This is an article in a multi-part series on M13’s Future of Money thesis. View more here.
Crypto failures have dominated tech news in the second half of 2022. We go beyond the headlines to dig into M13’s unwavering thesis about the future of the technology.
In recent weeks, tech headlines have been overwhelmed by breaking news about crypto exchange FTX’s mismanagement of customer funds and abrupt bankruptcy. The collapse comes amidst the ongoing “crypto winter,” a period characterized by macroeconomic pressure, declining cryptocurrency valuations, and cooling investment in the crypto space.
Understanding the expansive future of crypto requires a viewpoint that can see beyond the standard news cycle. M13 Partner Latif Peracha leads crypto investing with a long-term view:
“Crypto has proven to be a very cyclical industry over the last decade. This down cycle has been exacerbated by multiple black swan events (i.e. Terra/Luna, FTX) that have set the industry back as it relates to both institutional and retail trust. Ultimately the opportunities presented by permissionless open protocols are more clear than ever. The global adoption of crypto - measured by wallets and volumes - has only increased. As venture investors, our time horizons are very long. Our singular focus is investing in companies and protocols that will allow crypto to truly reach a billion people, and the next 18 months will be a very exciting time to invest.”
M13 investor Mark Grace dives further into M13’s approach to crypto and what a realistic vision of the future of the industry entails.
How M13 looks at crypto
What is M13’s crypto investing strategy?
We’ve invested in more than 20 different projects or businesses in the last three years, across the tech stack. We've invested into protocols like Solana directly as well as infrastructure investments that aren't as consumer facing.
We’ve also invested in consumer-facing apps that are powered by crypto. One example is STEPN, which is essentially a mix between Strava and Pokemon Go: users can walk or run to earn tokens.
Within crypto, we invest in projects that help bring the next billion users into the space. There has been a lot of focus on the speculative aspects of crypto but our work has been on investing in and building projects that have real utility.
Within crypto, three themes are interesting to us.
1. Consumer infrastructure: Crypto is still hard for the average consumer to use. Projects here make it easier for users to buy, sell, and use crypto.
2. Incentive economy: When done right, crypto tokens can be powerful tools for rewarding users and making products more engaging and retentive.
3. Crypto in the real world: Our focus is investing in companies that are providing real utility or interacting with assets in the real world.
Can you share some highlights from M13’s portfolio?
One good example of a company we invested in earlier this year that’s seen real traction and is solving real problems is Flipside Crypto.
Flipside works with foundations or governing bodies of crypto protocols—such as Ethereum, Near, and Solana—to help them understand what’s going on in their ecosystems. These foundations want to understand: who is building on my blockchain, what are the trends, what are the major applications seeing adoption?
To do so, a foundation can grant tokens to Flipside. Flipside then posts “bounties”—basically real-world word problems—to a community of analysts and developers that it’s curated. These developers try to solve the bounties, and whoever has the most compelling solution wins the tokens. The value prop to the analysts is that they make money for completing tasks; the value prop to the foundation is getting new insights on the usage of their blockchain, as well as introducing smart, engaged analysts into their ecosystem.
Other M13 investments that are further along with their product development include Fold, Lightning Labs, Milo, Nori, and STEPN.
Crypto companies shaping the future of money
Select M13 investments in web3, crypto, and blockchain.
Flipside Crypto is an analytics company that helps protocols attract talent and gain insights. Read more.
Fold brings crypto rewards to the masses via its Visa bitcoin cashback debit card, which lets users earn bitcoin rewards on everyday purchases (like their cup of coffee). Read more.
Lightning Labs is building the Lightning Network which is helping scale bitcoin transactions. Read more.
Nori is a marketplace for carbon removals that uses the blockchain to combat the double counting issues of the carbon market. Read more.
Read more:
M13 Partner Latif Peracha talks about the drivers behind investing in Nori carbon removal, a sustainable solution against climate change.
4 min to read
Impact on the market
What will change as a result of the broader downturn?
Crypto markets have been slowing down this year, which is in line with the broader tech market and macroeconomic trends in general.
