The value of a cryptocurrency can be influenced by a number of factors, including news about the cryptocurrency and its underlying technology, government regulations, and general market conditions. The market can also be influenced by investor sentiment, which can be affected by a wide range of events. Just a month ago, everyone is still saying it's a bear market. As of this week, everyone is cheering for the current bull run. Bitcoin hit its highest price since mid-August by breaching the US$24,000 price ceiling. This was largely attributed to investors liquidating almost $70 million of bets on predominantly short positions.
There are many different types of investments in the cryptocurrency space, and the specific popular investments can vary over time.
Most Popular Types of Cryptocurrency Investments
Purchase and holding: This is the simplest and most common investment strategy. Investors buy a cryptocurrency like Bitcoin USD/BTC or Ethereal EUR/USD and hold it for the long term, with the expectation that its value will increase over time.
Trade: Trading involves buying and selling cryptocurrencies on an exchange to make a profit based on short-term price fluctuations. This strategy requires a good understanding of technical analysis and market trends.
Mining: Mining involves the use of computer hardware to solve complex mathematical problems and verify transactions on a blockchain network. Miners are rewarded with newly minted cryptocurrency as an incentive for their work.
Stakeout: Staking involves keeping a certain amount of a cryptocurrency in a wallet and locking it to support network security and transaction processing. In return, participants receive rewards in the form of newly minted coins.
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs): ICOs and IEOs are ways that companies can raise funds by selling newly created cryptocurrencies to investors. This strategy can be risky as some ICOs and IEOs have turned out to be scams.
Cryptocurrencies have several investment theses. Some investors believe that they have the potential to replace traditional fiat currencies, while others see them primarily as a store of value or a medium of exchange. Additionally, some investors see the underlying blockchain technology as having the potential to revolutionize a variety of industries, from supply chain management to identity verification.
Some investment theses specific to cryptocurrencies
The use of cryptocurrencies as a medium of exchange: Some people believe that cryptocurrencies will eventually be used as a primary means of exchange, replacing traditional fiat currencies.
The store of value thesis: Some people believe that cryptocurrencies will eventually be used as a store of value, similar to gold.
The thesis of the blockchain revolution: Some people believe that the underlying blockchain technology has the potential to revolutionize a wide range of industries and that investing in cryptocurrency is a way to get on the ground floor of this technological revolution.
The "big fool" theory: Some people believe that the price of a cryptocurrency will continue to rise as long as someone is willing to buy it at a higher price, even if the cryptocurrency has no intrinsic value. This is sometimes known as the "big fool" investment theory.
Venture capitalists (VCs) are individuals or companies that provide financing to early-stage companies in exchange for an equity stake. In the cryptocurrency space, venture capitalists have traditionally invested directly in cryptocurrencies or in blockchain-based startups, but recently there has been a shift in focus towards investments in blockchain infrastructure and applications.
The fall of FTX and other cryptocurrency exchanges has led VCs to be more cautious about investing directly in cryptocurrencies. Instead, they are looking to invest in companies that are developing the underlying technology and infrastructure of the blockchain. This includes companies that are developing blockchain-based platforms, creating decentralized applications, or working on other blockchain-related projects.
The reason for this change is that many venture capitalists see a long-term potential for blockchain technology to disrupt various industries and believe that investing in the underlying infrastructure will generate better returns than investing directly in cryptocurrencies, which are known for their volatility. Another reason for this change is that the regulatory landscape for cryptocurrencies is still uncertain and can create risks for investors. By investing in blockchain infrastructure and applications, venture capitalists can mitigate some of these risks and potentially earn higher returns in the long run.
Some specific areas of interest for venture capitalists in the cryptocurrency space.
Blockchain infrastructure: VCs are increasingly supporting startups working to build a strong blockchain infrastructure. These companies focus on developing innovative solutions that can potentially revolutionize the blockchain ecosystem. A key area of โโinterest for venture capitalists is the development of new consensus algorithms. These algorithms allow network participants to agree on a shared state of the blockchain without relying on a centralized authority. Some companies are working on proof-of-stake (PoS) algorithms that reduce the power consumption associated with proof-of-work (PoW) algorithms, which are used by Bitcoin and other cryptocurrencies.
They are also investing in Tier 1 companies, which are startups that focus on building the foundational infrastructure layer of the blockchain. These companies are working on creating new and innovative technologies that can potentially improve the scalability, security, and performance of the blockchain. Former team members of traditional financial giant Jump Trading have established a tech startup called Monad Labs, which has raised $19 million in seed funding. The company intends to create a new blockchain that addresses the shortcomings of existing layer 1 protocols. According to a statement, the Monad blockchain will be introduced to a testnet in the coming months, with plans for mainnet implementation later this year. The blockchain will use the proof-of-stake consensus mechanism and will be compatible with the Ethereum Virtual Machine (EVM), allowing projects on Monad to interact with the EVM software platform. This interoperability will allow developers from other blockchain projects to build decentralized applications that can work together on the Ethereum network.
web3 solutions: Web3, also known as Web 3.0, is the next iteration of the World Wide Web and is based on blockchain technology. It is designed to be more decentralized, secure, and open than the current Web. Venture capitalists are looking for projects that align with the core principles of Web3 and have the potential to drive adoption and growth. This is another upward trend. Just last week, I noticed that over $20 million was raised in the Web3 space.
- Boiler, a Web3 application infrastructure provider, has secured a total of $9 million in financing from two investment rounds. The funding was spearheaded by established financial powerhouse Sequoia Capital and digital currency-focused firm Dragonfly.
- UK based startup oil, which focuses on Web3 in the gaming and entertainment industry, revealed that it raised $5 million in a seed funding round led by venture firm Play Ventures' Future Fund.
- In a seed funding round co-led by Insignia Venture Partners, MindWorks Capital and Signum Capital, Shipment of laboratories has raised $12.5 million. The company's goal is to offer a more accessible approach for developers and users to build and interact with decentralized communications-based applications (dapps).
I noticed that among the VCs in my network they are also looking for blockchain applications. Venture capitalists have also invested in companies using blockchain to build new applications, such as supply chain management platforms, decentralized finance (DeFi) platforms, and decentralized identity solutions. Interoperability and cross-chain solutions, for example, aim to allow different blockchain networks to communicate and interact with each other and are also one of the main investment options.
In my opinion, investing in blockchain infrastructure and applications is likely to promote the expansion and maturation of the cryptocurrency ecosystem and potentially generate more sustainable returns for investors in the long term. However, it is important to recognize that VC investing is only one aspect of the broader cryptocurrency ecosystem. Other investors, such as hedge funds, family offices, and individual investors, may have different theses and investment strategies, which can also affect the market. It is crucial to stay informed about the various factors that can influence the cryptocurrency space and adapt investment strategies accordingly. As a licensed fund manager and VC for over a decade, this is my humble note to everyone.
"To achieve the best returns in the crypto space, it is important to believe in the underlying technology, focus on community growth, and capitalize on market trends. By understanding the technology behind a particular cryptocurrency and its potential to solve cryptocurrency problems, real world, investors can make informed investment decisions that align with their long-term goals. -Anndy Lian
