The Transformational Impact of Distributed Ledger Technologies and Cryptocurrencies on the VC Industry

In recent years, the advent of distributed ledger technologies (DLT) and cryptocurrencies has sparked a revolution in the world of venture capital (VC). These technological innovations have completely reshaped the way investors and startups interact, creating new opportunities and challenges for both parties. In this article, we will explore the profound changes brought about by DLT and cryptocurrencies on the VC industry.

Understanding Distributed Ledger Technologies

Distributed ledger technologies, often referred to as blockchain, are decentralized systems that allow multiple parties to maintain a secure and transparent record of transactions. Unlike traditional centralized databases, where a single authority controls the data, DLT relies on a network of nodes that collectively validate and store information.

This technology has introduced a new level of trust and efficiency in the VC space. By leveraging DLT, investors can now participate in fundraising events using cryptocurrencies, enabling borderless and instant transactions without the need for intermediaries. Startups, on the other hand, can enjoy faster access to funding, improved fundraising processes, and increased transparency.

Blockchain Venture Capital: How Distributed Ledger Technologies and Cryptocurrencies Changed the VC Landscape

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Implications for Startups

DLT and cryptocurrencies have provided startups with alternative means to raise capital, challenging the traditional VC model. Initial Coin Offerings (ICOs), for example, have emerged as a popular fundraising method, allowing companies to issue their own digital tokens to investors in exchange for funds. This approach removes many of the barriers associated with traditional funding channels, making it easier for startups to secure financing.

Furthermore, DLT has facilitated the creation of decentralized applications (dApps) that operate on top of blockchain networks. These dApps offer startups innovative ways to leverage existing infrastructures and gain access to a global user base. By eliminating intermediaries and reducing operational costs, dApps have democratized access to financial services, creating new opportunities for entrepreneurs in underserved regions.

Transformation of VC Investments

DLT has not only impacted how startups raise funds but has also transformed the way venture capitalists invest. Cryptocurrencies, such as Bitcoin and Ethereum, have become alternative assets for VCs looking to diversify their portfolios. Additionally, the rise of security tokens and tokenized securities has opened up new investment opportunities, allowing for fractional ownership of assets and improved liquidity.

DLT has also enabled the emergence of tokenized equity platforms, which provide investors with access to early-stage startups through tokenized securities. These platforms democratize VC investments by allowing smaller investors to participate in the funding of potentially high-growth companies.

Risks and Challenges

While DLT and cryptocurrencies have brought numerous benefits to the VC industry, they also come with their fair share of risks and challenges. The regulatory environment surrounding cryptocurrencies is still evolving, leaving investors and startups uncertain about the legal frameworks and compliance standards. Additionally, the volatility of cryptocurrencies poses financial risks that investors need to carefully consider.

Furthermore, the lack of standardization in the DLT space creates technical challenges for investors and startups. Interoperability between different blockchain networks is still a hurdle that needs to be addressed to enable seamless integration and scalability.

The Future of VC in the DLT Era

The impact of DLT and cryptocurrencies on the VC industry is indisputable, and its potential for future growth is enormous. As these technologies continue to mature and regulatory frameworks become more defined, the barriers to entry will decrease, and more traditional investors will enter the space.

Moreover, the of programmable smart contracts on DLT networks opens up new possibilities for venture capitalists, simplifying the investment process and improving the efficiency of managing portfolios.

In , distributed ledger technologies and cryptocurrencies have revolutionized the VC industry, enhancing fundraising opportunities for startups and providing new investment avenues for venture capitalists. While challenges and uncertainties persist, the potential for growth and innovation in this space is immense. The VC landscape has been forever changed, paving the way for a more inclusive and efficient future.

Blockchain Venture Capital: How Distributed Ledger Technologies and Cryptocurrencies Changed the VC Landscape

by Cointelegraph Research ([Print Replica] Kindle Edition)

4.6 out of 5

Language	:	English
File size	:	9849 KB
Screen Reader	:	Supported
Print length	:	182 pages
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Venture capitalists have invested over $16 billion in blockchain equity since 2012. Even with over 3,000 deals in eight years, blockchain VC still makes up only 1% of the global VC market.

The Cointelegraph Blockchain Venture Capital book explains the current state of venture capital investments in the blockchain ecosystem. Cointelegraph Research has built the most comprehensive data set of all blockchain venture capital to date. Covering over $16 billion invested by 928 different angels, VCs, incubators and corporates, the new 59-page book is the most in-depth analysis ever written on the blockchain VC industry.

This book contains exclusive interviews with the most influential VCs including Etiënne vantKruys of TRGC, Jin Kang of #Hashed, Alon Goren from the Draper Goren Holm Fund, Stephan Wong from PNYX Ventures, Camron Miraftab of Rarestone Capital, Michael Anderson of Framework Ventures, and Ryan Taylor of the Dash Investment Foundation.

The book is divided into three major sections including information relevant for startups, venture capitalists (general partners) and investors (limited partners). The following are highlights from the book.

Projects with coins that were popular for Blockchain VC deals included: Avalanche (AVAX), Curve (CRV), DerivaDEX (DDX), Nervos Network (CKB), and Zilliqa (ZIL), just to name a few.

Many blockchain VC funds have outperformed traditional VC funds.While traditional funds have had returns in the low double digits, several blockchain venture capital funds have earned 10 times that. Apart from the staggering returns, blockchain-focused VC funds have also enjoyed a low correlation with traditional asset classes.

For example, Blockchain Capital’s BCAP token’s correlation with stock indexes has been in the 0.00–0.14 range. The diversification potential for investors interested in venture capital is loud and clear.

VC investments in the blockchain industry came under serious economic pressure during COVID-19. Blockchain VC investments decreased by 13% between 2019 and 2020, while traditional VC investment increased by 18%. The global amount invested in blockchain VC dropped from $3.17 billion in 2019 to $2.77 billion in 2020.

In 2020, the hot trend for blockchain VC deals was decentralized finance. More than 200 venture and hedge funds bet on the future of 100+ DeFi projects. Currently, over $20 billion in capital is locked into DeFi protocols.

To learn more about how to get involved with DeFi, read Cointelegraph Consulting’s Definitive guide on DeFi here.

For firms that are in their Series A funding round and beyond, price to sales (P/S), price to book (P/B) and price to earnings per share (P/E) are common comparative analysis multiples used to value blockchain private equity. The valuations of some private crypto companies are astronomically higher than the FANG stocks. For example, one crypto company raised capital with a P/E ratio of 110.

To put this into comparison, Apple’s P/E ratio during the coronavirus was hovering around 24 but reached a maximum of 41.93 in December 2020. However, this is comparing apples to oranges to some degree. Nevertheless, VCs backing startups at multiples near record highs implies that those investees will have to generate more capital than they received — and they will have to do so in a highly volatile environment.

To learn about which sectors these trendsetting blockchain VCs think will be hot in 2021, read the full book. The book also covers the tax implications of investing in blockchain private equity in various countries, how to do discounted cash flow analyses for exchanges that go public like Coinbase or Kraken, and the benefits and risks associated with tokenizing the shares of a fund.