As the crypto market matures, venture capitalists (VCs) are becoming an integral part of the crypto ecosystem, with investments of more than $33 billion into crypto and blockchain startups in 2021 alone. That’s nearly 5% of all venture capital deployed in 2021, according to a study by Galaxy Digital Research.
VC support helps turn niche, amateur projects into well-funded companies and, in turn, brings legitimacy to the digital asset market. Since VC firms generally only invest in lucrative industries, interest in crypto from VCs brings a boost of confidence in crypto.
Even in the latest Terra crash, CNBC ran the headline “Price dips in bitcoin and Ethereum may offer investors a chance to get into cryptocurrencies.” Everyone in the industry knows mainstream headlines weren’t as generous in the market crashes of yesteryear.
But the plethora of VC funding has its drawbacks, and an excess of crypto funding without enough cashouts can lead to another dot-com bubble fiasco.
Swept up by the zeitgeist of a technology set to transform every industry, investors back in the mid–to-late ‘90s ignored traditional metrics of investing and overvalued assets, leading to a bubble burst that cost investors a whopping $5 trillion. Swap the date with the early 2020s and the dollar amount with a much larger number, and the same sentence could apply to a future crypto industry disaster.
So how can that be prevented?
Cause of dotcom crash
During the dot-com crash, investors ignored the fundamental principles of investments, ignoring market trends and companies' revenue generation. Instead, VCs measured success based on website traffic growth, and companies focused their money mainly on marketing instead of developing the products themselves. VCs poured more and more money into companies that weren’t executed properly and stock prices became overvalued — a whopping 40% of dot-com companies were overvalued at the time.
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And it appears a similar phenomenon may be happening in the crypto world today, with some VCs flooding money into companies that may not have a good ROI. If we’ve learned anything from 2001, it’s that ensuring due diligence is a key metric for success. Being well-funded doesn’t necessarily equal success, and its critical crypto thinks of other venues of success to support funding from VCs.
The responsibility for preventing such a catastrophe in crypto lies on the shoulders of both crypto companies themselves, which have a duty to operate smartly and ethically, and governments to ensure they do.
VCs and launchpads
On the company front, niche and less experienced crypto founders should make use of VCs and launchpads, which bolster VC funding, by not only giving existing projects money but also helping bring new projects to market. There are hundreds of projects, and those in need of funding and guidance shouldn’t let such resources go to waste.
In addition to funding, a key issue crypto projects face is taking an idea from inception to implementation. Blockchain as a technology and the sub-industries to which it has given birth, such as DeFi, NFTs, DAOs and Web3 tend to attract creative founders with big ideas about transforming the world. Those founders sometimes lack the relevant experience in finance, crypto or both (or art, real estate or whatever other intersection of tech they’re working in). Such founders often need extensive support to turn their idea into successful projects. And, often, they’re not utilizing the resources available on the market to their fullest potential.
VC networks and launchpads have a role to play in raising the rate of successful crypto startups, and therefore strengthening the industry overall.
Besides practical means to help crypto projects thrive, the government has a major role in preventing future crashes, just as it does in traditional financial markets. Regulation prevents investors from getting swept up in the crypto craze by vetting projects that are potential scams. From October 2020 to May 2021, 7,000 people reported losing a collective $80 million to crypto scams.
What many crypto investors don’t think about (though legitimate projects surely do) is that a lack of regulation harms people working to build the future of finance and Web3. Beyond preventing market manipulation, money laundering, terrorist financing and other criminal activities, as well as ensuring financial security for investors, regulation funnels more money into legitimate projects by eliminating the scams and rug-pulls.
Effective regulation prevents a multitude of fake crypto projects from poisoning the industry and sucking up the oxygen. It empowers only the ones most likely to succeed to get through the red tape.
The influx of VCs and push by governments to regulate crypto serve as bright signs for crypto’s future, despite the recent crash and questions about stablecoins. It’s up to the industry to embrace them to prevent worse crashes in the future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Tomer Warschauer Nuni is CMO @Kryptomon, a serial entrepreneur and investor focused on the innovative blockchain and NFT gaming industry.
This article was published through Cointelegraph Innovation Circle, a vetted organization of senior executives and experts in the blockchain technology industry who are building the future through the power of connections, collaboration and thought leadership. Opinions expressed do not necessarily reflect those of Cointelegraph.