Why do traditional institutions prefer to invest in cryptocurrency wallets?
The imagination space of wallets is no longer the same as before.This article is sourced from Rhythm BlockBeats
In the first half of 2021, a total of 404 companies in the cryptocurrency sector received financing, with a total amount of $7.271 billion. Among them, 9 companies related to cryptocurrency wallets received $863 million in financing, far exceeding the industry average. The cryptocurrency wallet industry has become one of the most lucrative sectors in the cryptocurrency field, aside from trading platforms.
According to publicly available data, 13 companies related to cryptocurrency wallets conducted financing in 2021, raising a total of $890 million from the market. The largest single financing amount was Ledger's $380 million Series C round, which was the second-largest single financing amount in the cryptocurrency industry at that time, second only to Bitmain's $400 million financing in 2018.
The list of institutions participating in the financing of cryptocurrency wallets includes many traditional investment institutions that previously focused on Fintech. However, this group of institutions has rarely invested in DeFi, which is more aligned with their focus area, raising curiosity about why traditional institutions prefer to invest in cryptocurrency wallets.
1. What is a cryptocurrency wallet?
Cryptocurrency wallets can be divided into cold wallets and hot wallets based on whether they can connect to the internet. Cold wallets can further be categorized into hardware wallets, paper wallets, etc., while hot wallets can be divided based on the tools used for connectivity, such as mobile wallets, web wallets, etc. Additionally, cryptocurrency wallets can be classified into decentralized wallets and centralized wallets based on whether they are on-chain. Furthermore, cryptocurrency wallets can also be categorized based on public chain ecosystems, whether they are custodial, and other types. 
After years of development, the technical threshold for cryptocurrency wallets is gradually lowering, and a cryptocurrency wallet product can now perform numerous functions. For example, hot wallets can add features that support offline creation, allowing cold wallets to be created without internet access. The decentralized cryptocurrency wallet MaiZi Wallet, which just received $12 million in Series B financing from Binance Labs in December 2020, supports over 60 public chains, while imToken, which also received $30 million in Series B financing this year, supports 12 public chains.
Therefore, for investment institutions, simply categorizing cryptocurrency wallets does not hold much significance.
2. What kind of business model does a cryptocurrency wallet have?
In the internet sector, when starting a business, if there is no revenue or the revenue is far below the costs incurred, companies must rely on metrics such as growth rate, PV/UV, retention rate, etc., to explain their story to capital, and all these metrics ultimately point to "traffic."
Similarly, cryptocurrency wallets attract traditional institutions with traffic.
Just before two rounds of financing, the business model of the established cryptocurrency wallet and trading provider Blockchain.com, founded in 2011, faced continuous skepticism from both inside and outside the industry. At the same time, the longest-serving Chief Operating Officer Liana Douillet Guzmán and Executive Vice President of Finance Chris Lavery also announced their departures. In 2019 alone, Blockchain.com had five executives choose to leave.
Although other businesses were not outstanding, the 31 million verified users and 65 million wallets from over 200 countries gave Blockchain.com the confidence to secure substantial financing. On the last day of the Chinese New Year holiday in 2021, Blockchain.com announced it had secured $120 million in financing. Subsequently, in less than a month, Blockchain.com secured another $300 million in financing.
Of course, Blockchain.com is also actively exploring other business areas. According to CoinMarketCap data, the trading platform created by Blockchain.com has a daily trading volume of only $13 million. In contrast, the top 20 trading platforms have an average daily trading volume exceeding $1 billion.
The story of traffic is not only sought after by investment institutions but also by the capital markets.
Founded in 1995, the multi-platform web browser Opera announced on July 24, 2020, that its built-in cryptocurrency wallet had reached 170,000 monthly active users. After this announcement, Opera Group's stock rose by a cumulative 13.37% over six trading days.
With a traffic entry point, how to monetize has become a challenge for cryptocurrency wallets.
Currently, the main profit models for cryptocurrency wallets on the market can be divided into two categories: to B and to C.
To B sector:
- Undertaking cryptocurrency custody for large institutions and users with significant capital, such as institutional-level custody for MetaMask Enterprise Edition and Cobo Wallet custody;
- Providing financial derivative services for institutions, such as BitGo offering digital wallets to institutional clients to help manage asset portfolios and loans;
- Accepting advertising placements from certain projects;
- Collaborating with certain public chains for integration, etc.
Compared to the to B sector, the to C sector is the primary source of profit for most cryptocurrency wallets.
To C sector:
- Earning transaction fees through built-in features such as OTC, small currency exchanges, and integrated swaps, such as the now-closed OTC from Bitpie. However, the revenue from this part of the business varies significantly among different wallets.
