When the tide goes out, traditional VCs start entering the crypto space

This article is sourced from BlockBeats, authored by 0x71.

Even Jinsha River Ventures is getting to know Crypto.

BlockBeats has learned that recently, venture capital funds such as Jinsha River Ventures, Lightspeed China, and Northern Light Venture Capital have been paying attention to the crypto sector. Domestic internet VCs are starting to enter the Crypto space.

As early as April this year, Zhu Xiaohu, managing director of Jinsha River Ventures, publicly stated, "For myself, I can consider purchasing a small portion of assets in Bitcoin as part of asset allocation." He believes that "once we see real application scenarios for digital currencies starting to emerge, such as DeFi (Decentralized Finance) lending based on Ethereum, I believe there is still hope for digital currencies."

The same Zhu Xiaohu, in 2018, expressed in his social circle that neither Jinsha River nor he would participate in any ICO projects, stating that 99.99% of ICO projects are malicious scams.

As a "star investor" in the VC world, Zhu Xiaohu has successfully captured high-growth internet industry "unicorns" such as Didi, Ele.me, Xiaohongshu, and Inke, known for his unique vision and ability to "turn stone into gold." His shift from skepticism towards ICOs to recognition of DeFi may reflect the continuous maturation of this industry and subtly hint at the future direction of technological innovation.

When considering the rapid advances made by top international VCs in the crypto industry in recent years, Jinsha River's interest becomes even more understandable. After all, among the world's top venture capital firms, many are now involved in the crypto sector.

In May this year, legendary Silicon Valley VC Andreessen Horowitz (a16z), which invested in Facebook and Twitter, was reported to be preparing a third crypto fund exceeding $2.2 billion; SoftBank, which has invested in Alibaba, Didi, and Keep, is also entering the crypto sector by investing in a Brazilian cryptocurrency fund; IDG Capital, which has invested in over 500 internet companies including 360, Baidu, Tencent, Meituan, and Pinduoduo, has also been active in the crypto sector, acquiring well-known crypto projects such as Coinbase, imToken, and Ripple…

A more significant milestone event was the successful listing of the U.S. licensed cryptocurrency exchange Coinbase on Nasdaq in April this year, which has opened new possibilities for domestic investors who have long been skeptical about the compliance of the crypto industry.

As the era of rampant growth in consumer internet comes to an end, the demographic dividend that the domestic internet industry relies on is gradually disappearing, customer acquisition costs are increasing, traffic is no longer easy to obtain, and the mobile internet market is approaching saturation. Chinese internet VCs, accustomed to rapid expansion, now have to shift their focus elsewhere.

When the compliance channel opens, Crypto becomes an enticing blue ocean that cannot be ignored.

The Troops Are Starting to Enter

Changes always begin quietly. Suddenly, seasoned crypto investors are being favored by internet VCs.

Niu Fengxuan, the founder of the decentralized Dapp data analysis platform DappReview, which was acquired by the world's largest cryptocurrency exchange Binance, has confirmed to BlockBeats that he has left Binance to join the venture capital fund Sky9 Capital, which has invested in companies like Dianping and Pinduoduo, becoming a partner in the fund's crypto sector. The founder of Sky9 Capital, Cao Dayong, previously served as managing director and founding partner of Lightspeed China. It was he who initially "recommended" Bitcoin to Binance founder and CEO Zhao Changpeng, leading to the subsequent story.

Chen Yuetian, an investor in subculture and ACG (Anime, Comic, and Games) projects who has captured star projects like SNH48, Miwei Media, and Renren Video, and is now the founder of Huofeng Capital, has also started investing in crypto projects in the past six months. He told BlockBeats that many well-known internet VCs are currently looking at the crypto sector.

BlockBeats has also learned that a leading domestic RMB fund that has invested in Didi is considering establishing a dedicated crypto fund.

From the recent financing situations in the crypto industry, it can also be seen that domestic internet VCs' interest is increasing.

In March this year, the decentralized crypto wallet imToken announced the completion of a $30 million Series B investment led by Qiming Venture Partners, with participation from Series A investors IDG Capital and new investors Breyer Capital, HashKey, Signum Capital, Longling Investment, SNZ, and Fosun Group co-founder Liang Xinjun.