The crypto winter is going to get a lot of tourists out of the space. It’ll get rid of investors who are haphazardly in the market or opportunistic founders dabbling in building something in crypto. And that’s a good thing—it helps the space become more focused and mature.
Two things stand out to me with respect to crypto. First, the public’s perception of crypto is going to be soured for a time. People’s level of trust in the space has been set back.
I’ve seen a lot of sentiment that people in crypto welcome the bear market: it allows those who are really devoting their time, energy, and resources into the space to succeed. The balance to strike will be not becoming too insular and not shutting out the rest of the world from crypto.
Also, we expect more regulation to come. It’s hard to say what that entails because the regulatory environment in the US has been so convoluted over the last few years. That said, there’s a pretty good level of bipartisan support for the crypto industry in general across local, state, and federal regulatory bodies.
Even with this fallout, we’re still seeing people continue to build interesting products and apps in crypto, and consumers are still using these products. The space continues to soldier on.
What will not change in the wake of the broader crypto downturn?
FTX was a very centralized, opaque business that people didn’t have good insight into, including people who worked at FTX. As a result, a lot of people in the crypto space feel vindicated to see that many of the collapses in crypto in the last year have been of poorly run, centralized entities.
This actually proves the point that decentralized systems work well—and I think a lot of decentralized protocols will continue to get stronger and gain more adoption.
The theme of self custody and owning your own assets will also continue to get stronger. This can be tricky, because having self-custody of your assets can be difficult. There’s a need for technology that makes it easier for people to own their own crypto.
On the future of crypto
Does this crypto market downturn change anything for M13’s crypto strategy?
Certainly no one likes a gut punch—but our overall conviction in the space still remains. We see this market as an opportunity to focus even more deeply.
We’re continuing to talk with compelling founders working on interesting projects. We’re continuing to see growth in smart contract development, which shows that developers are continuing to invest time and resources in the space. And we’re continuing to see metrics like usage hold up fairly strongly.
Looking ahead, where do you see major areas of opportunity in crypto space?
A big part of the crypto ethos is that you should be able to hold your own funds and not rely on a third party like a bank or a crypto exchange to hold them for you. For example, if you own a Bitcoin on an exchange like FTX, you don’t own that Bitcoin: you own a ledger entry that says you own that Bitcoin, which is held in an FTX wallet somewhere.
The alternative is that you could hold that Bitcoin yourself in your own self-custodial wallet, which you access with a seed phrase (essentially, a password). The technical knowledge to set this up is little to none, though it does require logistical knowledge and diligence around remembering your seed phrase.
The upside is that this is all very technically secure. There’s little chance of you getting hacked. You own your assets outright, and something like an FTX collapse won’t vaporize them.
The downside to this is that if you lose your seed phrase, you’re basically out of luck and will never be able to access your funds. You also run into the “$5 wrench issue”—someone could come in and threaten you with a $5 wrench and force you to give them your password.
A lot of companies are trying to figure out how to combine the security of self-custodial models with the ease of custodial models. It hasn’t been cracked yet but that will be very important to getting more people in the space.
What can we expect to see in terms of regulation?
There’s a degree of governmental agency infighting right now when it comes to regulating crypto. There’s also an issue where most politicians don’t have a strong enough grasp on what crypto is yet. It’s difficult to regulate an industry that you don’t understand.
That said, there have been politicians making good strides to learn more, and there are promising bipartisan bills in the works. Senators Cynthia Lummis (Wyo., R.) and Kirsten Gillibrand (N.Y., D.) have proposed legislation to regulate crypto.
Are there resources you recommend for readers who aren’t crypto experts and want to get smart on the space?
I like Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond by Chris Burniske & Jack Tatar. It’s the best book I’ve read on the space.
More practically, my advice is to download a wallet. You can buy a cheap NFT, or something that looks interesting to you, and play around with it to figure out how it works. Going through that process can be fun and helps you learn more than just reading about it.
How to get in touch
This is an article in a multi-part series on M13’s Future of Money thesis. View more here.
Crypto failures have dominated tech news in the second half of 2022. We go beyond the headlines to dig into M13’s unwavering thesis about the future of the technology.
