The Breakdown - Have We Turned A Corner in Bitcoin and Crypto Startup Funding?

Episode Date: July 19, 2023

This week has seen multiple 9-figure crypto funds announced. A metaverse company also raised a monster $54 m round. Finally, Wolf has opened up applications for its third cohort. NLW argues why the bitcoin and crypto funding space feels to have finally turned a corner. ** Today's Episode Sponsored By: In Wolf's Clothing -- The first startup accelerator exclusively for Bitcoin and Lightning startups -- Applications for Cohort 3 open NOW -- https://wolfnyc.com/apply ** Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Wednesday, July 19th, and today we are talking about crypto funding and the continued shift away from the bare market blues. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit.ly slash breakdown pod. Hello friends. Well, today I want to start with a quote from Jake Trevinsky.

Jake is the head of policy at the Blockchain Association. And actually this tweet, which was from today, was a quote tweet of himself from September 2021. In that original tweet, he had said, it was 12 months since last all-time high. Everything in crypto was down 85 to 99%. Twitter was quiet and angry, traders were giving stocks a try, nobody believed another bull market like that would ever come again. It was January 2019. Here we are today trading JPEG's worth more than houses. Now, his quote tweet today read, that mania ended. The market collapsed. The bad guys got blown out or locked up. Twitter is quiet and angry, but memories of our very bad 2022 are fading, the big guys are launching ETFs, Congress is moving legislation, the SEC is losing in court,

the early bull vibe is strong. Now, if you've been listening to this show regularly, you have definitely grok that I've been feeling like there is a palpable psychological shift in the markets. I think that there have been three key moments in 2023 that have made that shift real. The first came during the banking crisis. The psychological impact of seeing Bitcoin not only hold but rally as people were lining up to get their deposits out of regional banks around the country was not just a big moment for us. It was a mainstream narrative moment that I think will stick with people for quite some time to come. The second important key shift moment was, of course, BlackRock's ETF application and all of CEO Larry Fink's chatter about Bitcoin subsequently.

We saw last cycle how influential just having a couple of respected hedge fund guys could be talking about your asset. When the CEO of the world's biggest asset manager goes all in, we've hit a whole different level. Now, of course, on top of that, outside of just the signaling to market that Fink in BlackRock represent, there's also a sense that they must have a strong feeling that a spot ETF is likely to come to bear. Out of 576 ETF applications, they've only ever had one denied. So number one, we have the banking crisis. Number two, we have the BlackRock ETF. And then number three is, of course, the ripple SEC decision by Judge Torres. On Tuesday, Representative Richie Torres of the Bronx, wrote a letter to Gary Gensler asking, I'm writing to inquire if the

SEC intends to come to terms with the folly of the Commission's crusade against crypto assets in light of the latest decision by Judge Annalisa Torres of the Southern District of New York. Needless to say, regulation by enforcement had a dreadful day in court. In a landmark legal opinion, Judge Torres resoundingly rejected the regulatory overreach of the SEC, which has been indiscriminately declaring all crypto assets except Bitcoin to be securities. By emphasizing the need to prove the presence of an investment contract, Judge Torres's reasoning represents a return to a rigorous application of the Howie test, which has been applied sloppily by the SEC. Indeed, the latest court decision establishes a clear rule that should bear the name of Judge Torres,

who has brought long overdue legal clarity to the chaos of crypto regulation. The Torres doctrine, as I call it, holds that crypto assets are not securities in themselves, but can be sold as part of investment contracts which do qualify as securities under the Howey test. Judge Torres has made crystal clear to the SEC that digital assets are not securities in the abstract, and that it lacks the legal authority to regulate digital assets untethered from an actual security offering. Now, of course, we are still just figuring out what the fallout and implications of that decision are going to be in full, But today's show isn't actually about that. Today's show, as I said, is about, as Jake Trevinsky put it, the early bull vibe and the