In May this year, crypto financial institution PayPal Finance announced the completion of a $40 million Series A financing, with top institutions such as Wanwu Capital (an early-stage fund under Boyu Capital), Sequoia Capital China, BAI Capital, Tiger Global Management, and Dragonfly Capital participating. Among them, Wanwu Capital, BAI Capital, and Tiger Global Management are all making their first foray into Asian crypto asset financial services. Previously, PayPal Finance had completed two rounds of financing, with investors including ZhenFund, Lightspeed China, Kinetic Capital, NGC, and others.

On June 21, global crypto financial service provider Amber Group announced the completion of a $100 million Series B financing, led by Huaxing Capital, with participation from Tiger Brokers, Tiger Global Management, Arena Holdings, Tru Arrow Partners, Sky9 Capital, DCM Ventures, Gobi Partners, and Series A investors Pantera Capital, Coinbase Ventures, and Blockchain.com.

In addition to institutions like Sequoia Capital China and Lightspeed China that have previously ventured into the crypto sector, BlockBeats has learned from various sources that funds like Source Code Capital, E-Capital, and Matrix Partners China have recently been exploring Crypto, showing interest and intention in this field. Traditional VCs are indeed entering the crypto industry.

"However, most internet VCs may still be in the observation phase," Chen Yuetian said.

Although institutions are entering, the demand for related talent may not be large. "Current internet institutions prefer to learn slowly; their pace is not aggressive. An institution might only hire one or two VPs or even higher-level personnel, as long as they can hold the entire sector," said Frank Li, an investment partner at SNZ.

In addition to personally reviewing projects, some internet VCs have also chosen a more discreet method—directly investing in blockchain capital. Earlier this year, Sequoia China announced that it had become a strategic partner of Dragonfly Fund, completing an investment in Dragonfly Fund. According to official information, Dragonfly (Dragonfly Digital Capital) is a venture capital fund focused on the blockchain industry, deeply focusing on blockchain technology research through a long-term value investment strategy, and actively cultivating the entrepreneurial ecosystem within the field.

The founder of Dragonfly Fund, Feng Bo, is a legendary veteran investor who founded Lianchuang Ciyuan in 2005 and has invested in a series of mobile internet products such as Xunlei and PPStream. He later founded Dragonfly Capital in the early days of the blockchain industry, becoming a well-known blockchain venture capital fund in China, and is referred to as the "strongest player in the crypto circle" for gathering four "big names": Sequoia Capital global executive partner Shen Nanpeng, Ethereum founder Vitalik Buterin, Meituan CEO Wang Xing, and Dianping founder Zhang Tao. His investment projects include popular public chains and DeFi projects like 1inch, Compound, Cosmos, dydx, and Near.

Image from the internet, taken at the 2019 Dragonfly Crypto Summit, from left to right: Shen Nanpeng, Feng Bo, Vitalik Buterin, Wang Xing, Zhang Tao

In a joint press release, Shen Nanpeng stated, "The Dragonfly team relies on its deep research and accumulation of underlying blockchain technology to continuously explore innovative layouts for products and technologies, effectively coordinating resources to actively cultivate the ecosystem of entrepreneurs in the field, earning a good reputation in the process."

With multiple VCs taking simultaneous action, a crypto wave may be on the horizon. However, to trace the reasons behind this movement of Chinese internet VCs entering the Crypto space, one cannot overlook another continent across the ocean.

Are VCs Also FOMO-ing?

FOMO stands for Fear of Missing Out, referring to the anxiety of constantly worrying about missing or losing something, also known as "fear of missing out syndrome."

In the investment world, FOMO is very common, and VCs are no exception.

In the past three years, while Chinese internet VCs were still observing from the sidelines, "American institutions like a16z (Andreessen Horowitz) and USV (Union Square Ventures) started investing in crypto projects early on and have been continuously investing over the past few years. Chinese VCs have fallen behind and can only scramble to catch up," Chen Yuetian said.

Among the many U.S. VCs focusing on the crypto sector, the most prominent is undoubtedly the top Silicon Valley venture capital firm a16z. With its aggressive style and robust capital strength, it has rapidly expanded its territory, capturing a series of phenomenal companies from Facebook, Twitter, and GitHub to Clubhouse.

