Crypto Long & Short: Crypto Needs More Than VC Interest

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Inflation therefore finally appeared in the consumer price index this week. And it happened hot, with year-over-year inflation in the United States hitting 5.4%, well above the Federal Reserve’s 2% target. It also marks a 13-year high (FYI, it was 2008, not exactly a good economic year). The kicker? Professional investors didn’t seem to care.

The yield on 10-year Treasury bonds, which is the benchmark for fixing the cost of borrowing mortgage rates and corporate debt in America, initially declined. Expectations of higher inflation and economic growth tend to boost, not dampen, government bond yields. As the 10-year-old eventually rose, the initial reaction was startling.

This column originally appeared in Crypto Long & Short, CoinDesk’s weekly newsletter for professional investors.

With the markets in mind, I wanted to use this week’s newsletter to talk about the alleged lack of institutional interest in bitcoin these days. (Hint: Obviously there’s no shortage of it.) I also wanted to explain why I think the industry is able to see another resurgence of institutional interest in cryptocurrencies following the upcoming public listing of Circles in the fourth quarter of 2021.

So-called institutions don’t care about crypto

BlackRock CEO Larry Finks’ comments on CNBC Squawk Box grabbed headlines last week after claiming there was very little demand for crypto assets. In the past, you have asked me about crypto and bitcoin. Again, in my last two weeks of business travel, no questions were asked on this, Fink said.

Granted, Fink was referring to retirement investing and how registered investment advisers, pension funds, and insurance companies should build portfolios on behalf of their clients over a long-term horizon. He was not talking about the institutional investment strategies of hedge funds, venture capitalists or large corporations.

So while I don’t think Fink was suggesting that institutional interest in crypto assets in general is low, I want to hang on to the flawed conclusions from his comments that institutions don’t care about crypto. This is something people have asked me about ever since the price of bitcoin started to drop from its all-time high of $ 64,888.99, and since anecdotal evidence like Finks’ claims has come to light. started suggesting that smart money was no longer in the crypto space.

Direct crypto investments and venture capital funds

We haven’t seen the glut of companies buying bitcoin to put on their balance sheets in the second quarter like we did in the first quarter. What we saw instead was a huge amount of capital poured into crypto companies through venture capital funds or direct investments. There has been more business activity for blockchain-focused companies in the first half of 2021 than there has been in all of 2020. Venture capital funding around the world across industries has reached all-time highs so far this year, but even so, the share of transactions entering crypto and blockchain startups is also on the rise, from 0.89% to 5.97% in H2 2020 in H1 2021.

Crypto and Blockchain VC Funding as a Percentage of Global VC Funding

The timeline below outlines some of the most significant trading and fundraising activity over the past four months. Venture capital funds themselves have also accumulated record amounts of capital in the last quarter. On June 24, Andreessen Horowitz (a16z) announced that he had created the largest crypto-related fund to date, raising $ 2.2 billion for his Crypto Fund III.

VC transaction activity and fundraising for crypto and blockchain startups since March 2021

Venture capital investment in crypto companies does not indicate that all types of institutions are currently deeply interested in crypto. For some, VC bets are 1 in 100 long shots in search of the next Coinbase (so goes the cynic). One upcoming event that I believe will spark broader institutional interest in crypto is the public listing of crypto financial services firm Circle.

On July 8, Circle announced its intention to go public through a merger with a special purpose acquisition company, Concord Acquisition Corp (NYSE: CND). This is harmless because in the grand scheme of capital markets $ 4.5 billion is peanuts, but the butterfly effects of Circle’s public offering may have far-reaching consequences for the crypto markets by bringing greater regulatory clarity in the United States for stablecoins.

The advent of a regulatory compliant Stablecoin

A stablecoin is a cryptocurrency tied to the value of a fiat currency. In 2018, Circle, working with cryptocurrency exchange Coinbase, created a dollar-indexed stablecoin called USDC. USDC is fully supported 1: 1 by an audited reserve and governed by Center, a member-based consortium that sets technical, policy and financial standards for stablecoins. The USDC is not the only stablecoin pegged to the dollar, but it is one of the largest beside the tie (USDT).

Supply of stable coins indexed to the dollar

Stable coins are important for the health of the crypto markets because they solve the problem of high volatility and convertibility between fiat and crypto. When banking relationships were difficult to establish for crypto exchanges, stablecoins were essential to the growth of the market.

Circle’s IPO can be a critical step in achieving regulatory clarity and acceptance of stablecoins in the United States. Circle co-founder Jeremy Allaire said this when he pointed out on CoinDesk TV that Circles intention to go public was to bring more reserve transparency with the United States Securities Commission ( DRY). Allaire also said he welcomes working with regulators to see adjustments to various forms of banking and payment regulation to accommodate some of the nuances and characteristics of stablecoins.

For context, the transparency of the stablecoin reserve has been a burning issue for the dominant dollar-linked stablecoin, tether, which just a few months ago settled a legal battle with the New York attorney general’s office for allegedly attempted to cover the loss of $ 850 million in client and business funds.

The USDT is a sore spot for institutional investors. Investors don’t like to fall out of favor with lawmakers, and they don’t like losing money. The lack of transparency for the USDT represented the possibility of these two things happening; possibly to the same catalyst (imagine if the cable has gone to zero).

If the USDC continues to increase its market cap to outperform the tether while also becoming a regulatory compliant stablecoin, this could open the door for institutional investors who once feared the regulatory risk of cryptocurrencies, particularly in this regard. which concerns crypto trading and exits. .

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