Crypto Startups: How To Invest And Make Profits

Crypto startups are attracting serious investment despite a slump in prices. In 2021, crypto and blockchain startups raised a record $25 billion, an eightfold increase year-on-year. This trend has continued into 2022, with crypto exchange FTX and blockchain infrastructure firms Fireblocks and Blockdaemon raising hundreds of millions of dollars. The global blockchain market is expected to reach a size of $2.3 trillion by 2032, and more than 90% of European and US banks are researching blockchain options. This article will explore the opportunities for investing in crypto startups, the risks involved, and the potential rewards.

Crypto wallets and security

Crypto wallets are an indispensable aspect of managing and utilizing various digital assets. They are tools that allow users to store, manage, and transact their digital assets. Crypto wallets can be physical devices or online platforms that keep your private and public keys so you can carry out transactions. When you buy crypto, you are issued two keys: a public key and a private key. The public key can be compared to a bank account number that you can share with third parties to receive crypto without compromising your assets. The private key, on the other hand, signs transactions and allows you to send and receive crypto. It is crucial to keep your private keys secure and secret.

There are different types of crypto wallets, each with its own benefits and drawbacks. Hot wallets are connected to the internet and are usually convenient to use, but they are also vulnerable to online attacks. Examples include web-based, mobile, and desktop wallets. Cold wallets, on the other hand, keep your private keys offline and out of reach of online threats. Examples include paper and hardware wallets.

• Get a cold storage wallet for savings. Cold storage gives you absolute control over your funds, and you’re the only one who can access them.
• Use multisig wallets for treasury. Multi-signature wallets will require more than three people to sign transactions, making it extremely difficult or nearly impossible for a hacker to get the required signatures to steal funds.
• Use two-factor authentication (2FA). 2FA adds an extra layer of security that prevents unauthorized access to your wallet.
• Have multiple wallets. By putting your crypto across multiple wallets, you reduce the degree of your loss in case one wallet gets hacked.
• Be careful with public Wi-Fi. Public Wi-Fi owners can access some of your data once you connect, which can help a threat actor gain sensitive details about your wallet and hijack it.
• Be on guard against phishing. Hackers use various social engineering techniques to trick their victims into giving up their details.
• Use strong and unpredictable passwords. The more unpredictable your password is, the better. Avoid using your name or nickname as the password.
• Keep your seed phrase and passwords in a safe place. Anyone who has access to your seed phrase can access your non-custodial wallet.
• Only interact with secure websites. Some websites have weak security, which can be deliberate. You can detect such websites as they would have HTTPS instead of HTTP.

Some popular crypto wallet providers include Ledger, Trezor, MetaMask, and Phantom.

Crypto and blockchain startups funding

The crypto and blockchain space is attracting a lot of interest from investors, with venture capitalists investing a record-breaking $25 billion in blockchain companies in 2021, an eightfold increase from 2020. This trend has continued into 2022, with crypto startups raising serious cash despite a slump in prices.

Where is the Money Going?

Crypto exchange, brokerage, non-fungible token, gaming, and payment companies have seen the most significant inflows. Fintech firms, in particular, have been very attractive to investors, with NYDIG, Forte Labs, and MoonPay landing the biggest deals. Coinbase, the crypto exchange, has also been very active in the market, acquiring Curv and making an initial stock offering that valued the company at about $40 billion.

Who is Doing the Investing?

US-based fintech firms topped the list of the top 10 equity deals globally in Q4 2021. About half of the top 13 most active blockchain venture capital investors were US-based firms, including Jump Capital, Andreessen Horowitz, and X21. Coinbase Ventures, the venture arm of the US crypto exchange Coinbase, was the most active corporate investor, although this ranking was dominated by Asian companies.

The future direction of the market is uncertain, with a sharp sell-off in crypto assets causing concern among investors about a potential "crypto winter". However, some industry leaders believe that even if this occurs, it will lead to innovation, particularly around "Web3", the idea of a decentralized internet based on blockchain technology.

Examples of Funded Crypto and Blockchain Startups

• Fireblocks: A crypto infrastructure startup that provides blockchain security solutions to institutions. Valued at $8 billion in a $550 million funding round.
• Blockdaemon: A node management tool that allows businesses to manage their blockchain applications. Scored $207 million in funding on a $3.3 billion valuation.
• Sorare: A blockchain-powered fantasy soccer platform and marketplace for digital player cards. Raised $739.2 million in Series B funding.
• Moonpay: Provides cryptocurrency sellers and exchanges with the technology to allow everyday consumers to buy and sell crypto using traditional payment methods. Has more than 7 million customers and raised $650.7 million in Series A funding.
• Axoni: Offers blockchain infrastructure, distributed application development, and workflow automation tools. Raised $20 million in Series B funding.
• Mysten Labs: Creates foundational infrastructure to accelerate the adoption of web3. Raised $300 million in Series B funding, with a $2 billion valuation.

Crypto exchange and trading platforms

When choosing a crypto exchange, there are several factors to consider:

• Supported assets: The number of cryptocurrencies offered by an exchange can vary widely, from just a handful to over 200. If you're looking to trade anything beyond the most popular coins, you'll likely need a pure-crypto exchange.
• Payment methods: Most exchanges support wire transfers, but some also allow you to buy crypto with a credit or debit card.
• Fees: Crypto exchanges typically charge trading fees, withdrawal fees, and other transaction fees. These can vary significantly between platforms, so it's important to research them before opening an account.
• Security: Crypto exchanges are a prime target for hackers, so strong security measures are essential. Look for features like two-factor authentication, identity verification, and SOC-2 certification.
• Customer service: The quality of customer support can vary between exchanges, with some offering only limited options. If you're new to crypto, you may want to choose an exchange with good customer service.
• Reputation: It's important to research an exchange's reputation before signing up, including reading customer reviews and looking into its history.

