Those who recall the ICO craze of 2017 will recall the explosion of crypto startup projects raising capital from May of that year, when bitcoin reached all-time highs and surged above $15 thousand by December. There were many projects seeking capital to mint new coins that promised revolutionary changes.
The ICO landscape rapidly descended into chaotic scenes of indiscriminate buying and selling often for quick profit, disregarding long-term sustainable growth and investor interests. Hype and expensive marketing campaigns often misled investors, many of whom succumbed to greed instead of performing even cursory due diligence.
Though there were many excellent projects, some still with us today, many were fraudulent, ill-intentioned or at best, misguided. The SEC gave notice that it considered many tokens as securities and would apply the Howie Test to coin projects. This significantly dampened the market and in the end, some studies identified more than 80 percent of all ICOs as scams earning the badge of shitcoins for many from the lCO boom.
This was not crypto’s best day and the sector did little to engender legitimate and responsible inclusion within the financial system with policy makers and regulators, and this sentiment still lingers in the corridors of power today.
This is the principal reason many in my global community came to together to form Global Digital Finance, an industry not-for-profit organization focused on developing and sharing leading market practices and standards for the crypto and digital assets sector.
Many of us were called to action to demonstrate that the crypto and digital assets sector was founded, staffed, and run by responsible people who could abide by jurisdictional and global laws, and were keen to support policy makers and regulators with meaningful compliance, while asking for patience with the new technologies and business models as the developed.
The big message was, “there are adults on the room”, and there is some groundbreaking innovation going in here that is of benefit to society, lets not get lost in the technological jargon and please exercise a bit of patience.
Characteristic of bubbles that burst, a slump followed this high point, commonly known as the “Crypto Winter”. There was a silver lining to those dark days in that it proved to be a time for learning from mistakes for many and rethinking the future of crypto.
A wave of pioneering crypto-based incubators, accelerators and venture capitalists emerged aiming to restore normalcy and rekindle the flame of innovation. In addition to discovering and supporting genuinely promising early-stage startups, incubators significantly broadened the scope for capital formation and accumulation in the blockchain cryptocurrency sector.
The “2021 List of Blockchain Venture Builders, Incubators & Startup Accelerators,” is pretty comprehensive, and since their arrival on the scene, this collective has been a catalyst for increasing institutional investments in crypto-based projects, which has helped flood the market with record amounts of cash.
Kardia Ventures CEO Huy Nguyen believes incubators bring far more than expertise and experience to the table. They also provide startups with access to an essential and extensive network of investors, stakeholders, and service providers, and provide much-needed capital to help ensure early stage startups have a clear path to success. Kardia Ventures has made tens of millions of dollars in investments across 18 companies, including participating in an $8.5 million seed round for DeHorizon and a $2.1 million initial round for Thetan Arena.
A Record Year For Venture Investment
Venture capitalists invested $26 billion in crypto-based projects in 2021, dwarfing figures from previous years. The surge includes a $10 billion investment in crypto exchange Bullish Global, and $350 million in funding for NFT gaming company Dapper Labs. Additionally, Paradigm and Andreessen Horowtiz have launched their own crypto investment funds worth $2.5 billion and $2.2 billion, respectively, the largest of their kind to date.
Venture capitalists aren’t getting into the crypto industry merely for the ROI. Shan Aggarwal of Coinbase Ventures highlights that short-term gain isn’t the primary metric for success given the blockchain-powered future that Web 3.0 promises. What’s really important is infusing liquidity into crypto markets. In other words, addressing volatility issues is key to long-term success, and the recent influx of venture dollars goes a long way to help ensure smoother sailing.
Institutional investors are increasingly interested in the crypto market but aren’t always aligned with the principles of decentralization and user-orientation and some have been at odds with the broader interests of the crypto and digital assets community. This prevalence has caught the attention of Cardano founder Charles Hoskinson who thinks institutional investment threatens the sector’s meritocratic and community-governed nature.
Hoskinson warns, “They (the institutional investors) are always going to get their pound of flesh before everybody else.”
