Why Venture Capital is Jumping into the ICO Market

Duh! ‘Everybody’ knows that venture capital (VC) firms are actively getting involved in cryptocurrencies and initial coin offerings (ICO’s). BUT WHY?  Axios has published a piece elaborating some reasons and a bit of background as well. Oh yeah, there are other reasons, too. Like ICO’s may be cutting into the highly profitable VC business model so they better “join them” and learn some new ways to make money.
(Bill Taylor/CEO)

“Top-tier venture capital firms are quietly taking advantage of the recent explosion in new cryptocurrencies, with many backing so-called “crypto hedge funds” that trade and invest in cryptocurrencies, usually at their earliest stages. Others are experimenting alone.

Why it matters: More than $1.5 billion has been raised through initial coin offerings — or ICOs — so far this year. In many cases they can serve as an alternative funding mechanism to traditional venture capital, so backing crypto hedge funds can help VCs maintain a piece of the action

In the spring, for example, venture firms including Sequoia Capital, Andreessen Horowitz and Union Square Ventures reportedly invested in a crypto hedge fund called MetaStable. Another crypto hedge fund called Polychain has raised from some of the same shops, while other VC firms like CrunchFund are directly participating in cryptocurrency token sales.

Explainer: ICOs are a form of crowdfunding through which a cryptocurrency project sells part of its pool of tokens (future cryptocurrencies) to early backers.

  • Usually, these tokens are sold for Bitcoin or another digital currency, and the fundraising often happens before the project begins —as a way to fund its development.
  • Similar to company stock, investors hope that the value of these future cryptocurrencies will increase once they start trading publicly.
  • Many ICOs involve a “pre-sale” during which a subset of the tokens are sold to a select group of investors (often professional investors) before the official ICO takes place, usually at a slightly higher price.

The funds: Cryptocurrency hedge funds are cropping up quickly—there are already dozens of them, according to a recent Hedge Fund Alert report. Axios primarily spoke to people involved with three of them: MetaStable, Polychain Capital, and one managed by Pantera Capital. While their investment strategies vary, all focus on purchasing cryptocurrencies and tokens…”

Full Story at Axios