signs that things are coming back, particularly when it comes to startups and funding. For a portrait of the contrast, let's look at a report on funding last quarter as compared to what we're about to see in today's news. Crunchbase has just released a new report that shows a steep drop in venture funding for Web3 firms during the last quarter. year over year between Q2 2020 and Q2 20203, venture capitalists deployed 76% less capital than they had a year previous. In aggregate, the first half of 20203 saw $3.6 billion in startup funding, which was 78% less than the $16 billion deployed in the first half of 2022. Now, as some level setting, Crunchbase also

reported that Q2 in general saw an 18% decrease in startup funding across the board. Galaxy Digital echoed CrunchBase's findings with their own report in which they found only $2.3 billion in funding. raising for blockchain and crypto projects in Q2 this year, making it the weakest quarter of startup funding for the crypto industry since Q4 of 2020. Crypto startup funding peaked in Q1 of last year with $13 billion in capital deployed. So that's the background, right? It has been a significant reset over the course of 2023. However, to me, that makes today's news all the more interesting. First up, venture capital firm Polychain Capital has raised around $200 million in the first close for its fourth crypto venture fund. The firm, which is one of the most prominent,

prominent VC firms in the industry plans to raise 400 million for the fund overall. Polychain was founded in 2016 by Olaf Carson Wee, who was the first employee at Coinbase. Their first fund put the firm on the map by taking a large position in Ethereum tokens. Since then, Polychain led fundraising rounds in major projects, including the Uniswop Series B in 2022, as well as investing in a wide array of global crypto projects like African Crypto Exchange Yellowcard. Polychane's first three funds currently hold a reported $2.6 billion in assets under management, according to pitchbook data. Although that said, the firm's liquid holdings muddy the water on total

valuation due, of course, to high volatility. In 2019, the Wall Street Journal had reported that Polychain had experienced a 40% drawdown in asset value, which was around 400 million at the time, although interestingly, while that drawdown is unquestionably massive, it actually represented them outperforming the market overall. During the same time, the general crypto markets collapsed by 70%, so in that light, 40% doesn't look quite as bad. Now, Polychain raised its third. fund, which was sized at $750 million throughout 2022 and 2023, and is now deployed most of that capital according to a person familiar with the firm's operations. Now, it's undeniable that this fund, which does represent a reduction in size from their last fund, shows that the market has

changed. However, the fact that they were able to close on $200 million at all right now is also an indication that things might be starting to look up. Now, of course, one fundraise does not a trend make. However, that was not the only fundraise announced yesterday. Coin fund has also announced to significant raise, bringing in $158 million from investors to deploy into crypto companies. Importantly, that fundraising effort outstripped the firm's initial target of $125 million, which speaks, I think, to returning enthusiasm to deploy capital into the crypto ecosystem. Now, as we just heard, it has been a rough time for fundraising in the crypto space. CryptoVCs raised a record $22 billion last year, but only $500 million through May of this year.

Coin Fund CEO, Jake Brookman, recognized the struggle, saying, our investors have shown deep confidence in our people and strategy by continuing to allocate capital to our products in a bare market. Over the last two years, we built a truly institutional-grade firm, the model of a large professional manager in Web 3. Brookman called 2022 an exceptionally difficult year, with major mainstream investors who had been interested in crypto during the bull run, backing off entirely when prices began to collapse. Now, this will be coin fund's fourth seed fund. Their previous funds backed companies including dapper labs, which kick-started the NFT craze with their NBA Topshots product, as well as BlockDemon, which has grown into a significant player in the blockchain infrastructure segment.

This latest investment vehicle has already deployed capital into Giza, a startup building AI tools for smart contracts, as well as SuperState, which plans to combine Defi with mutual funds. Now, when it comes to where their investment priorities are, Jake did note that interest had fallen off in some areas of the crypto industry that had been frothy during the last bull run. He said, quote, some of the more consumer stuff is a little bit in a lull, like if you look at the NFT space. However, at the same time, the decision in the ripple case, while preliminary and narrow, has provided some hope for crypto VC firms that tokens won't be snuffed out by overzealous regulation. Now, Coin Fund Chief Investment Officer Alex Felix said that he believed that the slowdown in

the crypto sector was a blessing in disguise. He said, it slows down dealmaking, but it allows you more time to make the most thoughtful and best decisions possible. You have to be really solving harder problems and put your company under a lot more scrutiny earlier than you would have in the broader tech boom. Okay, so we've got two funds announcing nine figure raises, but what about, you know, NFT Metaverse type companies? They pretty much all died, right? Well, not so fast. A Metaverse company named Futureverse has raised $54 million in a series A funding round, led by recent breakdown guest Dan Tapiero's 10T Holdings, and also including participation from others including Ripple Labs. Now, what's interesting about Futureverse is that it emerged in late