The scenario is changing for the better with institutional investors rethinking their strategies to suit the needs and demands of the decentralized world of Web3.0. Deciding everything behind closed doors shrouded in secrecy has been the traditional way of doing things and these days, some seek to ratify investment decisions through community-oriented voting, as was witnessed during the funding rounds of SushiSwap.
Retail Investors Continue To Drive Adoption
Retail investors will always dominate the transaction volumes in crypto and have almost singlehandedly created to the $2 trillion crypto market without the governments and the legacy financial system, arguably Satoshi’s main goal with bitcoin. Many institutional investors access the market by participating in funds and listed equities focused on blockchain and cryptocurrency to get exposure to the asset class, especially in the West.
High volatility, a consistent feature in cryptocurrency, isn’t conducive to the demands of retail investors, who typically lack the capital buffer necessary for absorbing market fluctuations and do not have the hedging playbook or experience to rely on. Large capital losses pose a significant threat to many retailer investors who are limited to risk exposures far lower than institutional players. Volatility is also a big issue for regulators and is an important consideration in policies for investor protection as it relates to cryptoassets.
Recently retailer customers in Vietnam, India, Pakistan and the Ukraine have been buying cryptocurrencies and driving the adoption rate to more than 881 percent in 2021. In India retail investment rose 600 percent from April 2020 to March 2021, leaping from $900 million to $6.6 billion, however, traders went on a selling spree in anticipation of unfavorable regulations and a possible ban on cryptocurrencies, which led to tumbling prices.
Such erratic buying and selling hinders the sector’s progress, setting off a vicious circle of perpetual volatility. Policymakers are advised to offer a greater degree of consistency and clarity when it comes to the direction of travel and regulatory certainty of cryptoassets to help better align to and address retail investor’s interests for longer-term market stability.
A Crypto Market For All Investors
The crypto and digital assets sector is on the verge of a paradigm shift with Web3.0, and for that shift to happen, incubators, accelerators and venture capitalists are poised to rise to the occasion. In addition, onboarding new investors is vital, and many are already meeting these new challenges with relative efficiency.
Creating a safe space for retail and institutional investors is one of their primary functions of incubators and accelerators. If policymakers and regulators can match this with regulatory sandboxes such as Hester Peirce’s Safe Harbor Proposal in the U.S., and the Pan-European Regulatory Sandbox as part of MiCA, the sector will be better grounded to efficiently and effectively serve all investor markets.
The opportunity to start a new era of innovative industry and regulator collaboration is upon us and we are close to the tipping point of policy makers understanding the importance and impact that this new and innovative digital financial infrastructure will have on society.
Platforms like Morningstar Ventures are leveraging in-house and outsourced expertise to boost investor confidence through rigorous assessment and risk management. Using these principles, Morningstar Ventures has broadened its portfolio to span a multitude of investments across the Decentralized Finance (DeFi) space, including tokens like Elrond, Polkastarter, Humans.ai and Yield Guild, and equity investments including NGRAVE, Moralis.io, Unstoppabledomains.com, and Ethernity.io. Successful incubators like Morningstar Ventures consider all the markers necessary for well-informed investment decisions, from revenue models to growth potential.
With ongoing innovations in crypto-based venture capital funding, the scope for secure retail investments is broader than ever before. Diverse fundraising methods, such as Initial Exchange Offerings (IEOs) and Initial DEX Offerings (IDOs), are crucial to further lowering the barriers to entry. Furthermore, present-day launchpads prioritize sustainable growth, implementing robust checks and balances to filter bad actors. DAO Maker, for example, offers a lock-in functionality that secures investors while ensuring accountability on the part of the innovator.
Ultimately, delivering the Web3.0 vision will require adoption by both retail and institutional investors. Institutional investors have the resources to deploy to reduce volatility and improve mainstream adoption by infusing liquidity into cryptocurrency markets, while retailers uphold the sector’s community-governed structure. Both are key to success. To bridge the gap and entice both sides to the table, incubators, accelerators and venture capitalists play an important and vital role in helping ensure the crypto and digital assets sector’s sustainable future.