On this episode of “The Breakdown,” NLW looks at an array of recent fund announcements, including:
- Dan Tapiero and 10T’s $750 million
- Pantera raising a $600 million fund
- Jump Capital announcing a new $350 million fund with more focus on crypto and Jump Trading launching Jump Crypto
- Mets’ owner Steve Cohen investing in a high-frequency trading firm
- Bain Capital Ventures launching a dedicated crypto fund
What does it say about the state of the crypto markets? Listen to find out.
“The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Feodora Chiosea/iStock/Getty Images Plus, modified by CoinDesk.
What’s going on guys, it is Tuesday, September 14 and today we are talking about what billions in crypto fundraises tell us about the state of markets. Before we do that, however, I just want to do a single point on the Brief which is about inflation. It was inflation day and year-over-year, we’re still at 5.3%. That’s down 5.4% in June and July, however. So in terms of rate of change, the one-month increase in June was 0.9%, and the one-month increase in July was 0.5%. The one-month increase last month in August was 0.3%. So, there seems to be some slowing. Now, there are a couple ways to look at this. The first is that CPI is a bad, incomplete measure of inflation, and we should ignore it. This is, like I said, the Brief so I’ll leave that tape to the side for now. The second is that CPI is slowing down and that the Fed has been right that this is all transitory inflation. It almost certainly seems to me like how many pundits will take it. But a third interpretation, which is one I’ve seen in a few outlets, is that this is something of a headfake. Here’s what a commentator in the Wall Street Journal said: “The August CPI report might be a little bit of a headfake, honestly,” because “other factors might be moving under the surface: there was a growing risk that higher inflation exacerbated by ongoing supply chain frictions could put a dent in demand next year.” Anyway, this is deserving of more than a Brief but I wanted to at least give you that update, on the day that these inflation numbers came out.
But with that, let’s shift to our main topic for the day. There has been a lot of capital focused on crypto announced lately. Before we get into the specifics, I want to talk broadly about how to interpret capital coming into the space. First, obviously, it can tell us about the state of investor interest in the category as a whole. If more capital is being invested now than it was a year ago, especially if significantly more, there’s clearly a sentiment shift. That said, I think what’s more interesting is who is coming in and through what vehicles. Are there different types of actors who are investing, who haven’t invested before? Are they investing personally or through their traditional vehicles? Are more institutional investors showing up in the ranks of limited partners of funds? One thing I will caveat is that investment into funds can be a lagging rather than a leading indicator. The reason for this is that in general, it takes some number of months for fund investments to close, given how fast crypto markets can shift. A deal could have come together while markets were hot, but then be announced months later, even after things had turned. What’s more, certain types of fund investments can be Exhibit A in a larger froth.
A great example of both of these was in 2017 during the ICO boom, something like between 400–500 new crypto hedge funds were formed and funded. This was often basically someone who had gotten rich on early bets on bitcoin or ethereum having a bunch of other well-to-do people around them ask them if they could help them invest. The number of those 2017 vintage funds, many of which, by the way, closed in early 2018, months after the peak that survived, is in the I don’t know, low dozens at most. In other words, we’re probably talking about a 90% fail rate. The point of all of this is just to make the case that more funds flowing into a space are not a priori a bull signal, even if they represent market bullishness. With that caveat out of the way, let’s look at some of the recent announcements. And first let’s follow up on our friend Dan Tapiero who I had on the show last week. For those who didn’t listen or who just missed some of the details, Dan Tapiero is a macro investor who has been in the game for 25+ years. He’s worked for Tiger Management, Duquesne, which is Stan Druckenmiller’s fund and more. He’s also launched investment firms focused on gold, real estate and many other categories.
A couple of years ago, however, he really started going down the crypto rabbit hole. There’s a 2019 interview of him with Raoul Pal from Real Vision and you can see him in the midst of light bulbs going off. 10T is Dan’s big play into the space. In 2019, 2020, he founded the firm and his focus was on equity and revenue generating businesses in the crypto arena. Instead of token holdings, he’s looking at the equity in companies like exchanges or infrastructure companies. To get a sense of his profile, the firm has invested in companies like Kraken, Deribit, Bitfury, eToro, Ledger and more. What’s interesting to me about Dan’s fund is that it’s focused on a category that hasn’t had as much interest from crypto investors as others. In some ways, it feels to me like the risk spectrum for crypto investors is totally bifurcated and barbell. On the one end is ‘all the way in, get me in early to DeFi, get me in on the next Solana, give me tokens, let’s go.” On the other end is just passive exposure to Bitcoin, or maybe a basket of quote unquote blue chips, although those products seem to be massively less popular than the simple Bitcoin funds.
