Shifting Winds: Capitalizing on Unprecedented Opportunities in 2024
SHIFTING WINDS: CAPITALIZING ON UNPRECEDENTED OPPORTUNITIES IN 2024
Dear Readers,
2024 stands as a pivotal year for investors looking to invest capital for superior returns. Amidst a backdrop of significant technological advancements and institutional adoption in the blockchain sector, there is a rapidly evolving market landscape which we believe suggests now is the time to start putting capital to work.
In short, market headwinds are shifting to market tailwinds.
As investors in more than 40 top-tier venture firms, we have unique access to investor strategies and we’re eager to share this with our investor community. We’d love to speak with you in depth about how these strategies can benefit you in this next phase.
While we are always firstly focused on the technology and real-world use cases, we as investors need to position ourselves behind powerful tailwinds. Our strategy is to deploy capital into down markets and harvest exits in top markets.
In 2024, we're observing an unprecedented convergence of factors that make blockchain venture investing particularly enticing.
Firstly, the US Federal Reserve is widely expected to start cutting interest rates, ending a period of monetary tightening. This will have wide ranging implications for the allocation of capital in the economy.
Secondly, the recent successful and highly institutional Bitcoin ETFs coupled with the upcoming 'halving’ is creating a perfect storm for significant price appreciation of the industry’s most visible asset.
Thirdly, we believe we have found the bottom of this blockchain bear market and compared to the previous bear market in blockchain (2017-2019), we still are seeing more than double the activity. This suggests significant value creation is around the corner and that it will exceed the previous market’s highs.
Finally, we believe that blockchain venture is about to receive a massive windfall from a reopening in the US capital markets. 2022 and 2023 were historically bad years for venture investors to exit their investments. This was particularly true for IPOs. Now we are seeing a plethora of top tier venture-backed companies line up to access the public markets.
The venture capital space, particularly in blockchain, is ripe with opportunities for growth. Companies in this sector are not just surviving; they're thriving, scaling up, and showing promising profitability.
In Q4, Tether, one of the largest stablecoin providers, posted a profit that was greater than Goldman Sachs ’. Yes, indeed, blockchain firms are already larger and more profitable than some of the world’s most famous financial institutions.
And we’re just at the beginning.
A Loosening Monetary Environment
The Federal Reserve's recent tightening cycle has been notably aggressive compared to past cycles. Over the past year, the Federal Reserve has raised the federal funds rate at the fastest pace since the 1980s, aiming to combat inflation. This historic tightening has shifted the allocation of capital globally, with capital flowing to less risky, high interest paying investments, such as US treasuries.
Cumulative Increase in Fed Fund Rate
Now with inflation seemingly suppressed, the Federal Reserve's projections for the Federal Funds Rate show a forecasted decrease over the coming years. According to the FOMC Summary of Economic Projections from the Federal Reserve Bank of St. Louis, the median projections are as follows: 5.4% for 2023, 4.6% for 2024, 3.6% for 2025, and 2.9% for 2026. This indicates a gradual reduction in the federal funds rate over these years, with potential for 75 basis points cuts in 2024.
Federal Reserve rate cuts can be beneficial for high-return asset classes like blockchain and venture capital because these assets tend to thrive in lower-interest rate environments. When the Fed cuts rates, it leads to a lower cost of borrowing, which encourages investors to seek higher returns, leading them to invest in riskier assets that potentially offer greater rewards. Technological companies, especially those not yet profitable, often become attractive as they may benefit from lower borrowing costs.
It's critical to invest ahead of this monetary shift to capture value creation driven by the distribution of capital in the economy.
The Confluence of Spot Bitcoin ETFs and the Halving
This year is a pivotal one for the world of Bitcoin, marked by two significant events: the approval of US Spot ETFs and the Bitcoin halving. Each of these developments carries the potential to spark a bull run in the industry. When combined, they are generating considerable anticipation for a substantial impact on the market.
BlackRock shocked the financial world last summer when it filed for a Spot Bitcoin ETF. In January of this year, that ETF, along with 10+ other institutional ETFs were approved by the SEC. In the past month, the popularity of Bitcoin ETFs has been unprecedented. This past Wednesday alone, there was over $1 billion in inflows into the ETFs, according to data from Bloomberg Intelligence.
As more investors buy into Bitcoin ETFs, the funds managing these ETFs need to acquire more Bitcoin to back the shares, potentially driving up the price due to increased demand. Moreover, the availability of institutionally backed Bitcoin ETFs adds legitimacy to Bitcoin as an investable asset class, potentially attracting more institutional and retail investors to the market. The ETFs have only been on the market for less than one month but have already attracted billions of dollars from investors looking to gain exposure to Bitcoin.