In recent weeks, tech headlines have been overwhelmed by breaking news about crypto exchange FTX’s mismanagement of customer funds and abrupt bankruptcy. The collapse comes amidst the ongoing “crypto winter,” a period characterized by macroeconomic pressure, declining cryptocurrency valuations, and cooling investment in the crypto space.
Understanding the expansive future of crypto requires a viewpoint that can see beyond the standard news cycle. M13 Partner Latif Peracha leads crypto investing with a long-term view:
“Crypto has proven to be a very cyclical industry over the last decade. This down cycle has been exacerbated by multiple black swan events (i.e. Terra/Luna, FTX) that have set the industry back as it relates to both institutional and retail trust. Ultimately the opportunities presented by permissionless open protocols are more clear than ever. The global adoption of crypto - measured by wallets and volumes - has only increased. As venture investors, our time horizons are very long. Our singular focus is investing in companies and protocols that will allow crypto to truly reach a billion people, and the next 18 months will be a very exciting time to invest.”
M13 investor Mark Grace dives further into M13’s approach to crypto and what a realistic vision of the future of the industry entails.
How M13 looks at crypto
What is M13’s crypto investing strategy?
We’ve invested in more than 20 different projects or businesses in the last three years, across the tech stack. We've invested into protocols like Solana directly as well as infrastructure investments that aren't as consumer facing.
We’ve also invested in consumer-facing apps that are powered by crypto. One example is STEPN, which is essentially a mix between Strava and Pokemon Go: users can walk or run to earn tokens.
Within crypto, we invest in projects that help bring the next billion users into the space. There has been a lot of focus on the speculative aspects of crypto but our work has been on investing in and building projects that have real utility.
Within crypto, three themes are interesting to us.
1. Consumer infrastructure: Crypto is still hard for the average consumer to use. Projects here make it easier for users to buy, sell, and use crypto.
2. Incentive economy: When done right, crypto tokens can be powerful tools for rewarding users and making products more engaging and retentive.
3. Crypto in the real world: Our focus is investing in companies that are providing real utility or interacting with assets in the real world.
Can you share some highlights from M13’s portfolio?
One good example of a company we invested in earlier this year that’s seen real traction and is solving real problems is Flipside Crypto.
Flipside works with foundations or governing bodies of crypto protocols—such as Ethereum, Near, and Solana—to help them understand what’s going on in their ecosystems. These foundations want to understand: who is building on my blockchain, what are the trends, what are the major applications seeing adoption?
To do so, a foundation can grant tokens to Flipside. Flipside then posts “bounties”—basically real-world word problems—to a community of analysts and developers that it’s curated. These developers try to solve the bounties, and whoever has the most compelling solution wins the tokens. The value prop to the analysts is that they make money for completing tasks; the value prop to the foundation is getting new insights on the usage of their blockchain, as well as introducing smart, engaged analysts into their ecosystem.
Other M13 investments that are further along with their product development include Fold, Lightning Labs, Milo, Nori, and STEPN.
Crypto companies shaping the future of money
Select M13 investments in web3, crypto, and blockchain.
Flipside Crypto is an analytics company that helps protocols attract talent and gain insights. Read more.
Fold brings crypto rewards to the masses via its Visa bitcoin cashback debit card, which lets users earn bitcoin rewards on everyday purchases (like their cup of coffee). Read more.
Lightning Labs is building the Lightning Network which is helping scale bitcoin transactions. Read more.
Nori is a marketplace for carbon removals that uses the blockchain to combat the double counting issues of the carbon market. Read more.
Read more:
M13 Partner Latif Peracha talks about the drivers behind investing in Nori carbon removal, a sustainable solution against climate change.
4 min to read
Impact on the market
What will change as a result of the broader downturn?
Crypto markets have been slowing down this year, which is in line with the broader tech market and macroeconomic trends in general.
The crypto winter is going to get a lot of tourists out of the space. It’ll get rid of investors who are haphazardly in the market or opportunistic founders dabbling in building something in crypto. And that’s a good thing—it helps the space become more focused and mature.
Two things stand out to me with respect to crypto. First, the public’s perception of crypto is going to be soured for a time. People’s level of trust in the space has been set back.
