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VCs see 'somewhat frothy market' as interest in crypto projects heat up

·Reporter
·2-min read
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Venture capitalists in the crypto space say valuations are high, which means investors need to dig deeper to find their diamonds in the rough.

Franklin Bi, a director of portfolio development at Pantera Capital, says that a big reason for the “frothy market" for crypto companies and projects is the inflow of capital from outside the crypto space.

“We’re seeing non-specialized venture capitalists coming into the space who may not fully understand what it means to invest in the early stages of a token project or a decentralized network,” Bi said at a Yahoo Finance/Decrypt crypto conference Tuesday.

The high valuations don’t appear to be due to a narrowing of investible options; the alphabet soup of crypto and crypto-adjacent companies is only expanding. Decentralized finance (DeFi) applications, non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs) have all exploded in popularity in 2021.

That universe of investible opportunities will only get larger with interest in the metaverse. Grayscale Investments CEO Michael Sonnenshein said transactions in the metaverse — for goods, for services, for land — will create a use case for cryptocurrencies and products linked to them.

"We're now seeing a lot of the confluence of gaming, virtual reality, and social media networks converging around these ideas." Sonnenshein said.

Beyond the price tag

The availability of capital to crypto projects is coming alongside a bigger picture renaissance of capital through the COVID recovery. Easy money policies from the Federal Reserve have encouraged risk-taking by those who can afford to spare the funds.

For Kinjal Shah, a senior associate at Blockchain Capital, considering the macro environment is key when looking at expensive price tags.

“We’re in a bull market,” said Shah, adding that she pays mind to the “amount of attention and capital that is being thrown within this ecosystem.”

But VCs with the crypto know-how have a leg up in the space by being able to tap into communities they’re already entrenched in. Bi said that looking through valuations to pick opportunities with “shared values” is critical for any VC.

Shah added that other types of intangibles matter when looking at investment opportunities as well, namely diversity. She has hosted office hours on a monthly basis for female founders to get in touch.

“As we see the space mature, I think the more intentional we can be about how we build it is going to result in better outcomes,” said Shah.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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