Investing in Cryptocurrency Startups

Most cryptocurrencies are decentralized, meaning they don’t have a corporate entity that one could invest in.

A typical cryptocurrency (what I like to call “crypto”) is, like bitcoin, governed by its users, miners and usually a nonprofit foundation.

So there’s no way to invest in bitcoin as a company. You can buy coins, but there is no stock or equity.

However, there is a dynamic and fast-growing community of private businesses being built around crypto today.

If crypto continues to take off, these companies could be the financial giants of the future.

I’ll tell you about a few of the crypto startups I’m watching, and why I’m excited about the increasing number of these companies using equity crowdfunding.

Bitwise

Bitwise aims to be the “Vanguard of cryptocurrency.” The fintech startup just revealed its first investment product, the HOLD 10 Private Index Fund. It’s a basket of the top 10 cryptocurrencies by market cap.

Co-founder Hunter Horsley told Coindesk

We want to create a meaningful and secure way to own a portfolio of cryptocurrency. We feel that, today, it’s too hard and it’s too expensive.

The company plans to charge 2% per year, with no additional fees. That’s a bargain compared to most crypto hedge funds, which take at least 20% of profits, plus 2% annually.

Bitwise has attracted notable Silicon Valley investors, including AngelList co-founder Naval Ravikant.

For now, the HOLD 10 fund is only available for accredited investors. This is likely due to the fact that the SEC hasn’t approved any bitcoin ETFs yet, but I fully expect Bitwise to go after the broader market eventually.

Coinbase

Founded by Brian Armstrong in 2012, Coinbase has grown exponentially to become the world’s largest cryptocurrency exchange.

With 10.8 million users and 36 million wallets, Coinbase is a force in the crypto community.

Coinbase has processed more than $25 billion in transactions in 2017, according to a Fortune article published in August. It also offers crypto payment processing tools for roughly 40,000 merchant accounts.

The company just announced a $100 million round of funding at a $1.6 billion valuation. Investors in its latest round include top venture capital firms IVP, Greylock and Spark Capital.

This August fundraise made Coinbase the first crypto “unicorn” startup (one that has grown to a $1 billion-plus valuation). Its earliest investors include members of FundersClub, an online investment platform for accredited investors.

The company’s explosive growth has caused some growing pains, however, and Coinbase is struggling to keep up with customer service inquiries. U.S. laws dictate that it follow certain rules designed to prevent money laundering, and partly as a result, the company’s pipeline is clogged.

The good news is it appears to be putting the new round of capital to good use, having recently launched phone support for users. If it can overcome these issues, Coinbase is well-positioned to become a dominant financial institution in this new market.

Bittrex

Bittrex is a fast-growing and disruptive cryptocurrency exchange.

The biggest difference between Bittrex and Coinbase is the number of digital currencies they offer.

Coinbase offers three: bitcoin, Ethereum and Litecoin.

Bittrex allows users to trade 200 different cryptocurrencies, including all the top ones offered by Coinbase. The other 197 “altcoins” are what really set Bittrex apart.

Altcoins have exploded in popularity over the last year, as the price of Ethereum rose from less than a dollar in 2016 to $294 today, giving it a $27 billion market cap.

On Bittrex, users can search for the next big opportunity. Many of the coins on this exchange are tiny, with market caps in the low millions.

Bittrex also offers a flat trading fee of 0.25%, while the fees on Coinbase vary and tend to be higher.

The one drawback to using Bittrex is that you can’t buy coins directly with dollars or other fiat currency, as you can on Coinbase.

Still, it’s a great example of a disruptive startup shaking up the incumbents of a new industry. By offering users a much wider selection of alternative cryptocurrencies, Bittrex is gaining ground on crypto powerhouse Coinbase.

Bittrex’s founding team has deep experience in web security, having worked at Amazon, Blackberry and Microsoft.

With a talented team, great tech and impressive growth, Bittrex is definitely a crypto startup to watch.

Crowded Startup Pipeline

We’re just beginning to see how transformative and disruptive the crypto market can be.

An entire ecosystem of new financial technology is being created. This sort of thing doesn’t happen very often, to say the least.

Many crypto startups will launch over the next few years, and some are likely to become the fintech titans of tomorrow.

We’ve already started to see a few high-quality crypto deals utilize equity crowdfunding.

Just last month we recommended one to members of our research service, First Stage Investor. It’s called Balance, and it’s building a user-friendly financial dashboard app that tracks not only your traditional financial transactions, but your crypto ones too. Soon users will be able to buy and sell cryptocurrencies directly through its app, and many more features are in the works.

The deal was quite popular, and it filled up after the company raised the maximum allowable $1.17 million. With a focus on simplicity and ease of use, Balance is well-positioned to help bring crypto to the mainstream.

Balance is among the first crypto- and blockchain-related startups to utilize equity crowdfunding, and it certainly won’t be the last.

I can’t reveal any details yet, but developments are coming that will merge the equity crowdfunding and crypto worlds in ways I couldn’t have even imagined a year ago.

It’s going to be a very exciting time.

Good investing,

Adam Sharp
Co-Founder, Early Investing