Blockchain & crypto: Euphoria or sustainable alternative investing?

The rise of cryptos and blockchain has been meteoric to say the least. According to Statista, the crypto market cap which touched $10 million in 2011, increased to a whopping ~$3 trillion in 2021.

The increased adoption is driven by the younger generation - 18 percent of US students own some amount of crypto currency. In India, majority of the crypto investors are under the age of 35 years. Contrastingly, the messiahs of investing like Warren Buffet have been big critics of crypto. Buffet had equated crypto to “probably rat poison squared”. The key reason being crypto is not supported by an underlying asset and has no inherent value other than speculative. Ray Dalio was also quoted saying “I don’t think digital currencies will succeed in the way people hope they would”.

But in all the buzz around crypto, blockchain is the real winner. It started as a basis for cryptocurrencies, but is quickly spreading to other industries. It has the potential to disrupt the banking system - as digital, encrypted and tamper-proof ledgers, blockchains could serve accuracy and information sharing into the financial services ecosystem.

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India and crypto and blockchain innovation

In October 2021, blockchain research firm Chainalysis had ranked India second globally in crypto adoption. While the non-believers have stayed out of the crypto camp, there have been increasing investments going into blockchain and cryptocurrencies. As per Tracxn data, India witnessed $638 million for crypto-currencies and blockchain investments across 48 different rounds in 2021.

Worldwide, these investments soared to around $25 billion. VC firms from the valley are increasingly turning their radar to the booming crypto and blockchain space in India, while Indian firms are also experimenting setting up dedicated funds for this space.

VC firm Antler’s India arm is excited about the Indian blockchain story and likely to invest a third of its $100-150 million corpus into 25-30 blockchain and Web3 startups in India. They are focused on blockchain for institutions and gaming, as well as infrastructure for wallets.

California-based VC firm, Draper Dragon, has set up an India office. Andreessen Horowitz also entered India through their bet on the crypto selling platform, CoinSwitch Kuber. Blockchain platform, Polygon, recently raised $450 million from Sequoia in Feb 2022. Most of the crypto exchanges like CoinDCX, CoinSwitch and Vauld have been able to raise funding. CoinDCX raised about $90 million in August 2021 led by Facebook co-founder Eduardo Saverin's B Capital Group, whereas Sequoia India doubled its investments in CoinSwitch Kuber. Investors are also excited about Web 3.0 startups as the next phase of the internet evolves. Sequoia India has made about 20 investments in Web 3.0 startups including Betafinance, Clearpool, Coinshift and Faze.

Globally, large corporations are recognising the need to evolve and adapt to the changing technologies in metaverse. JPMorgan is the first bank to explore blockchain and metaverse with JPM Coin, which is designed to enable real-time cross-border payments for its clients. Large tech behemoths like IBM is collaborating with companies across various sectors like health care, supply chain, private equity and other industries on blockchain projects

What is driving increasing investments in this space?

Blockchain and Crypto are quickly transitioning from awareness to interest to investment, with the increasing customer base of blockchain and crypto platforms, built on the back of increased advertising

Regulatory environment improving

• Supreme court has set aside RBI’s ban on banks on crypto trade facilitation
• Government has recognised crypto in a way, by taxing gains on crypto in the 2022 budget

Demographics and high-quality tech talent in India is another key factor driving this space

Multiple use cases for blockchain are driving widespread adoption and innovation

Blockchain investing a sustainable alternate form of investing?

Like most financial assets, crypto needs to become a sustainable store of value and not only a speculative asset based on demand and supply. "Store of value" usually describes assets which can sustain their worth over longer timeframes without depreciating, such as precious metals or some currencies.

Currencies have value because they are regulated by a monetary authority and thus acceptable for payment of goods and services. Also, they are divisible and easily transferable.

The ecosystem for any financial asset evolves with a combination of usage, reduced volatility and solid floor value. Once cryptocurrencies reach a stage where they are regulatorly fully accepted and large financial institutions start holding it as a store of value, it will find a place in the same league as precious metals and fiat currencies.

Once crypto becomes a sustainable store of value and its underlying technology establishes multiple use cases, there is no stopping crypto and blockchain, to become a sustainable form of investing.