The value of a cryptocurrency can be affected by various factors, including news about the cryptocurrency and its underlying technology, government regulations and general market conditions. The market can also be affected by investor sentiment, which can be affected by a wide range of events. Just a month ago, everyone was still saying it was a bear market. As of this week, everyone is rooting for the current bull run. Bitcoin reached its highest price since mid-August by breaking through the USD 24,000 price ceiling. This was largely attributed to investors liquidating nearly USD 70 million of predominantly short position bets.
There are many different types of investments in the cryptocurrency space, and the popular specific investments may vary over time.
More popular types of cryptocurrency investments
Purchase and holding: This is the most simple and common investment strategy. Investors buy a cryptocurrency such as Bitcoin (CRYPTO: BTC) or Ethereum (CRYPTO: ETH) and hold it for the long term, with the expectation that its value will increase over time.
Trade: Trading involves buying and selling cryptocurrencies on an exchange to make money based on short-term price fluctuations. This strategy requires a good understanding of technical analysis and market trends.
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Mining: Mining involves the use of hardware to solve complex mathematical problems and verify transactions on a blockchain network. Miners are rewarded with newly minted cryptocurrency as an incentive for their work.
Bet: Staking involves holding a certain amount of a cryptocurrency in a wallet and unlocking it to support network security and transaction processing. In exchange, stakers receive rewards in the form of newly minted coins.
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs): ICOs and IEOs are ways for companies to raise funds by selling newly created cryptocurrencies to investors. This strategy can be risky as some ICOs and IEOs have been proven to be scams.
Cryptocurrencies have several investment tasks. Some investors believe they have the potential to replace traditional fiat currencies, while others see them primarily as a store of value or medium of exchange. In addition, some investors are looking at the underlying blockchain technology as having the potential to revolutionize a number of industries, from supply chain management to identity verification.
Some specific investment tasks for cryptocurrencies
Use of cryptocurrency as a medium of exchange: Some people believe that cryptocurrencies will eventually be used as a primary medium of exchange, replacing traditional fiat currencies.
Great value thesis: Some people believe that cryptocurrencies will eventually be used as a store of value, similar to gold.
The thesis on the blockchain revolution: Some people believe that the underlying blockchain technology has the potential to revolutionize a wide range of industries and that investing in cryptocurrencies is a way to get in on the ground floor of this technological revolution.
The “greater fool” theory: Some believe that the price of a cryptocurrency will continue to rise as long as someone is willing to buy it at a higher price, even though there is no intrinsic value to the cryptocurrency. This is sometimes referred to as the “bigger con” theory of investing.
Venture capitalists (VCs) are individuals or firms that provide funding to early-stage companies in exchange for an ownership stake. In the cryptocurrency space, VCs have traditionally invested directly in cryptocurrency or blockchain-based startups, but recently there has been a shift in focus toward investments in blockchain infrastructure and applications.
The fall of FTX and other crypto exchanges has made VCs more cautious about investing directly in cryptocurrencies. Instead, they are looking to invest in companies that build out the underlying technology and infrastructure of the blockchain. This includes companies that develop blockchain-based platforms, build decentralized applications or work on other blockchain-related projects.
The reason for this shift is that many VCs see long-term potential for blockchain technology to disrupt various industries and believe that investments in the underlying infrastructure will yield better returns than investing directly in cryptocurrencies, which are known for their volatility. Another reason for this shift is that the regulatory landscape for cryptocurrencies remains uncertain and can create risk for investors. By investing in blockchain infrastructure and applications, VCs can mitigate some of these risks and potentially realize greater long-term returns.
Some specific areas of interest to VCs in the cryptocurrency space.
Blockchain infrastructure: VCs are increasingly backing startups working towards building a robust blockchain infrastructure. These companies focus on developing innovative solutions that can potentially revolutionize the blockchain ecosystem. An important area of interest for VCs is the development of new consensus algorithms. These algorithms enable network participants to agree on a shared state of the blockchain without relying on a centralized authority. Some companies are working on proof-of-stake (PoS) algorithms that reduce the energy consumption associated with proof-of-work (PoW) algorithms, which are used by Bitcoin and other cryptocurrencies.
They also invest in tier1 companies, which are startups focused on building the basic infrastructure layer of the blockchain. These companies are working to create new and innovative technologies that can potentially improve the scalability, security and performance of the blockchain. Former team members from traditional finance giant Jump Trading have established a tech startup called Monad Labs, which has raised $19 million in seed funding. The company intends to create a new blockchain that addresses the shortcomings of existing layer 1 protocols. According to a statement, the Monad blockchain will be introduced on a testnet in the coming months, with plans for mainnet deployment later this year. The blockchain will use the proof-of-stake consensus mechanism and be compatible with the Ethereum Virtual Machine (EVM), allowing projects on Monad to interact with the EVM software platform. This interoperability will enable developers from other blockchain projects to construct decentralized applications that can work together on the Ethereum network.
Web3 solutions: Web3, also known as Web 3.0, is the next iteration of the World Wide Web, and it is built on blockchain technology. It is designed to be more decentralized, secure and open than today’s web. VCs look for projects that align with the core principles of Web3 and have the potential to drive adoption and growth. This is another rising trend. Just last week I noticed that more than $20 million was raised on the Web3 site.
- Caldera, a provider of Web3 application infrastructure, has secured a total of $9 million in funding from two investment rounds. The funding was led by established financial powerhouse Sequoia Capital and digital currency-focused firm Dragonfly.
- UK-based startup Nefta, which focuses on Web3 in the gaming and entertainment industry, has disclosed raising $5 million in a seed funding round led by the Future Fund of the venture firm Play Ventures.
- In a seed funding round led by Insignia Venture Partners, MindWorks Capital and Signum Capital, Sender Labs has raised $12.5 million. The company’s goal is to provide a more accessible approach for developers and users to construct and engage with decentralized communication-based applications (dapps).
I noted among the VCs in my network that they are also looking at blockchain applications. VCs have also invested in companies that use blockchain to build new applications, such as supply chain management platforms, decentralized finance (DeFi) platforms, and decentralized identity solutions. Interoperability and cross-chain solutions, for example, aim to enable different blockchain networks to communicate and interact with each other and are also one of the best investment choices.
In my opinion, investing in blockchain infrastructure and applications is likely to promote the expansion and maturation of the cryptocurrency ecosystem, potentially generating more sustainable returns for investors in the long term. However, it is important to recognize that VC investment is only one aspect of the broader cryptocurrency ecosystem. Other investors, such as hedge funds, family offices and individual investors, may have different investment theses and strategies, which may also affect the market. It is crucial to stay informed about the various factors that can affect the cryptocurrency space and adapt investment strategies accordingly. As a licensed fund manager and VC myself for over a decade, this is my humble comment to all.
“To achieve the best returns in the crypto space, it is important to believe in the underlying technology, focus on community growth and capitalize on market trends. By understanding the technology behind a particular cryptocurrency and its potential to solve real-world problems, investors can make informed investment decisions that align with their long-term goals.” – Andy Lian