- Providing PoS project staking services, such as most wallets supporting users to participate in ETH 2.0 staking after charging a certain fee.
- Selling hardware wallets. Some hardware wallets are sold at low costs while profiting through other means.
Hardware wallet OneKey price vs. cost
MaiZi Wallet, which has over 2 million users, stated to Rhythm that its main sources of income are staking and swaps. However, compared to short-term commercial monetization, MaiZi Wallet is more concerned with cultivating user habits.
Currently, we cannot obtain internal data of cryptocurrency wallets from the public market, but we can refer to Coinbase, which is already listed and has a related business type.
From Coinbase's publicly available reports, its staking revenue grew by 5438.38% from 2019 to 2020, and custody revenue grew by 516.85%. These two businesses contributed approximately $30 million in revenue to Coinbase in 2020.
Original image source: CITIC Securities
Of course, there are also wallets that choose to establish investment institutions after receiving institutional investments and rely on investment profits. After all, wallets with vast user data may understand user needs best. MaiZi Wallet, while stating that it will not establish its own investment institution, also agrees with the behavior of wallet companies creating their own investment institutions, just like Tencent discovered Pinduoduo through WeChat and invested in Pinduoduo.
3. Why do traditional institutions invest less in other areas of cryptocurrency?
According to CB Insights data, in the first half of 2021, a total of 404 companies in the cryptocurrency sector received financing, with a total amount of $7.271 billion. Among them, 9 companies related to cryptocurrency wallets received $863 million in financing, far exceeding the industry average.
In the cryptocurrency sector, the available investment areas are not limited to wallets. Why do most traditional institutions invest less in areas other than wallets?
Before answering this question, it is essential to consider why investment institutions buy Bitcoin at $30,000, $40,000, rather than at $4,000, $10,000, or $20,000?
One crucial point is that cryptocurrency assets, whether as risk assets or safe-haven assets, have a market capitalization that is too small compared to other categories of financial markets. Therefore, at $4,000 or $10,000, Bitcoin's market capitalization determined that it could not enter the asset portfolios of larger capital management.
When Bitcoin's price rises to $30,000, it becomes a necessary asset in certain types of investments (even if the proportion is small), just as funds tracking the S&P 500 are required to buy Tesla stock after the S&P 500 index includes Tesla.
Similarly, the market for other industries in the cryptocurrency sector is still not large enough.
Taking the lending market as an example, the total lending volume in the entire DeFi sector, including ETH, BSC, and Heco, is $23.2 billion, with the largest collateral lending platform, Compound, having a total lending volume of $6.9 billion and a total of 380,000 wallet addresses.
In contrast, Goldman Sachs' online lending platform Marcus, launched in 2016, currently has $97 billion in deposits and $8 billion in consumer loans, with over 4 million users in the UK and the US. Of course, comparing Marcus to the DeFi lending market is not an appropriate example, but it indirectly illustrates the small coverage and insufficient market size of DeFi.
4. Why do crypto funds choose wallets?
If traditional institutions only understand traffic and the small market size, leading them to invest in cryptocurrency wallets, then why do investment institutions that have immersed themselves in the cryptocurrency industry for years also choose to invest in wallets?
In the cryptocurrency sector, cryptocurrency wallets are not standalone products but an essential part of the ecosystem, especially with the rise of DeFi, where using decentralized wallets has become a necessary skill.
For investment institutions engaged in cryptocurrency, investing in cryptocurrency wallets is more of a 1+1>2 investment.
For example, MaiZi Wallet previously received $7.8 million in Series A+ financing led by Alameda Research, and six months later, the foundation behind MaiZi Wallet announced the establishment of a $20 million fund to invest in Solana ecosystem projects.
The seed round financing of the trading platform FTX, founded by Alameda Research's founder Sam Bankman-Fried, and the first seed round investor in Solana were both Chris McCann.
Wallets are the traffic entry point for DeFi, and they are also an indispensable part of the cryptocurrency ecosystem. Just as Solana attracts users with its public chain design, it lacks an easy-to-use wallet software. The emergence of the Phantom wallet attracted investments from industry capital, including a16z and Coinbase investors.
Rhythm BlockBeats reminds that, according to a document issued by the CBIRC and other five departments in August 2018, titled "Risk Warning on Preventing Illegal Fundraising in the Name of 'Virtual Currency' and 'Blockchain'," the public should view blockchain rationally and not blindly believe in extravagant promises. It is essential to establish correct monetary concepts and investment philosophies and effectively enhance risk awareness. Any discovered clues of illegal activities can be actively reported to relevant departments.
Original link: https://www.theblockbeats.com/news/25623
