LONDON (Reuters) – Large finance and technology companies are investing in startup development technology to develop the crypto market, even if they are keeping themselves away from the volatile currencies.
FILE FILE: A small toy figure is to be seen on representations of the virtual currency Bitcoin displayed in front of a picture of the Chinese flag in this illustration picture on April 9, 2019. REUTERS / Dado Ruvic / Illustration
Venture capital investments in crypto and blockchain startups, which included corporate funds, rose to $ 850 million this year. The data was compiled by PitchBook for Reuters. The 13 deals put the flows on their way for a second annual record.
Such operations by companies such as the London Stock Exchange Group and Microsoft Corp. 117 investments increased fivefold in 2018 to a record $ 2.4 billion (£ 1.8 billion) over 117 investments. This suggests that big companies see promising results in emerging technology, even if they have problems for acceptance.
In particular, they avoided digital money, including Bitcoin, to avoid direct investment as they were worried about tightening regulation, frequent security holes and high volatility.
The lack of mainstream embrace has led to serious doubts about the potential of cryptocurrencies to evolve from speculative tokens to means of payment that can compete with Fiat money.
Bitcoin slumped by three quarters last year after reaching a record $ 20,000 in its raging 2017 bubble. It is still vulnerable to wild price movements, underlined by a recent jump of 20 percent, confusing traders and analysts.
And although Blockchain has found some use in areas such as trade finance, its application has been relatively tight.
Companies are exploring how and if blockchain and related technologies can be used in ways that could induce deeper change, said Richard Hay, UK chief financial officer of Linklaters law firm.
"There are two dynamics in the game," he said. "We can do something, save costs and, in the longer term, look for ways to use technology in a more transformative way."
Recent examples include a $ 20 million investment involving the London Stock Exchange and Banco Santander in a London startup whose platform can be used to issue debt on Blockchain, the technology that supports most digital coins ,
Investments range from startups of crypto-currency mining equipment manufacturers that show PitchBook data until April 8.
A key driver is the growing expectation that the "tokenization" of equity-to-oil assets – essentially the digitization of these securities and their trading in blockchain – will bring trade, according to lawyers and consultants working with fintech companies work together.
"People are really excited about tokenization – the ability to produce coins or other forms of value, so that's when we see all the action," said Anton Ruddenklau, global co-head of fintech at KPMG.
"You're investing as a technology hedge as well as anything else."
The bets on corporate venture capital are usually low, the data show. Deals this year had a median of $ 6.5 million, one stage below the $ 8 million of the previous year.
Others are much bigger.
Bakkt, a cryptocurrency trading platform founded last year by the owner of the New York Stock Exchange, Intercontinental Exchange Inc., raised more than $ 180 million from investors in December, including M12, Microsoft's venture capital arm.
The onslaught of venture capital financing is added as traditional venture capital (VC) investments flow into the sector. The data show that 617 transactions reached a record $ 5.6 billion last year. Venture capitalists assess how the technologies will affect the online economy.
"There is a huge experiment for effectively installing a domestic economy on the Internet," said Jamie Burke, CEO of Outlier Ventures, a fund that has invested in around eight block-chain related projects.
But with this experiment, examples of failures have come.
In December, the cryptocurrency project Basis announced that it would close its lenders and repay the money to its backers, including the GV of Google's Bign Capital Ventures, the owner of Alphabet, and regulatory concerns.
Cryptocurrency miners and exchanges are the four largest VC-backed companies, according to PitchBook data.
Some were struggling under the collapse of bitcoin prices. For example, Bitmain Technologies, worth $ 12 billion last month, closed a planned IPO in Hong Kong.
Others have fared better. The $ 8 billion San Francisco-based Coinbase rose 20 percent last year to $ 153 million ($ 173 million), the UK business register said last week.
The UK arm of the stock exchange, which records the company's sales outside the US, accounts for almost one third of the company's total sales, Coinbase UK CEO Zeeshan Feroz said.
According to calculations by Reuters, this indicates a global turnover of around 520 million US dollars last year – a rare insight into the financial position of a cryptocurrency exchange.
Coinbase declined to comment.