Don’t Follow “Dumb Money” Into This Corner of the Crypto Market

It seems that we can’t even go one week without seeing a new insane funding round for a privately held crypto company. It’s hard to comprehend the amount of money flowing into the blockchain and crypto world right now.

a digital graph overlayed over hands typing and a pile of crypto coins

Source: Shutterstock

As I mentioned here two weeks ago: “2021 has seen over $27 billion invested into crypto startups, which is more than the previous 10 years, combined.”

Current funding rounds for private crypto companies are larger than most companies are valued.

So today, let’s take a look at two recent examples of crypto company funding rounds… what this means for the crypto market as a whole… and where the future profits in this market lie…

Big Banks Make Big Bets

Founded in 2017, Anchorage Digital just announced the closing of a $350 million Series D funding round. Anchorage is a digital asset platform for institutions — allowing institutional investors to safely hold and use crypto.

With offices in San Francisco, New York City, Indianapolis, Iowa, Portugal and Singapore, Anchorage was able to secure investment from KKR (NYSE:KKR), Goldman Sachs (NYSE:GS) and, of course, Andreessen Horowitz. (Regular Venture Capital Digest readers know that a16z seems to have their hand in nearly every mega deal… and they are involved in another that I’ll share later this week.)

This new funding round for Anchorage places the company’s valuation at over $3 billion.

The company shared what it’s going to do with the funding in a recent press release:

“Anchorage Digital plans to use this latest funding to enhance its infrastructure solutions, specifically for global financial firms and fintech innovators. It will also invest to accelerate and simplify clients’ engagement with the latest in crypto innovation and increase the size of its team to continue to expand product offerings and grow its client base.”

Investors in this round clearly have their eyes on further integrating blockchain technology into their existing legacy business. Their investment in Anchorage is not only a VC investment in a great startup — but also the establishment of a strategic business relationship with the intent of integrating the technology into their operations.

The next deal is a doozy…

New York Digital Investment Group (known as NYDIG) just raised $1 billion.

Yes, you read that right… NYDIG raised $1 billion in its latest funding round.

That puts NYDIG’s valuation at over $7 billion.

NYDIG provides access to crypto investments for ultra-high-net-worth investors, mostly institutional clients. As the company describes itself:

“[NYDIG] delivers Bitcoin products across industries, from banking and insurance to fintech and nonprofits… [fusing] stringent regulatory standards with ironclad technology to make Bitcoin universal.”

The company’s technology helps businesses integrate crypto, specifically Bitcoin, into their operations.

Right now, NYDIG is rolling out multiple different products and services in a bid to partner with big banks.

The most recent funding round was led by WestCap, with participation from MassMutual, Morgan Stanley (NYSE:MS) and New York Life.

These two recent deals show us one thing: Institutional investors are finally hopping onto the crypto bandwagon. And this time with some serious money…

If you’ve been sitting on the sidelines, this could seem like a signal saying it’s time to buy.

Not so fast.

From here on, when it comes to crypto, we should tread carefully.

Here’s why…

“Dumb Money” Piles In

Legendary Union Square Ventures (USV) investor Fred Wilson warns us to be cautious about the flood of institutional money rushing into fund blockchain deals.

Most cryptocurrencies, like Bitcoin (CCC:BTC-USD), operate on a transparent public blockchain and are decentralized from a government or bank. That’s what makes them so attractive.

Conversely, much of the institutional money flowing into private blockchain deals is meant to fund platforms that work internally at major banks. These internal blockchains are controlled by a central authority. This allows for more control and easier regulatory policing for the institutional company.

Catch the contradiction there? That defeats the whole purpose of having a decentralized digital currency in the first place!

Wilson, who is a huge crypto and blockchain supporter, believes that the future lies with public open protocols, like Bitcoin or Ethereum (CCC:ETH-USD). Much of the new investment money, which is coming in by the billions, is chasing deals that are building out centralized blockchain platforms.

And the new money that’s coming in is serious. 2021’s total fintech funding is almost twice as much as 2020, and the year isn’t even over yet.

A chart showing fintech finding from 2015 to 2021.

This is not to say that blockchain investments are in a bubble… or that I’ve put a “red light” on investing in the sector.

In fact, there is much, much more upside ahead for the entire fintech world… public and private.

However, when you start to see a dramatic increase in numerous multibillion-dollar deals happening — in any industry — you should probably take a step back to figure out what’s going on.

Could this be a warning sign for the institutionalized version of the blockchain world? Could many of these mega-funded blockchain projects, primarily financed by big banks, end up failing?

If so, it would be the ultimate irony in the development of the crypto world… and would prove further how important decentralized digital assets will be in the future.

While I don’t have any fintech recommendations in my Top 3 Private Companies for 2022 report now, I’ve got a few on my radar that I might add to it after the holidays. Stay tuned!

Meanwhile, you can always check out that special report here.

On the date of publication, Cody Shirk did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

By focusing on megatrends that will shape the future, Cody Shirk uncovers generational wealth in the private investing space. To make sure you never miss Venture Capital Digest, click here to subscribe.

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