2022 as a merger between eight Metaverse infrastructure and content companies into a collaborative ecosystem. Subsequent to that, a further three companies have joined the amalgamation. The most notable projects include NFT profile picture collections, Fluff World and Cool Cats, as well as AI League, which is an AI-powered mobile soccer game, which holds FIFA licenses. Futureverse says they will use the proceeds of the funding round to continue development of the company's technology platform, which features tooling for Metaverse projects, along with the blockchain and the suite of ready-to-deploy protocols. Aaron McDonald and Chera Senderoff, the co-founders of the company said in a press release,

The Metaverse has the potential to transform the way humans engage and collaborate with one another and improve our experiences across a number of different spheres, including gaming, payments, asset management, and more. Dan Tapiero said, quote, Futureverse has developed an immersive and vertically integrated Metaverse platform that acts as an AI technology provider, Metaverse infrastructure builder, layer one architect, creative studio, and digital community all in one. Now, one of the ironic things about the rise of AI this year, is that as much as people joke about energy moving from crypto over into AI, which of course, there's a bunch of that. The reality is that a lot of the tools that are being

built right now in that AI space are actually the type of things that might make this vision of the metaverse a lot more high potential. Being able to imagine a world in your head, and then sketch a loose outline on a piece of paper, and then use natural language inputs to actually bring that to life, just with a few words and a few clicks, kind of brings back that vision of a metaverse in a way that was a lot more possible than it was even a year and a half ago. Now, whether it actually pans out will also be about where consumers want to spend their time, but it's just a fascinating little quirk of the contemporary narrative. So broadly speaking, the point that I'm making is not that everything is back off to the races now. It's instead that

we've clearly surmounted some hurdle, where we're getting more news again about things starting up and things raising money than things shutting down and things losing money. That is a nice shift to be living through. Now lastly, what about for you Bitcoiners who are listening who don't give a crap about Web3 and aren't interested in the new opportunities of token funds or Metaverse? Is there anything going on that's for you? The short answer is absolutely yes. And of course, I am talking about Wolf. Now, if you are listening to Bitcoin Builders, and if you're not, why not? You'll know that these guys are the exclusive sponsor of the show. Their full name is called in Wolf's clothing, but they go by Wolf for short.

And they are a startup accelerator and mentorship program that is exclusively for Bitcoin and Lightning startups. The program is entirely in person in New York City. Transportation and lodging is included. Companies that are accepted get $250,000 in guaranteed seed funding, as well as participation in a demo day at the end. And there is a really cool, very diverse set of companies that are going through this. Out of their last cohort, I recently did interviews with a Lightning Infrastructure Company,

a company that's using Lightning and Bitcoin for global gaming tournaments. And while I can't talk about it yet, some of the companies going through this cohort are so ambitious as to defy belief. Wolf's second cohort is now in session, and the applications for their third cohort have just opened up. Their sponsorship is going to be jumping from Bitcoin Builders over to the main breakdown show throughout the duration of this application process. And that process is going on between now and August 4th. You can go to WolfnYC.com for more info, and if you do have any questions or things that you want me to pass on, come join us in the Breakers Discord, and I will do my best to get answers to any questions you might have. So, guys, that is the view from here.

There are shifting narratives, the return of institutions, big themes that haven't died yet, new opportunities for Bitcoin companies. We may not be all the way there yet, but I certainly like the direction we're facing. Until tomorrow, guys, be safe and take care of each other. Peace.