I’ve seen a lot of sentiment that people in crypto welcome the bear market: it allows those who are really devoting their time, energy, and resources into the space to succeed. The balance to strike will be not becoming too insular and not shutting out the rest of the world from crypto.
Also, we expect more regulation to come. It’s hard to say what that entails because the regulatory environment in the US has been so convoluted over the last few years. That said, there’s a pretty good level of bipartisan support for the crypto industry in general across local, state, and federal regulatory bodies.
Even with this fallout, we’re still seeing people continue to build interesting products and apps in crypto, and consumers are still using these products. The space continues to soldier on.
What will not change in the wake of the broader crypto downturn?
FTX was a very centralized, opaque business that people didn’t have good insight into, including people who worked at FTX. As a result, a lot of people in the crypto space feel vindicated to see that many of the collapses in crypto in the last year have been of poorly run, centralized entities.
This actually proves the point that decentralized systems work well—and I think a lot of decentralized protocols will continue to get stronger and gain more adoption.
The theme of self custody and owning your own assets will also continue to get stronger. This can be tricky, because having self-custody of your assets can be difficult. There’s a need for technology that makes it easier for people to own their own crypto.
On the future of crypto
Does this crypto market downturn change anything for M13’s crypto strategy?
Certainly no one likes a gut punch—but our overall conviction in the space still remains. We see this market as an opportunity to focus even more deeply.
We’re continuing to talk with compelling founders working on interesting projects. We’re continuing to see growth in smart contract development, which shows that developers are continuing to invest time and resources in the space. And we’re continuing to see metrics like usage hold up fairly strongly.
Looking ahead, where do you see major areas of opportunity in crypto space?
A big part of the crypto ethos is that you should be able to hold your own funds and not rely on a third party like a bank or a crypto exchange to hold them for you. For example, if you own a Bitcoin on an exchange like FTX, you don’t own that Bitcoin: you own a ledger entry that says you own that Bitcoin, which is held in an FTX wallet somewhere.
The alternative is that you could hold that Bitcoin yourself in your own self-custodial wallet, which you access with a seed phrase (essentially, a password). The technical knowledge to set this up is little to none, though it does require logistical knowledge and diligence around remembering your seed phrase.
The upside is that this is all very technically secure. There’s little chance of you getting hacked. You own your assets outright, and something like an FTX collapse won’t vaporize them.
The downside to this is that if you lose your seed phrase, you’re basically out of luck and will never be able to access your funds. You also run into the “$5 wrench issue”—someone could come in and threaten you with a $5 wrench and force you to give them your password.
A lot of companies are trying to figure out how to combine the security of self-custodial models with the ease of custodial models. It hasn’t been cracked yet but that will be very important to getting more people in the space.
What can we expect to see in terms of regulation?
There’s a degree of governmental agency infighting right now when it comes to regulating crypto. There’s also an issue where most politicians don’t have a strong enough grasp on what crypto is yet. It’s difficult to regulate an industry that you don’t understand.
That said, there have been politicians making good strides to learn more, and there are promising bipartisan bills in the works. Senators Cynthia Lummis (Wyo., R.) and Kirsten Gillibrand (N.Y., D.) have proposed legislation to regulate crypto.
Are there resources you recommend for readers who aren’t crypto experts and want to get smart on the space?
I like Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond by Chris Burniske & Jack Tatar. It’s the best book I’ve read on the space.
More practically, my advice is to download a wallet. You can buy a cheap NFT, or something that looks interesting to you, and play around with it to figure out how it works. Going through that process can be fun and helps you learn more than just reading about it.
How to get in touch
Read more
The views expressed here are those of the individual M13 personnel quoted and are not the views of M13 Holdings Company, LLC (“M13”) or its affiliates.This content is for general informational purposes only and does not and is not intended to constitute legal, business, investment, tax or other advice. You should consult your own advisers as to those matters and should not act or refrain from acting on the basis of this content.This content is not directed to any investors or potential investors, is not an offer or solicitation and may not be used or relied upon in connection with any offer or solicitation with respect to any current or future M13 investment partnership.Past performance is not indicative of future results. Unless otherwise noted, this content is intended to be current only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in funds managed by M13, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by M13 is available at m13.co/portfolio.