HAS THE ‘BLOCKCHAIN BEAR MARKET’ IMPACTED INSTITUTIONS?

Blockchain Coinvestors: Letter From London

Vol. 1, No. 3, September 2022 

Has the ‘BLOCKCHAIN Bear Market’ Impacted Institutions?

2022 has been a tumultuous period for global markets, to say the least. Global macroeconomic uncertainty and a resulting energy crisis have stoked recession fears worldwide. Sustained and elevated inflation in the US has forced the Federal Reserve to switch from monetary easing to tightening, the result of which has made growth stocks (typically further out on the risk curve) less attractive on a rate-discounted basis. Public digital asset markets have not been immune, as we have seen prices of industry blue chips, Bitcoin and Ethereum, fall up to 70% from the 2021 highs.

 

Yet in the midst of this ostensible crypto turmoil, BlackRock recently announced a partnership with Coinbase to provide their institutional clients exposure to digital assets This was soon followed by the news that BlackRock was launching its own spot Bitcoin private trust to give its US institutional clients direct exposure - a rather perplexing development not least given the timing in the middle of a crypto bear; but also because, after all, it was only in 2017 that BlackRock CEO Larry Fink called Bitcoin an ‘index of money laundering.’

 

So why the apparent change of heart and subsequent embrace of digital assets from the world’s largest asset management firm? And in the middle of a ‘crypto winter’?

 

As we lay out below, the BlackRock announcement should actually not be seen as an isolated instance, but rather the continuation of a long and steady trend of major global institutions embracing the blockchain industry.

 

In order to dissect institutional actions, we have identified 5 ways in which institutions are or have participated in the blockchain ecosystem:

  1. Balance Sheet Purchases

  2. Direct or Strategic Investments

  3. Adoption of Blockchain Technology

  4. Dedicated Teams or Groups

  5. Financial Institutions Offering Blockchain Products

What’s notable is that while market conditions have affected some categories of institutional adoption– most particularly balance sheet purchases – the crypto winter has not slowed the steady stream of institutional activity. In fact, if you follow the money, there is no institutional bear market – the largest companies and financial players continue to lean in heavily to the blockchain sector.

 

Balance Sheet Purchases

 

One notable way in which large institutions or companies have come into the blockchain space is by holding digital assets – most notably Bitcoin – directly on their balance sheets. When Tesla announced their $1.5bn purchase of Bitcoin in February of 2021, it sent social media into a frenzy and kicked off a sustained bull market run. However, Tesla is by no means the only publicly traded institution with Bitcoin held on the books. 

 

MicroStrategy, until recently led by notorious bitcoiner Michael Saylor, famously holds over 120,000 BTC or 0.6% of the entire Bitcoin supply. Other recognizable names holding Bitcoin include Square, Coinbase, Galaxy Digital, and Mercadolibre. However, just as news of Tesla’s purchase took the internet by storm, so did their decision to sell 75% of Bitcoin earlier this year - raising further questions about long-term, meaningful institutional adoption via outright purchases.

 

Outside of Microstrategy, there haven’t been any noteworthy meaningful purchases of bitcoin onto balance sheets since early 2021. In our view, the slowdown of balance sheet purchases demonstrates that institutions are proceeding with caution and we see this is an unlikely avenue for sustained adoption.  

 

Direct or Strategic Investments

 

While many companies remain hesitant to directly hold digital assets, the largest US companies have and continue to invest heavily into the blockchain sector. Blockdata tracks blockchain investments made by the top 100 publicly traded companies by market capitalization and found that through Sep 2021, more than 100 blockchain companies received investment from 36 of the top 100 companies. As you can see from the below chart, investment activity has steadily trended upward since 2013, with 2021 being the largest year to date.

Notably, from 2013-2021, the largest investor was Alphabet (formerly google), with more than 23 investments made. Other names, including some of the largest US financial institutions, on the list include Citigroup (15 investments), Mastercard (13), Goldman Sachs (13), Samsung (11), and JP Morgan Chase (8). The use cases receiving investment have spanned payments, infrastructure, enterprise solutions, services, capital markets, and NFTs.

 

While Blockdata has not yet released full 2022 data, they did update the report for Sep 2021 to Jun 2022 (see below), the result of which is a clear continuation of the trend. Through those 9 months more than 40 top companies invested approximately $6bn into blockchain companies and projects, outpacing the previous years’ totals combined (astute observers will note significant overlap with the Blockchain Coinvestors’ portfolio).

While a bear market for public prices persists, clearly institutions are taking advantage of the reset in valuations and continue to lean heavily into the space via direct investments.

