What are private markets for digital assets, anyway?

Not long ago, digital assets were dismissed by many as speculative noise. Today, they’re reshaping private markets. Venture capital firms poured over $70 billion into Web3 between 2021 and 2023, tripling previous investment cycles and drawing in family offices, hedge funds, and even traditional banks. What changed? Let’s unpack what’s driving this evolution, who’s getting involved, and why the opportunity may be bigger than most realize.

Compelling investment opportunities  

VC investment in Web3 assets is not a new phenomenon. For over a decade now, forward-thinking firms such as Union Square Ventures (USV), Andreessen Horowitz (a16z), and Pantera Capital have been allocating capital to the space. Recently, however, a confluence of factors has led to a much higher level of interest in the market, not only from VC firms but also from angel investors, family offices, high-net-worth (HNW) investors, and even traditional financial firms and wealth managers. 

One such factor is the realization that Web3 technologies are providing genuine solutions to problems that exist across a range of industries. Today, Web3 companies are solving challenges in relation to transaction fees, cross-border payments, data ownership and storage, supply chain transparency, and more. Much like the early days of the internet, the technology is disrupting real-world business models, and this is leading to strong revenue growth and significantly higher valuations for the companies involved. 

A good example of a Web3 company that is having success at present is Fireblocks, which offers an enterprise-grade digital asset custodial platform (that is currently used by many well-known traditional financial firms including BNY Mellon, ABN Amro, and Revolut). Founded in 2018, it surpassed $100 million in annual recurring revenue (ARR) in 2022. The same year, the company raised $550 million from investors, putting its valuation at $8 billion.  

When companies like BNY Mellon and Revolut rely on Web3 infrastructure, traditional finance is clearly taking notice.

Another example is Consensys, which helps businesses leverage blockchain technology to improve their efficiency, security, and transparency. Founded in 2014, it’s now generating estimated revenue of over $200 million annually. To date, Consensys has raised around $725 million over five funding rounds, giving it a valuation of around $7 billion.

Thanks to the success of these kinds of businesses, VC firms and other sophisticated investors are realising that the Web3 ecosystem – which is forecast to grow by over 40% per year between now and 2030 as the decentralised finance (DeFi) and metaverse industries take off – is a major source of opportunity. And they are scrambling to get involved. It’s worth noting that many firms are putting together their own Web3 teams to better understand how this exciting area of technology is likely to evolve over the next five to 10 years and position themselves at the forefront of the Web3 revolution. 

Diversification potential 

A second force fuelling industry growth is the desire for diversification within the investment community. Today, there are many different types of investors participating in the Web3 ecosystem. But they all have one thing in common and that is that they are looking to broaden their portfolios and hedge against traditional market risks.

Gone are the days of firms simply investing in traditional assets such as equities and fixed income securities. Amid concerns about economic uncertainty, geopolitical tension and conflict, and inflationary pressures, sophisticated investors are aggressively pursuing opportunities in the alternative investments space. One recent survey by private equity firm KKR found that family offices expect their alternatives allocation to grow from 42% to 52% between 2022 and 2024. 

The Web3 ecosystem offers a unique opportunity for diversification as it’s a nascent industry with a relatively low correlation to traditional financial assets. By investing in the Web3 private markets, firms can access early-stage deals and potentially generate explosive returns, while at the same time diversifying away from traditional asset classes such as equities and bonds. It’s a win-win situation. 

Growing acceptance of digital assets 

Finally, in recent years, we have seen far more acceptance of digital assets as a legitimate asset class. This has led to increased institutional investment in the space. 

Much of this can be attributed to the regulatory landscape, which has evolved significantly. Across the world, there have been major developments here. In June 2023, for example, Europe introduced the Markets in Crypto-Assets (MiCA) regulation. This framework is designed to protect investors and preserve financial stability, while simultaneously fostering innovation and promoting the attractiveness of the digital asset sector. More recently, in January 2024, the US Securities and Exchange Commission (SEC) approved Bitcoin exchange-traded funds (ETFs). This provided much-needed regulatory certainty for institutional investors, paving the way for increased participation in the digital assets market. 

When regulators create pathways for innovation, institutions follow with capital and conviction.

There’s no doubt that these regulatory developments have had a huge influence on investors’ attitudes towards digital assets. Once seen as a risky asset class, Web3 is now viewed as a legitimate investment opportunity among institutional and HNW investors.

What’s in it for you?

With thousands of companies active across the Web3 ecosystem, the private market for digital assets is thriving today. To date, more than $100 billion in start-up capital has been raised from VC firms, hedge funds, private equity firms, and other sophisticated investors. This influx of capital is fuelling the development of ground-breaking technologies and shaping the future of the internet. It is also paving the way for a more equitable, decentralised world. 

For those who are not yet active in this market, now is the time to explore the landscape. Today, there is an abundance of opportunities for investors, particularly in the secondary market, which is growing rapidly and offering more liquidity than ever before. With the global regulatory backdrop becoming more favourable, and institutions increasingly embracing the asset class, the future looks very promising. By acquiring the necessary knowledge and adopting a strategic approach, investors can position themselves to capitalise on the significant potential of this burgeoning industry.

Omar-Shakeeb, CBDO SecondLane; Oleg Ivanov, COO SecondLane