But either way, Dan is carving out space in the middle: space for picks and shovels bet. Picks and shovels, by the way, refers to the idea that during the Gold Rush, the actual Gold Rush in the mid 19th century in America, one of the best ways to make money wasn’t to be out prospecting or funding prospectors, it was to build the infrastructure of the things that all those people in that new industry needed around them. Any of you heard of Levi Jeans, guess where that started? Anyway, by focusing on this type of equity business where investors can actually see and track the multiples to revenue of the valuations of these companies, he’s opening up crypto exposure to a new category of investor who perhaps can’t wrap their head around token valuations and tokenomics. Even if they understand that what matters is that a whole industry is growing up around them.
The specifics of what Dan announced last week is that the 10T family of funds had raised about $750,000,000, three quarters of a billion dollars, and it allocated a huge chunk of it already, between $650 million and $700 million over the last few months. And to the point that I was just making about opening up investments to new categories of investors, the fund’s limited partners include public pension plans, endowments, foundations, family offices and high net worth individuals. That list, by the way, is almost perfectly in rank order of conservatism. With public pensions being the most conservative, one of the pensions involved in 10T is the Municipal Employees Retirement System of Michigan. So what does it mean that a pension is investing in a crypto fund? Well, I think it’s reflective of two things. The first is a growing comfort with the crypto asset space as something that is going to be here for a while to come. And certainly within that, an increase in the types of tangible business opportunities with these adjacent unicorn businesses.
But, it also demonstrates the fact that zero-bound and negative real interest rates are forcing even these arch conservative funds to look farther out on the risk spectrum for return for yield. They simply can’t meet their obligations with uber safe assets. The last thing I’ll note on Dan, which is a pretty remarkable stat from his interview, was that when he was raising the fund in 2020, they did some research and found around 20 crypto infrastructure service exchange, mining, etc unicorns. This year, that number has 3.5x to over 70.
Next, let’s talk Bain Capital Ventures. A few months ago, Bain Capital Ventures, which is the venture arm of the private equity firm of the same name that has more than $120 billion in assets under management, announced the new $1.3 billion fund to invest in startups. And for the first time, Bain Capital Ventures has a dedicated crypto fund. This is according to public filings. It’s classified as a pooled investment vehicle and so far, hasn’t made any sales. Now, Bain has, in the past, invested in crypto companies including CoinDesk parent Digital Currency Group, Compound and Lolli, and it also led BlockFi’s $350 million round earlier this year. But this represents something different and deeper in the crypto space. James Lavish on Twitter added these details and said: “It’s for qualified purchasers, individuals and families with five+ million dollars of investments and limited to 499 investors here.” He also wrote: “Keys here: classified and signaled as a venture fund, which could relate to the crypto asset class itself or the stage of companies they plan to invest in, and still only for ultra wealthy qualified purchaser level investors.”
Speaking of getting deeper into the crypto space, Mets owner and Point72 founder Steve Cohen continues on down his crypto rabbit hole. He’s investing in an individual capacity in a firm called Radkl although it’s spelled R-A-D-K-L. It’s a quant trading fund focused on digital assets. The fund said that Cohen won’t be involved day-to-day, but he’s involved enough that he gave a quote in the launch press release: “While the cryptocurrency market is now a $2 trillion asset class, we are still in the early stages of institutional adoption. As more professional investors enter the space, there’s a need for institutional acumen and a firm like Radkl.”
Now, speaking of that transition, there’s also one announcement that represents a fund that is both traditional but has been quietly making big moves in crypto for some time. And now they’re revealing more of their strategy. That’s Jump. The headline news is that Jump Capital, based in Chicago, closed its seventh venture fund, a $350 million fund. That’s about 75% bigger than its sixth fund of $200 million from October 2019. Jump Capital has previously invested in crypto, including joining a $62 million round in the Mexican exchange Bitso. In 2019, Bitso was recently in the news for working with the El Salvador government to build the Chivo wallet. Jump said that in addition to their historic FinTech mandate, this fund will also have “an increased concentration on the evolving crypto ecosystem.” That means, potentially, the infrastructure layer, DeFi, gaming, Web 3.0, but still, the unveiling of a deeper involvement in crypto isn’t just on the venture side.