 

Application of Blockchain Technology

 

While many top companies and institutions continue to invest, others are experimenting ‘in-house’ as they look for operational efficiencies from distributed ledger technology.

 

For instance, IBM has assisted Kroger, the grocery chain, in implementing blockchain into their food handling processes and Northern Trust, one of the US’ largest banking institutions, for use in private equity deals. Microsoft’s flagship cloud computing offering, Azure, launched a separate branch of the platform called Azure Blockchain which allows users to create their own consortium networks and applications using prebuilt networks and software. Starbucks utilizes the Azure Blockchain platform to track coffee beans from its source farmers while GE Aviation has used the service to record and track the details of aviation parts.

 

Hence, according to Blockdata, 81 of the world’s top 100 public companies already use blockchain technology, with 27 of them having launched a fully functioning service or product. 

 

Perhaps then unsurprisingly the bear market hasn’t seemed to slow this trend. In August, the DTCC (Depository Trust and Clearing Corp), Wall Street’s giant that processes almost every trade in the $40 trillion-dollar US stock market, announced it is live testing its private, permissioned blockchain for clearing and settling transactions in the equity market. The Ion Platform project, as it has been named, is already processing over 100,000 trades per day and is being developed with Barclays, BNY Mellon, Charles Schwab, Credit Suisse and other major financial instructions.

 

While at Blockchain Coinvestors we see enterprise solutions in blockchain as a slower avenue for adoption, the sustained pace of activity shows that institutions remain interested in exploring ways to improve operational efficiency with the technology.

 

Dedicated Teams or Groups

 

Another telling sign that institutions are leaning in are shifts in personnel. Given the costs associated with hiring dedicated staff – or even entire new groups – we think notable hires demonstrate serious strategic emphasis by the largest institutions.

 

State Street recently announced that it has launched State Street Digital, dedicated to addressing the industry’s move toward digital finance. Leading that charge is Nadine Chakar, a three-decade industry veteran and executive vice president. Similarly, Google’s cloud division is formulating a team focused on winning blockchain business, Amazon is actively hiring for a “Head of Digital Currency and Blockchain” to join its payment acceptance team, and Microsoft has a posting for a “Director of Business Development” for cryptocurrencies.

 

And then of course, we have JP Morgan. While Jamie Dimon had proudly professed his disdain for Bitcoin, calling it ‘worthless’, his bank has been on a crypto hiring spree. As of November 2021, JP Morgan led all banks with over 100 open positions for blockchain-related jobs. More than a third of said roles were for the bank’s new Onyx division, a digital assets arm focusing on blockchain. According to LinkedIn Data, crypto hiring by the major banks was up 40% in the first half of 2021 when compared to the same period in 2020.

 

Finally, in July, Moelis & Co, the LA-based investment bank, launched a Global Blockchain Group that will provide advisory services to blockchain and crypto firms. The new group is being led by co-founder John Momtazee, with Blockchain Coinvestors Partner Lou Kerner acting as Senior Adviser. Momtazee stated that group is unfazed by the crypto winter and rather believes this is the ideal time to advise firms in the space as the long-term prospects of blockchain technology in the global commercial landscape remain unchanged.

 

Financial Institutions Offering Blockchain Products

 

Direct investments and a crypto-related hiring spree aren’t the only ways in which Wall Street is embracing crypto. BlackRock’s partnership with Coinbase to provide their institutional clients with exposure to the digital assets markets is only one example. Interestingly, Goldman Sachs offered its first bitcoin-backed loan allowing a borrower to use Bitcoin as collateral. Earlier this year, Goldman announced a dedicated digital assets team, and traded its first over-the-counter Bitcoin options to Galaxy Digital in May.

 

Moreover, Fidelity recently announced its plans to offer Bitcoin as an investment option in its 401(k), becoming the first major 401(k) provider to do so. This comes after the firm’s February announcement that it had launched its first physical Bitcoin ETP in Europe, following in the footsteps of Invesco who launched their ETP 3 months prior. Unsurprisingly, Fidelity UK’s digital assets business saw a 1,800% increase in revenue between 2021 and 2022, further fueling speculation that the investment management firm’s relationship with crypto is very much here to stay.

 

In August 2022, Mastercard’s CEO announced that the firm is working in partnership with Binance to enable its customers to use cryptocurrency for purchases in over 90 million stores worldwide. Crypto partnerships are not a new phenomenon for Mastercard. In April this year, the firm partnered with Nexo to launch the world’s first crypto-backed payment card as well.

 

The View from London

 

At Blockchain Coinvestors we are not surprised by the sustained embrace of blockchain by large institutions. Our thesis remains intact: all of the world’s commerce is digitizing, and blockchain technology will underpin this sectoral shift. Yet, we recognize it’s curious the bear market hasn’t appeared to affect the sentiment of many large institutions.