Moreover, the next Bitcoin network “halving” is estimated to occur in April 2024. The Bitcoin halving is an event that occurs approximately every four years (or every 210,000 blocks mined) in the Bitcoin network. During this event, the reward for mining new blocks is halved, meaning miners receive 50% less Bitcoin for verifying transactions. This halving process is significant because it reduces the rate at which new Bitcoins are generated, making them scarcer. This scarcity can potentially increase the value of Bitcoin, as there are fewer new coins entering circulation.
Historically, halving events have been followed by significant increases in Bitcoin's price. This positive price movement can also have a knock-on effect on the broader crypto market, as increased interest and investment in Bitcoin often proceeds substantial flows to the blockchain ecosystem.
Higher Bottom, Suggesting Higher Top
While public media sentiment has foretold the end of the blockchain sector, the reality on the ground could not be more different. Indeed, activity has slowed in terms of deal count and investment, yet blockchain venture activity remains robust, particularly when viewed relative to the prior bear market.
Deal count and capital invested is still about double what it was during most of the 2017-2019 bear market, suggesting net growth of the startup ecosystem over longer time frames.
The increased deal count and capital invested in the blockchain sector, even during a bear market, is a positive market signal for several reasons:
It indicates sustained interest and confidence in the long-term potential of cryptocurrencies and blockchain technology, even amidst market downturns.
Higher investment levels suggest that investors are seeing value and opportunities in the market, which could be a sign of maturing and diversifying within the industry.
Increased investment during a bear market could mean a stronger foundation for future growth when market conditions improve.
Venture funds typically outperform other asset classes following a market downturn. We believe now is the time to deploy capital to ensure access to the next bull market’s exits.
Technology Firms Are Poised to Go Public
We are amid an historically poor market for exits and IPOs. The reduced number of VC-backed IPOs in 2022 and 2023 can be attributed to several factors. High interest rates, geopolitical instability, and recessionary concerns have played significant roles in impacting the IPO market. Investors have shown a preference for companies with greater scale and profitability.
In the venture capital ecosystem, a depressed IPO market presents several challenges. Primarily, it impacts the return on investment for venture capitalists, as IPOs typically offer a significant exit strategy, yielding substantial returns. When the IPO market is sluggish, not only are potential profits reduced, but it also creates liquidity issues, hindering the ability of venture capitalists to reinvest in new ventures. This scenario can lead to a decrease in the valuation of startups within their portfolio, as these are often benchmarked against similar publicly traded companies.
A weakened IPO market also signals broader economic uncertainties, which can erode investor confidence and make it more challenging for venture funds to raise new capital. Furthermore, for startups, a challenging IPO landscape can delay crucial growth and scaling opportunities, affecting their long-term market expansion and success. This interconnectedness underscores how a vibrant IPO market is essential for the health and dynamism of the venture capital sector.
Already this early into 2024, there's a sense of optimism for a potential rebound in the IPO market, influenced by a backlog of IPO hopefuls, and improving market conditions. In fact, there are many high-profile companies that have been waiting on the sidelines, including Reddit, Stripe, Turo, and Circle, which many expect to launch IPOs in 2024.
The reopening of the IPO market is a boon for venture capital investing for several reasons.
It revitalizes the exit strategy landscape, providing venture capitalists with lucrative opportunities to realize significant returns on their investments.
The success of IPOs often reflects broader economic stability and investor confidence, further encouraging investment in venture capital.
For startups, an active IPO market provides not just critical funding but also enhances their credibility and visibility in the market, which is essential for growth and expansion. In essence, the reopening of the IPO market injects vitality into venture capital, fostering a more dynamic, confident, and profitable investing environment.
The View from London
The convergence of several large market forces suggests that the present moment is an optimal time for investing into blockchain ventures.
The anticipated easing of monetary policy by the Federal Reserve suggests a more favorable environment for riskier assets, as lower interest rates typically drive capital towards ventures offering higher potential returns. This shift is particularly advantageous for technological companies, including those in the blockchain sector.
Furthermore, the coincidence of the institutional Bitcoin ETFs and the upcoming Bitcoin halving, is creating a unique market situation whereby new institutional and retail demand is entering a market where new supply is about to be constrained by 50%.
Moreover, the blockchain sector has demonstrated resilience and growth even during a bear market, with current activity levels significantly outpacing those of the previous downturn. This indicates sustained confidence in the long-term potential of blockchain technology, suggesting that the sector is well-positioned for future growth that will outpace the previous cycles high.
Finally, with the reopening of the IPO market, there's an air of optimism for blockchain venture investing. A vibrant IPO market offers lucrative exit strategies and higher valuations for venture capitalists, enhancing the appeal of investing in blockchain startups.
The blockchain sector has been quietly thriving, under the context of a negative macroeconomic backdrop. It now seems headwinds are turning into tailwinds, and we want to be positioned to capitalize on these market forces. It’s time to allocate capital and get to work - come join us.
Thank you for reading,
Mitch Mechigian
Partner, London
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1000+ blockchain companies and projects including 80+ blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
“The best way to invest in blockchain businesses”