Blockchain and Crypto, Member Exclusive

BankChain Briefing: As crypto cools, VCs get back in the drivers seat

  • It is Friday the 13th, but the Freddy Kruger horror show is nothing compared to the carnage in the crypto industry.
  • As the crypto winter rages on, we step inside the conversations being held by crypto VCs about the industry moving forward.
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BankChain Briefing: As crypto cools, VCs get back in the drivers seat

It is Friday the 13th, but the Freddy Kruger horror show is nothing compared to the carnage in the crypto industry. DCG and Gemini are at each other's throats over a $1.1 billion promissory note. Coinbase is facing fines and announcing even more lay-offs. Binance, responsible for 75% market share of global crypto trading, is under a DOJ investigation. And it's not even halfway through the first month of this new year.  

As the crypto winter rages on, we step inside the conversations being held by crypto VCs about the industry moving forward. Veteran crypto VC investors Akshi Federici and Balder Bomans shared insights in a Pitchbook webinar about the bear market, due diligence, web3, and why everything's not lost. Here are the takeaways: 

Bear market: This is not 2018

Typically the crypto industry uses the bear markets to build the best tech - to front-run the next bull market. But both investors agreed that this is not your typical bear market for two reasons. Firstly, the macroeconomic conditions of a looming recession forecast gloomy price action for the year ahead. Secondly, the loss of trust following the Luna and FTX collapse has put a wet blanket on the entire industry. 

In 2023, the Fed is adamant about bringing down inflation. As they continue cranking up the interest rates and breaking the stock market, the price of Bitcoin - a high-beta risk asset - will face the same downward pressure. 

According to Federici, there is no 'hockey stick' recovery in sight for 2023. While she predicts some recovery, she doesn’t see the market rebounding to levels prior to 2022, at least not for a couple of years. "The sentiment and trust will take time to build, particularly because our industry’s promise is about trust, and that is what has eroded significantly," she added.

Due Diligence: VCs back in the driver's seat

In the FOMO of 2021, VC due diligence flew out the window. In fact, before the Luna collapse, the first quarter of 2022 outpaced investments made in the entire prior year. VCs were scrambling to get into projects, and blockchain bros were calling the shots. The industry was so heated and fast-paced, that even though the evaluation criteria were in place, the processes were in shambles.  

Source: Pitchbook

Bomans recalls that a year ago, his fund was looking at deals 4 or 5 times over budget and they only had two days to make a decision: “We even had an instance, where we asked a founder two questions in a chat. And he said, ‘oh, if you’re asking questions, then I don’t want to work with you no more.’”

But, as the market cools down, both investors agree that there will be more time to carry out due diligence processes. The grown-ups are back in the driver’s seat, so to speak, and they are looking for teams who can do ‘more with little.’ An important criterion that has emerged is assessing whether teams need risk management personnel for the projects that they are building. Having said that, Federici predicts a more competitive environment moving forward, based on the fact that a lot more dry powder will be going after a much smaller pool of credible projects.

Web3 and why everything's not lost

In 2022, Web3 took the largest share of investments. It attracted non-crypto brands and consumers through NFTs, gaming, and the metaverse. Starbucks launched a blockchain-based loyalty program. Visa Crypto dabbled with Ethereum-based smart contracts. And MasterCard partnered with Polygon to launch a Web3 acceleration program for musicians. 

Both VCs agree that the tech stacks nowadays are much better and that crypto is attracting a much stronger and more diverse talent. 2022 saw an influx of professionals from traditional finance, legal and regulatory backgrounds enter the crypto space. The amount of capital invested makes it too big to fail - but not big enough to disrupt trad-fi. 

Highlights from our recent coverage

‘We are committed to saying Visa should be a crypto-native company’: Cuy Sheffield on Visa’s crypto strategy

Visa Crypto recently made an announcement. No, not for another credit card launch. The digital payments giant wrote a proposal about automating recurring payments on the Ethereum blockchain.

The crypto landscape is built on the shoulders of whitepaper proposals coming from blockchain developers using GitHub accounts. And while most FIs wait for crypto regulations to kick in to get involved, Visa is rolling up its sleeves and stepping in to contribute towards its architecture.

Weekly-10Q: For investors, the question remains — At what pace will the Fed raise rates in the future?

No rate cuts in 2023.

The Federal Reserve’s December meeting minutes released last Wednesday show that officials continue to try to win the battle against record inflation, and expect higher interest rates to stick around until further headway is made.

This means the stock market should not expect a rate cut or decline until 2024, according to analysts.

Tweet of the month

https://twitter.com/cameron/status/1609913051427524608

What we are reading: 

Latest on SBF

  • The fall of SBF: How CoinDesk shook up the crypto world (Intelligencer)
  • Sam Bankman-Fried pleads ‘not guilty’ to fraud, conspiracy charges (CoinDesk)
  • SBF’s top associates plead guilty to US charges (FT)
  • U.S. moves to seize Robinhood shares, Silvergate accounts tied to FTX (WSJ)

Crypto contagion 

  • Gemini's Cameron Winklevoss calls for Barry Silbert's ouster from crypto conglomerate DCG (CoinDesk)
  • DCG's Barry Silbert talks about Genesis in letter to shareholders (CoinDesk)
  • Silvergate stock down 40% following Diem write-off, job cuts (Decrypt)
  • From $1.5 billion to $0, crypto payments platform Wyre shuts down (Blockworks)
  • Gemini co-founder accuses DCG’s Silbert of 'bad faith' stalling in $900 million locked funds dispute (CoinDesk)
  • The end of Crypto Twitter as we know it? (CoinDesk)
  • Binance skeptics seek answers concerning similarities with FTX business model (PYMNTS)

Sentiment and insights

  • Bob Diamond says digital currencies to have ‘very important place’ in finance (FT)
  • Central bank digital currency: blockchain could upend banking (FT)
  • Crypto lenders morph into miners as repossessed rigs pile up (American Banker)
  • US House Republicans to set up crypto committee to oversee shaky industry: Report (CoinDesk)

New product launches

  • Mastercard launches Web3-based accelerator for musicians (Finovate)

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