Market threats and high hopes: will venture capitalists save Blockchain?

Di Ciaran Hynes, Managing Partner of COSIMO Ventures

It has been a disturbing few weeks for blockchain technology. Public maintenance projects are suffering losses from 30% to 60% in market capitalization. Although the volume of trade remained relatively stable in comparison, experts are reluctant to predict when the sector will return to normal. Regulators are concerned about the stability of the sector, investors are worried that they have chosen the right project and the general public wonders if the bitcoin bubble has actually popped up.

I also asked these questions. I wondered if the prospect of devaluation would have an impact on product development at this crucial moment in the evolution of the blockchain. I immediately understood, however, that I missed the point. The blockchain landscape is not collapsing, it is changing. As we prepare for the coming year, it is imperative that we do not over-analyze the worst-case scenario, but rather examine how this new reality can indicate positive changes to come.

Below, I would like to outline one of the many transitions that will lay the foundations for long-term success in the blockchain sector: the fall in the initial supply of coins (ICO) and the consequent increase in venture capital funding (VC).

After 343 projects raised a total of $ 5.4 billion USD in 2017, the ICO boom attracted international attention and became a central pillar for the blockchain building. The developers were attracted to the idea of ​​using an unregulated decentralized platform to build a global community and investors were attracted to the idea of ​​early access to the next Google or Amazon before they became giants in the international market.

Unfortunately, of the projects that conducted an ICO in 2017, 64% have failed before or after completing the financing rounds. Of course, while in 2018 a lot of money continued to pour into the ICOs (about $ 17 billion), in the last few quarters, capital investment in ICOs has dropped, with a fall near 74%. As bankruptcy rates continue to rise, it is becoming increasingly clear that we need to change the way we invest in blockchain and that change is coming in the form of VC funding.

For decades, VCs have invested primarily in traditional activities, but are beginning to enter the blockchain space in a much more visible way. VCs are estimated to have invested $ 2.85 billion in blockchain projects in the first three quarters of 2018 alone, with an increase of 316% compared to 2017. Especially in the United States, where allegations of infringement against ICOs have increased, the prospect of investing in VC seems to be a safer and more attractive alternative to comparison.

The US Securities and Exchange Commission (SEC) has recently doubled its intention to regulate sales of tokens involving US investors, imposing fines of $ 250,000 against Airfox and Paragon blockchain projects. In the wake of this new regulatory climate, blockchain project leaders need venture capital investors to provide long-term scalability while ensuring compliance with a rapidly evolving policy.

One might ask: how can VC investments provide greater scalability than ICOs, which are one of the fastest growing crowdfunding processes on the market? Typically, VC investors adopt stricter due diligence criteria for potential investments, often requiring a company to have a proven product before purchasing an agreement. In the ICO market, this often does not happen, and many investors have fallen victim to fraudulent projects as a result.

In 2017 alone, 80% of all ICO conducts were reported to scams, emphasizing the need to strengthen due diligence processes in the blockchain investment. This is why VC funds are considered more compliant and scalable by comparison. You're more likely to trust a project with a verified potential than one with little follow-through.

Some VCs are taking a further step forward by implementing blockchain technology in the structure of their investment funds to allow greater access and opportunities. Traditional VCs have a much longer time horizon for ROI on a given investment, averaging 7 to 10 years, and have more restrictions as to when investors can enter and exit portfolio investments.

However, the new VC tokens are streamlining this process, reducing the threshold requirement for investors and promoting asset liquidity. In many ways, VC tokens can be a response to ICO failure, allowing blockchain investors to be involved in a more secure and reliable format.

For too long, international investors have prematurely labeled the United States as a forbidden market, fearing that they might inadvertently be caught in the cross-regulatory fire. However, through VC funding, US-based projects can create more satisfying ways to invest, enabling emerging startups to spend more time creating innovative and competitive products on the international blockchain.

In fact, VCs in the United States were hyperactive this quarter, with 119 agreements revealed – the highest in the short history of the blockchain. The SEC has made clear that it believes in the potential of the Blockchain and has promised to consider various ways to reduce entry barriers. Once the most compliant investment processes are consolidated, we will probably begin to see these updated beliefs.

Now more than ever, investors seek stability in the way they interact with blockchain. Rapid schemes have given way to stable business models, high ambitions have been replaced by thoughtful action plans, and the Wild West of cryptography has given way to traditional conformal integration. When old processes die, new and improved ones take their place. As we prepare for next year, investors should consider the new ways we can navigate this evolving landscape, paving the way for future growth.