In the world of cryptocurrencies, a16z is an early adventurer. This company has the Bitcoin white paper framed on the wall of its Silicon Valley office and has been involved in the crypto field for seven years, adhering to the investment philosophy of "long-term investment" and "all-weather investment," successfully backing leading projects in the crypto industry such as Coinbase, Uniswap, Solana, MakerDao, Dfinity, and Chia, becoming an undisputed industry "barometer."

Alongside the direction of capital, there have also been breakthrough developments in innovative projects in the foreign crypto industry over the past few years. With the joint efforts of dozens of leading project developers globally, the DeFi (Decentralized Finance) wave in the summer of 2020 and the NFT (Non-fungible Token) craze at the end of 2020 became the biggest drivers of this round of cryptocurrency bull market, innovating the financial and entertainment industries with their decentralized concepts and successfully attracting the attention of mainstream audiences both domestically and internationally. In contrast, there have not been many outstanding crypto projects in China in recent years.

The continuous adventurous spirit of American venture capital funds has been observed by their counterparts worldwide, including in China.

In China, although Crypto has long been associated with negative labels such as pyramid schemes, money laundering, and scams, this cannot erase the fact that this industry belongs to cutting-edge technological innovation, brimming with massive funds and huge profits. The reasons that previously hindered Chinese internet VCs from entering the sector were simple: compliance exit and industry expectations.

Thus, Coinbase's successful listing in the U.S. became a very important trigger point. Although obtaining a cryptocurrency exchange license in the U.S. is cumbersome, the fact that Coinbase achieved a "grand slam" of compliance licenses and still went public means that exchanges in the U.S. do not exist entirely in the dark; as long as they fully embrace regulation, they can "stand in the sunlight."

This also provides a complete compliance path for other U.S. cryptocurrency exchanges, and the future of U.S. exchanges like Binance.us will have limitless possibilities.

"Coinbase has shown traditional investors that crypto exchanges can also be very legally listed on Nasdaq, which means investors now have a legal and compliant exit mechanism," said Vanessa Cao, founder of BTX Capital.

It is important to note that the exit mechanism is a crucial part of venture capital, key to generating profits in a cyclical manner. Without this link, the venture capital chain would be interrupted, making it impossible to achieve investment appreciation and a virtuous cycle, thus failing to attract more capital into the venture capital fold.

In the traditional stock market, the main exit channels for venture capital include initial public offerings (IPOs), equity transfers, share buybacks, and bankruptcy liquidation. Previously, in the crypto space, the only exit mechanism for investors was likely to unlock and sell tokens, which inevitably raised suspicions of "cutting leeks."

Even with an IPO exit mechanism, compliance remains an important consideration for internet VCs under the current policy backdrop in China. "Currently, there are almost no domestic internet VCs that can invest in crypto-native projects; most are still looking at blockchain service projects, such as PayPal Finance, which Sequoia invested in," Niu Fengxuan told BlockBeats. "Most internet VCs are still investing in equity."

Positive "Fundamentals"

Beyond changes in compliance exit mechanisms, another important reason for internet VCs choosing to enter the market is the change in the "fundamentals" of the crypto industry.

When we review the driving forces behind the current round of crypto bull market from 2020 to the present, in addition to the strong support from new capital and the continuous emergence of innovative projects, it is hard to ignore the efforts of Wall Street financial institutions like Grayscale to connect cryptocurrencies with traditional equity markets, and these innovative financial models rely on the compliant environment provided by U.S. regulations.

Currently, U.S. cryptocurrency trust products must be approved by the SEC. The popular cryptocurrency trust funds under Grayscale, such as GBTC and ETHE, are products that report to the SEC. Notable old-money family Rothschild Investment Corp and "female Buffett" Catherine Wood's ARK Invest are among the 23 companies that have held Grayscale's Bitcoin trust.

