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Just How Much Money Is Flowing Into the Crypto World, Really?

By Chris MacDonald – Nov 17, 2021 at 10:30AM

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Capital flows to any sector are vital, and crypto is no different.

When major financial institutions start taking crypto seriously, investors take note. Crypto-enthusiast Chris MacDonald and The Motley Fool's Eric Bleeker discuss what the increasing influx of capital to the crypto world might mean for the space -- on this episode of "The Crypto Show" from Backstage Pass, recorded on Nov. 10

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Eric Bleeker: That concludes the news segments. I mentioned I wanted to take a deeper dive on crypto in the VC world.

As I noted earlier, we listened to our members. We want to make this a member first show. We want to address questions you have in the space. Often this week, if we run long and we're not able to get questions, I'm going to take down all the questions and we'll try to answer them next week. We had some questions about how venture capital is flowing into the crypto world. I did just a bit of research on this, I want to present some findings.

What we have here is two numbers from 2016-2020. That would be, I guess five years of data versus 2021, and this is leading venture funds and the number of rounds they participate in, inthe crypto space.

You see Andreessen Horowitz who has been way out in front other VC firms in this space, definitely the leader. They had 39 in those five-years, and 29 this year, so a massive acceleration. But beneath that is where I think there's this graphic gets really interesting. You see entire global management at 2-14. You can look below at Sequoia Capital at 10-15, but Sequoia is now changing their mandate. I think they are looking to invest 25 percent in the crypto space.

Chris, we talked about what's going to lead crypto beyond just being internet money, just being digital gold and it's going to be technology innovation. It seems like the people who are the most plugged in to innovation across the technology space are seeing extremely clear signals of where they want to be invested in the next five years.

Chris MacDonald: I think that's a really good point. I think more capital into the crypto space is always a good thing, for sure.

A lot of crypto investors will look at this from the dollar sign perspective. What's the number behind this? And whether it's the number of rounds per spending or the total dollar amount. But I think, like you said, a lot of crypto investors are looking at the names of who is investing in this and trying to--  We're all not the smartest people in the room. There's just people who know a heck of a lot more than us. Looking at what the thought leaders in this space are doing and where they are investing, it's pretty clear that there's a solid trend that it's not just retail investors buying crypto.

There's some big money that's starting to recognize the utility that crypto can create and the future of where the digital world is headed so whether that's digital currencies or the metaverse, like we talked about earlier, cryptocurrencies are integral to that thesis.

Bleeker: You said we want to look at the dollars, I want to make sure we get there. Let's look at what's driving a lot of this investment.

We have large financial services. Companies like Visa (V 3.00%) and PayPal (PYPL 1.26%) have helped validate the sector and even Facebook [Meta Platforms (FB)] is planning its own digital wallet and currency, now called Diem. Large crypto players such as Coinbase (COIN 15.75%), with a market cap of 65.5 billion. Circle and Robinhood (HOOD 7.78%) have gone public further justifying the space and showing venture investors the size of the space and the volume of transactions they handle. 

And I've bolted this. Those events likely have driven many of these large growth firms to double or triple -- or 7X in the case of Tiger -- their bets in the crypto world from past years.

Chris, I think this is something we cover a lot but that we've talked about the angles for investing in crypto. I've roughly broken up into five dimensions. You've got the miners and people on that side. We have basically layer 1 platforms. We have apps built on top of cryptocurrencies and we also have things like public companies or the UI plays, and then broader into the fintech space. These companies like Visa and PayPal, crypto is probably not going to be something that's central to their investment thesis, but by watching what they're doing, and validating the space, it essentially begins a virtuous cycle when you have all the largest technology companies putting investment into crypto.

MacDonald: Yes, I think that's a really good way to think about it when you break the crypto world down into those segments.

Because when you think about how crypto got started, with, whether it's Bitcoin miners or just cryptography nerds essentially looking at this space and saying, well, this is interesting and I kind of want to get into it. I don't understand it. It's very complex.

When you read a white paper on some of these, it gets into the weeds of some pretty impressive mathematical algorithms and stuff like that. The actual nuts and bolts of it are very hard to understand. So when you get big companies like Visa, PayPal, Facebook coming into the space looking to make it easier, more accessible, Coinbase has done that in providing a user interface that investors can go and click a button and buy something. It wasn't always that easy.

The world of crypto, with these companies coming in and doing their own projects on top of what exists right now, it just provides for more adoption and the ease of investing. As this stuff gets easier to invest in, like we talked about, capital flows are going to get enhanced and we're going to see continued adoption of this in theory moving forward.

Eric Bleeker owns shares of Bitcoin. The Motley Fool owns shares of and recommends Bitcoin, PayPal Holdings, and Visa. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

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