Jump Trading is the firm that Jumped Capital came out of.It’s been around since 1999 with effectively no public brand and has previously been called “one of Wall Street’s most secretive high-speed trading firms.” Over the last six years, the company has quietly put billions, with a B, to work in crypto. They provide liquidity for Robin Hood Crypto, they’ve also provided liquidity for the Serum decentralized exchange. As I mentioned, the company’s Wall Street roots have always been super on the DL, but now they’re launching Jump Crypto, a new more public division that will be staffed with 80 people. The new president is Kanav Kariya, who said Jump Capital is a recognition basically of the fact that in a community driven space, “we need to have a voice and be more reachable and share what we are doing more broadly. It’s a commitment to the way we intend to operate to position our firm itself as a meaningful contributor participant.”
Then, on top of all this, there are the existing crypto funds. Pantera, which is a stalwart in the space, is raising a new $600 million fund of which $375 million closed in June. The fund has three categories: venture equity, similar to what Dan Tapiero was doing, although potentially earlier stage; early stage tokens and then traded liquidity tokens, which is bitcoin, basically; the largest allocation in this fund is venture equity. And so, in some ways, this sounds similar to 10T although still farther out on the risk curve. Dan Morehead, Panthera CEO, wrote: “The new fund is able to capture the often large swings in value between equity and tokens. Tokens reset quickly, in May tokens dropped 55% in the span of a few weeks. On the other end of the spectrum, venture equity is very slow moving.” Pantera manages $5 billion in total and started investing all the way back in 2013. To get a sense of how much things have changed, listen to this quote from Paul Veradittakit, a partner at Pantera: “Our first institutional or outside LP venture fund was in 2014 and it was a slog, it was so tough to fundraise, we raised about $25 million for that one, mostly from high net worth individuals and family offices. And it was just venture.” According to Pantera, DeFi has been driving increased interest “because of what was happening last year with DeFi investors really opened up to the possibilities of getting exposure to tokens. A lot of investors think it makes sense to have exposure to everything and they want to defer to a fund manager versus trying to decide which strategy to deploy and when.
The only other one I’ll mention from the traditional crypto world or, I guess their kind of traditional Silicon Valley world gone crypto, is a16z, Andreessen Horowitz. In June, they announced their mega $2.2 billion second crypto fund, and the biggest thing we’ve seen from them is just an absolute string of hires. They’re scooping up talent from other crypto firms and from traditional finance. In fact, it’s almost becoming a meme on Twitter with people announcing that they are not announcing that they are joining a16z. Says to me that they’re positioning strongly for a competitive role in basically every round in the future that’s going to involve venture capital. So, let’s close this out by summarizing what all these raises tell us first. On the face of it, funds are continuing to raise. That is your first important piece of information. And I don’t believe, in this case, that this is a lagging indicator, given that things are as bullish right now, or at least they have been over the last few weeks, as they were earlier this spring, and certainly are way more bullish than they were over the summer.
Second, traditional funds investors continue to come into the space. Pension funds joining Dan’s 10T. Bain getting in deeper, Steve Cohen investing in more exotic instruments. These things show that while we’re not getting a breaking news story about institutions coming to crypto every few days, like we were in January and February, that secular shift into the crypto space is very much alive. Three, it’s showing that the deeper funds get into this space, the more they have to play by crypto’s rules rather than venture capital’s rules. See, for example, Jump basically announcing that they have to play an active public role in communities and governance. Four, and finally, the simple fact is that based on all this capital, there is going to be a great big war chest for whatever comes next. Whatever combination of development, user acquisition or importantly regulatory battles may be on the horizon. I think it’s safe to say that venture funding into crypto is showing that there is a lot, a lot of capital on the sidelines and trying to get in. And that’s going to shape the months and years to come. For now guys, I appreciate you listening and until tomorrow, be safe and take care of each other. Peace!