Bitcoin and Ethereum ETF products also require compliance review. Bitcoin ETFs (Exchange Traded Funds) allow traders to access Bitcoin trading channels through traditional stock markets, eliminating the need to buy and sell crypto assets on cryptocurrency exchanges. Notably, Canada has already approved three Bitcoin ETFs this year. The first approved Bitcoin ETF saw a trading volume of over 9.65 million shares on its launch day, with a first-day transaction amount reaching $165 million, far exceeding the average first-day trading volume of newly listed ETFs in Canada.

Additionally, Thomas Peterffy, CEO of the globally renowned professional trading platform Interactive Brokers, has stated that due to strong demand from platform users for trading crypto assets, Interactive Brokers will launch crypto asset trading services before this summer.

The continuous development of compliant cryptocurrency businesses overseas has also prompted similar products in China to stir.

In June this year, internet broker Futu Securities and Tiger Brokers announced plans to enter the cryptocurrency industry, intending to launch cryptocurrency trading platforms and stating that they are applying for cryptocurrency trading licenses in the U.S. and Singapore. Tiger Brokers CEO Wu Tianhua mentioned in a conference call that "overall, customer enthusiasm for IPOs has significantly cooled compared to last year, and it seems that attention has shifted to the cryptocurrency market, especially after Coinbase's listing."

Futu Niuniu CEO Li Hua (Yezi Ge) also stated that in the future, there is a high chance that Hong Kong and overseas users will be able to trade Bitcoin directly on the Futu Niuniu platform.

Whether it is Grayscale's trust funds, Bitcoin ETFs, or brokers' crypto trading services, they are building bridges between the cryptocurrency and traditional equity markets, allowing ordinary investors to obtain legal windows for purchasing cryptocurrencies through the stock market and brokerage services, which also presents more compliant investment opportunities for VCs.

In addition to building a compliant bridge with the traditional financial world, the value and prospects of the crypto industry itself are also beginning to be recognized by mainstream institutions.

The DeFi wave in the summer of 2020 brought significant changes to the existing labels of the crypto industry. "DeFi is the biggest application that activates the crypto market, with lending, deposits, mining, and DEX (decentralized exchanges) innovating financial infrastructure. These projects are understandable to internet investors, attracting more attention from investors," Chen Yuetian said.

Frank Li also expressed to BlockBeats, "The emergence of DeFi and NFTs has allowed more internet investors to see the future possibilities of the crypto industry; people no longer view the crypto space as purely a bubble."

As more large institutions globally begin to "dance" with cryptocurrencies, the mainstream financial industry's impression of Crypto has changed. Compared to 2017, the investment mentality of VCs entering the market now has also shifted. "This time, many internet VCs want to look at the blockchain sector from a long-term perspective, and their investment style will be relatively conservative, not as aggressive, focusing more on compliance and legality for long-term investments, which is a positive phenomenon."

As a disruptive financial innovation, regulation and compliance are also crucial parts of the cryptocurrency industry. Each policy issuance delineates the boundaries of industry development and provides a secure environment for compliant projects to grow. Currently, under the strict regulatory backdrop for cryptocurrencies and Bitcoin mining in China, how to conduct crypto business compliantly, supporting fintech innovation while protecting the interests of ordinary investors, has become the primary concern for domestic institutions.

With places like the U.S., Canada, and Hong Kong opening up cryptocurrency trading platforms and licenses for trust funds and ETFs, VCs are accelerating their pace.

Change and Constancy in the Cycle

It is well-known that the price of Bitcoin experiences cyclical fluctuations every four years due to the halving. Influenced by Bitcoin price fluctuations, the cryptocurrency market also exhibits distinct cycles of bull and bear markets. In the past five years, the crypto industry has experienced two major bull markets in 2017 and 2020, with numerous innovations emerging during these bull markets.

Looking back at the history of the crypto industry, the most famous and "deadly" innovative concept during the 2017 bull market was ICOs, in which many domestic internet VCs actively participated, most of whom returned empty-handed.

In 2017, under Ethereum's innovative ICO model, a wave of ICOs swept through China, with countless projects blooming everywhere, and a large number of internet VCs entering aggressively. Reports indicated that in just October to November 2017, VC financing in the blockchain industry reached $1.88 billion, with ICO financing amounting to $4.18 billion.

At that time, some humorously remarked that the internet circle had been divided into two camps: those who were into blockchain and those who were not.