Some popular crypto exchange and trading platforms include:

• Coinbase: One of the most user-friendly platforms, with a large number of supported cryptocurrencies and advanced trading options.
• Robinhood Crypto: Allows users to easily buy and sell crypto with USD, but doesn't support crypto-to-crypto trading.
• Gemini: Offers products for all levels of crypto trading, with a focus on security and compliance.
• Kraken: One of the oldest and most reputable exchanges, with a large selection of coins and some of the lowest fees.
• Crypto.com: Supports over 350 cryptocurrencies and provides a range of crypto products, including a native token and a crypto visa card.
• BitMart: A global exchange available in over 160 countries, offering a very large number of cryptocurrencies and trading pairs.
• Cash App: Allows users to seamlessly buy, sell, and store Bitcoin from their smartphone.

Crypto for institutional investors

Institutional investors have been steadily increasing their presence in the cryptocurrency market since the mid-2010s. This trend began in earnest when MicroStrategy, led by Bitcoin maximalist Michael Saylor, invested $425 million in Bitcoin in August and September 2020. This move was followed by Square and Tesla, which invested $50 million and $1.5 billion in Bitcoin, respectively. As of June 2022, institutions hold 6.47% of all Bitcoin in existence, including sovereign governments like El Salvador.

The most straightforward way for institutions to invest in crypto is to hold cryptocurrency on their balance sheets. However, there are also indirect ways to invest, such as exchange-traded funds (ETFs) and Bitcoin futures contracts.

Cryptocurrency exchanges, such as Coinbase, Gemini, and Kraken, have made it easier for institutional investors to buy and store cryptocurrency. These exchanges have voluntarily approached regulators for licenses and approvals, increasing investor confidence. In 2018, Coinbase launched its 'Pro' offering, catering to institutional investors with more powerful trading tools.

Another way for institutions to gain exposure to the crypto market is through investing in companies with a partial or total focus on cryptocurrency. These include cryptocurrency mining companies, mining hardware makers, and companies that support cryptocurrency transactions, such as Robinhood Markets Inc. and PayPal Holdings Inc.

Institutions can also invest in cryptocurrency-focused funds, including exchange-traded funds (ETFs) and cryptocurrency investment trusts. The first Bitcoin Spot ETFs were approved in January 2024, allowing investors to hold Bitcoin and offering shares based on Bitcoin spot prices.

Decentralized finance (DeFi) is another area of interest for institutional investors. DeFi runs on smart contracts that power decentralized apps (dApps), offering financial services such as interest-bearing accounts. Some DeFi platforms, like Compound Treasury, have set up institutional gateways to attract institutional investors.

Non-fungible tokens (NFTs) and the metaverse are also attracting institutional investment. Some companies have invested in crypto domain names, such as Budweiser, which purchased beer.eth for 30 ETH. The metaverse, a virtual space where humans interact through avatars, has seen investments from multinational corporations since Facebook's rebrand to Meta in October 2021.

Overall, the institutional presence in the crypto market brings fresh money and excitement from current investors. However, it is a double-edged sword, as institutional investors can also contribute to large sell-offs in the market if they reverse their decisions, as seen with Tesla's decision to stop accepting Bitcoin payments in May 2021.

Crypto and blockchain regulation

Regulatory Landscape

The regulatory landscape for crypto and blockchain is still developing, and the rules vary across different jurisdictions. In the United States, the regulatory discussion has primarily been at the agency level, including the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), the Federal Trade Commission (FTC), and the Financial Crimes Enforcement Network (FinCEN). While these agencies have been engaged in the space, there has been limited formal rule-making. At the state level, some states have passed laws affecting cryptocurrencies and blockchain technology, with approaches ranging from promoting the technology with favourable regulations to imposing stringent requirements such as money transmitter licenses.

Securities Regulation

The SEC generally has regulatory authority over the issuance or resale of any token or digital asset that constitutes a security. The SEC has taken the position that even if a token has "utility," it may still be deemed a security if it meets the elements of the Howey test, which examines whether there is an investment of money in a common enterprise with a reasonable expectation of profits derived from the efforts of others. The SEC has brought enforcement actions against companies such as Telegram and Kik for conducting unregistered securities offerings.

Money Transmission and Anti-Money Laundering

Under the Bank Secrecy Act (BSA), FinCEN regulates money services businesses (MSBs), which include virtual currency exchanges and administrators of centralised repositories of virtual currency. MSBs are subject to anti-money laundering (AML) requirements, including the development and implementation of written AML programs, the designation of a compliance officer, and the provision of training for personnel. Additionally, all US persons are prohibited from doing business with individuals and entities on the Specially Designated Nationals and Blocked Entities List (SDN List) maintained by the Office of Foreign Assets Control (OFAC).

Tax Considerations

The Internal Revenue Service (IRS) has issued guidance stating that virtual currencies, such as Bitcoin, will be taxed as "property" rather than currency. This has several implications for taxpayers, including the need to pay taxes on gains from the sale or use of cryptocurrency, the requirement to pay taxes on mined cryptocurrency, and the inability to utilise Section 1031(a) for cryptocurrency transactions after January 1, 2018.

Consumer Protection

There is a growing focus on consumer protection in the crypto and blockchain space. For example, the proposed Digital Trading Clarity Act aims to provide regulatory clarity and protect consumers by establishing a compliance period for intermediaries listing certain digital assets. Additionally, the Biden administration's Executive Order on digital assets and blockchain technology identifies consumer protection as one of its key priorities.

Frequently asked questions