Since the outcome of the US presidential election became clear, bitcoin has smashed all-time highs—chasing $100,000 for the first time. The outlook for crypto venture capital investing, which often rides these bull markets, isn’t as clear-cut.
Regulatory changes by President-elect Donald Trump’s second administration may not solve the industry’s long-running problems and regulation-by-enforcement gripes.
Crypto VC investment dropped 31.1% quarter-over-quarter to $1.7 billion in Q3, according to PitchBook data. The dip reversed the momentum for crypto startups earlier this year, which PitchBook analysts attributed, in part, to macroeconomic factors like the lingering effects of higher rates.
VCs are watching the performance of bitcoin and other cryptocurrencies closely. Traders have been whipping up a bullish frenzy on the sentiment that Trump will champion legislation to boost the industry.
The correlation between cryptocurrency market capitalizations and VC dealmaking has decoupled over time. Murky US rulemaking, as well as persistently elevated interest rates, have muddied that trendline.
But early expectations are that Trump-appointed financial regulators could set up a new system for incorporating crypto companies and launching associated consumer- and trader-facing products. That work is projected to take into account everything from federal tax reform on trading gains and losses to establishing a clearer path for crypto operators to register tradable tokens.
‘Regulatory derisking’ lures Wall Street
Chris Perkins, president and managing partner of crypto investment shop CoinFund, said the high likelihood of an overhaul of US oversight is poised to trigger a marked uptick in startup deals and valuations.
Every crypto bull market brings an expectation that traditional finance firms will leave the sidelines. Prior cycles saw the likes of Apollo Global Management and macro hedge fund Brevan Howard committing serious resources.
But the promised explosion of Wall Street interest has typically fallen short. The industry thinks this time will be different.
Perkins—formerly a Citi managing director who now serves on two crypto-linked committees at the Commodity Futures Trading Commission—said the market is warming up to traditional finance’s position shift and making investments accordingly.
“The new sheriff’s going to evaluate everything, especially [rulemaking] still pending and in their power to curtail,” Perkins said of Trump’s incoming regulatory appointees. “It’s going to be a lot of cleanup. … People don’t realize how big a deal regulatory derisking is. It’s the biggest impediment to institutional adoption.”
That derisking, which could be more gradual than the industry hopes, should be a tailwind for crypto VC, according to Perkins.
He expects a surge in institutional investment in startups at the intersection of crypto and AI. He also anticipates blockchain-based gaming and traditional game developers deploying NFTs to pop.
And he thinks the asset class’s picks and shovels—payment and trading processors that convert funds from fiat currency to crypto and back again—will grow rapidly.
Tailwinds for crypto payment processors, decentralized tech
Will Ogden Moore, a research analyst at crypto investment firm Grayscale, said crypto could well be “entering the next chapter.”
A slew of separate, conservative-driven policy tweaks and rulemaking rollouts could add up to a big change for the US crypto business.
There’s a high likelihood that a Republican-controlled government could put in place steep tax cuts that “could weaken the dollar and drive further demand for bitcoin as an alternative money system.”
VC-backed bitcoin custodians, as well as payment processors, would benefit under that outcome.
“Crypto industry watchers are looking ahead at the potential for clearer regulatory frameworks, growth in [decentralized finance], tokenized assets and accelerated growth across blockchain-based businesses—all developments that would help foster mainstream adoption and innovation throughout the crypto ecosystem.” Ogden Moore said.
Fixed-income crypto trading could also rise—driven by lower fees, faster settlement times and attractive exchange rates, Perkins said.
And then there’s the matter of centralized data collection and personal financial privacy measures.
“You look at decentralized data, which is owned by the user and not taken by the company,” Perkins said. “These things are materially different, materially more efficient, than their traditional tech counterparts and predecessors.”
Featured image of President-elect Donald Trump at the 2024 Bitcoin Conference in Nashville by The Washington Post/Getty Images
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