Amid extreme market enthusiasm, the famous "3 AM Sleepless Group" was born. It was reported that this group included investment moguls such as Shen Nanpeng, ZhenFund founder Xu Xiaoping, Longling Investment founder/Cai Wensheng, Manzi Fund founder Xue Manzi, Kuaidi Dache founder/泛城 Capital founder Chen Weixing, and angel investor Li Xiaolai. Xu Xiaoping became known for his declaration that "the blockchain revolution has arrived, accelerating the entry into the blockchain era."

However, when the 2018 bull market cycle ended and the market entered a bear phase, investors and retail traders were left with nothing but chaos. As netizen @CallMeWhy sharply commented, "Domestic ICO projects are pitiful; not a single project can truly create value, and none are genuinely implemented. Even spraying pesticides has to be linked to blockchain, writing a novel has to be linked to blockchain, and video streaming has to be linked to blockchain."

"In 2017, many domestic internet people entered this industry after seeing the wealth effect, either investing or starting projects. Some of these individuals may not have performed well in their original industries; they were merely speculating on a new trend," Frank Li analyzed.

We can confidently say that the domestic ICOs in 2017 had deviated from the fundamental meaning of Bitcoin and blockchain's inception. Except for Ethereum, the vast majority of domestic projects had the suspicion of "fraud," causing harm to investors. In the context of extreme market enthusiasm, the domestic government introduced policies to crack down on ICOs, which can be seen as "rectifying the chaos," using growing pains to achieve healthy industry development and protect investors' interests.

The transition between bull and bear markets is a test for many, and investors are no exception. When the tide recedes, everyone looks around and realizes they are all swimming naked. "Most internet investors left the market without making money in 2017; very few actually profited," Chen Yuetian told BlockBeats when discussing the cycle. After a four-year blank period, "everyone gradually forgot about this industry."

Fast forward to the bull market cycle of 2020-2021, with the dual support of DeFi and NFTs, the crypto industry gained recognition from more international companies, Wall Street financial institutions, and even some small countries. This industry is no longer just labeled as "speculative"; more people believe that the crypto industry can change the paradigm of future finance and become an important infrastructure for opening the door to Web 3.0.

With the compliance exit channels opening and the industry's prospects becoming clearer, more domestic internet VCs are beginning to shift and "re-enter the layout."

"This time, good domestic institutions are starting to change their attitudes and are beginning to look at the crypto sector, slowly advancing in a prudent manner."

The most obvious change is that they have recognized the cyclical nature of the crypto industry and are starting to buy in. "Investing in a bear market and reaping rewards in a bull market is a theory recognized by all investors. There are also cycles in sectors like mobile internet, AI, and big data; it's just that their cycles are a bit longer," Frank Li told BlockBeats.

If previously "everyone lumped Crypto into the category of illegal activities," now "people's attitudes have become slightly more open, believing that the crypto industry is a viable sector to choose," Chen Yuetian analyzed the psychological changes of VCs, "Crypto may be a new thing that can drive change."

As the industry becomes less restless and speculative, and more institutions begin to take a long-term view, specialization and refinement become an inevitable development path. "Now, there are relatively mature post-investment services and market-making institutions in the crypto industry, which also ensures the later growth and liquidity of projects," Vanessa Cao analyzed.

As the industry gradually matures and institutions begin to lay out, how far into the future? "It is estimated that in another six months to a year, we will see a huge wave rise," Chen Yuetian said.

Once, no one would believe that taxis could stop at your doorstep without waving; Didi made it happen. Once, no one would believe that food could arrive at your doorstep within half an hour; Meituan made it happen. Over the past decade, behind these life-changing technologies lies the investment of VCs. In the next decade, it will be blockchain technology that changes lives, and this wave will also rely on the push from VCs.

As Chen Yuetian stated in his article "Spark Prophecy 2021": VC should be a very romantic and idealistic profession.

Once, we invested in companies that built chips from sand and shaped the future of humanity; once, we invested in companies that aimed to bring computers to every household's desk; once, we invested in companies that enabled real-time communication across countries, skin colors, and languages.

VCs should be the ones preserving the possibilities of change for this world. Prometheus brought fire; VCs should be the ones passing it on.