 

In fact, it’s hard not to feel like there’s actually two markets – one for retail and another for institutions. Since June alone, we’ve seen Christie’s Auction House launch its own Web3 venture fund, American Express announce a crypto card partnership with Abra, and Indonesia’s biggest tech company purchase a crypto exchange. In August, Singapore’s state investment fund, Temasek announced they were leading Animoca’s $100m financing round while The Fairfax County Board of Trustees in northern Virginia authorized its $6bn+ pension fund to invest in crypto lending.

 

So what’s driving this action? We found the financial times interview with Piyush Gupta, CEO of DBS, the largest Singaporean Bank, particularly insightful. This week, DBS announced plans to grow its crypto and digital assets business, despite the crypto bear. In referencing the crypto push, Gupta noted how ~$1bn had exited DBA into global crypto exchanges, such as Genesis and Binance, before the bank launched its own exchange. The simple fact may be that large institutions, particularly the entrenched financial players, are simply skating to where the puck is going (hint: that’s a hockey metaphor for our non-North American readers).

 

Of course, this report has remained largely silent on another area: continued adoption by large consumer brands. As Bloomberg’s recent article shows, the top luxury brands, such as Gucci and Tiffany, have not slowed down their embrace of NFTs and Web3 despite the crypto winter. But now that’s a topic for another day.

 

We’re not in the business of predicting or trading around public market movements, as we remain focused on private venture companies and projects with long term investment horizons. Nonetheless, we can’t but help notice where institutions are putting their efforts – and money – in this current market.

Thank you for reading.

Mitch Mechigian, Partner, London

ABOUT BLOCKCHAIN COINVESTORS

 

Launched in 2014, our goal is to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and crypto projects. The strategy is now in its 9th year and has to date invested in more than 40 pure play blockchain venture funds in the Americas, Asia and Europe; and in a combined portfolio of 400+ blockchain and crypto projects including approximately 60% of all blockchain unicorns. Our funds rank in the top decile amongst all funds in their respective categories on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in Grand Cayman, London, New York, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.

FUND PERFORMANCE

 

Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 5.45x with an IRR of 79%. Fund II shows equally impressive early results with Net TVPI of 2.13x and an IRR of 106%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships. Our funds are open to investors that meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. 

 

  • Blockchain Coinvestors Fund III (Fund of Funds) was created to provide diverse coverage of the best blockchain pure play venture funds in the Americas, Asia, and Europe. Blockchain Coinvestors Funds I and II have already experienced significant appreciation. Fund I Net TVPI is 5.45x with an IRR of 79%. Fund II shows equally impressive early results with Net TVPI of 2.13x and an IRR of 106%. Almost all of our fund investments are performing as top quartile against the Cambridge Associates Venture Benchmark.

  • Blockchain Coinvestors Fund IV (Early Stage Token) provides direct access to promising private stage token projects accessing our relationships with many of the world’s leading blockchain investors. We leverage asymmetrical information from our 40+ VC Funds to pick the most attractive opportunities. This is a continuation of the direct token investing strategy of the Fund Manager that has included private stage investments in Acala, Filecoin, NEAR, Polkadot, Structure, and others.

  • Blockchain Coinvestors VI (Mid Stage Growth) provides direct exposure to the emerging category leaders in the blockchain and crypto ecosystem. The fund leverages our unique sustainable competitive advantage (USCA) in blockchain, web3, and fintech to create a concentrated portfolio of between 20 and 30 investments with attractive return profiles and visible paths to liquidity. The fund assesses the more than 400 blockchain and crypto projects in which we are direct and indirect investors and employs a robust investment framework to select investment opportunities into the leading mid stage growth rounds - typically Series B, C and D. This is a continuation of the mid stage investing strategy of the Fund Manager that has included investments in Bitwise, Brex, InfiniteWorld, Securitize, Uphold, Wyre, and others.

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@blockchaincoinvestors.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@blockchaincoinvestors.com to learn more.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

Click here to receive the insightful weekly crypto newsletter and webinar invitations from our Blockchain Coinvestors partner Lou Kerner.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

 

Our investment team hosts regular webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

 

Institutional Investors - Making the Case for Blockchain

- September 19th, 7:00am PT
- September 19th, 12:00pm PT

 

What is Blockchain-Based Gaming?

- September 26th, 7:00am PT
- September 26th, 11:00am PT

 

AMA with Blockchain Coinvestors

- October 10th, 7:00am PT
- October 10th, 12:00pm PT

 

Recordings of past webinars and calls can be found at www.blockchaincoinvestors.com/webinars.

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