very early-stage companies, say, $5 million to $20 million — the prices are being inflated.”
This is a clear indication that more investors now believe in the future the crypto ecosystem holds, which can be mainly attributed to the surge in digital currency adoption. Recent research by the cryptocurrency exchange Crypto.com puts this growth into perspective.
As per the report, the crypto user base doubled from 100 million to 200 million in just four months earlier this year. Following the report, Crypto.com’s CEO noted that the growth rate is “encouraging,” and they plan to “continue investing heavily” in the field.
However, despite all the growth and positive momentum surrounding the crypto industry, there aren’t still many crypto-based firms with the potential to absorb huge investments. Arslanian pointed out this challenge saying:
“If your minimum ticket size is around $50 million, there aren’t that many companies that have that status yet. If you’re a large pension fund and you decided to make a crypto allocation, there are no more than two dozen companies around the world that are investable, looking for capital and could absorb $100 million.”
Why do you think larger VCs are suddenly so interested in investing in crypto firms? Let us know in the comments below.