PitchBook News - Bitcoin believers hold on for dear life

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The Weekend Pitch

May 23, 2021

Presented by Uncommon Giving

Hold on for dear life. It's an oft-heard rallying cry for denizens of the super-volatile cryptocurrencies market. That "HODL" sentiment has taken on special urgency this week after bitcoin sank to fresh lows. The digital coin fell as low as $30,000 on Wednesday, wiping out many of the gains it has made in recent months, before recovering slightly to just over $37,000 at the time of this writing.

The drop, which followed reports of the Chinese government's crackdown on the use of digital coins, merely accelerated a sell-off that had begun earlier in the month. Several other cryptocurrencies also tumbled.

I'll tell you why the latest downturn, though predictable, also revealed some awkward truths about the technology. But first: welcome back to The Weekend Pitch. I'm Andrew Woodman and you can reach me andrew.woodman@pitchbook.com or on Twitter at @adwoodman.

(Photo illustration by Mara Potter/photo via Getty Images)

I knew we were in for another crypto bust when friends in one of my WhatsApp groups—some of whom had never held crypto—started asking me about making investments in dogecoin, a wildly overvalued digital token based on the Shiba Inu meme. When everyone wants in, it's time to get out.

Experienced crypto investors have good reason to be sanguine about bitcoin's latest drop. Despite the volatility, blockchain-based startups have attracted a lot of long-term capital. VC investments in crypto startups hit an all-time high in the first quarter of this year, with $3 billion invested across 239 deals, according to PitchBook data. To be sure, these investors aren't just backing crypto, but also the underlying technology—blockchain—that is integral to the distributed-ledger concept and larger ambitions surrounding decentralized finance.

That said, not all blockchains are created equally. Some of the most popular cryptocurrencies are based on the earliest iterations of blockchain technology, which were arguably not built for the market as it exists today.

For example, bitcoin, dogecoin, ethereum and a lot of major cryptocurrencies run on blockchain using what is called a proof-of-work protocol. This essentially means a lot of computing power must be provided to a network of "miners" who crunch the numbers and make transactions happen. That requires using a lot of electricity. Earlier this year, a Cambridge University study estimated that the bitcoin network—which comprises all the mining power needed to validate transactions—uses more electricity every year than all of Argentina.

One cause of bitcoin's plunge was that Tesla said last week that it will no longer accept bitcoin over "environmental concerns." The electric car company, which takes pride in being a green transportation solution, was talking about proof-of-work electricity consumption. This is somewhat ironic, since Tesla founder Elon Musk had a hand in promoting currencies like dogecoin that run on proof-of-work protocols. Nevertheless, Tesla has a point.

Proof-of-work protocols have sustainability and scalability challenges, and not just because of the electricity they use. They can also be expensive for users, depending on the size of the transaction being processed.

There are sustainable alternative protocols such as proof-of-stake or delegated proof-of-stake. (These approaches don't lend themselves to succinct explanations, but suffice to say they're less resource-heavy.)

For this reason, the recent hype around unsustainable and outdated cryptocurrencies like bitcoin, or worse, dogecoin, seems a bit backward. No doubt bitcoin will recover, but it will be powered more by memes and the desire to get rich quick than by anything else.

VC investors know that blockchain technology has a great future ahead of it—but only if it's sustainable. One can't help feeling the bitcoin sideshow has become a distraction, especially when its lack of sustainability, and therefore scalability, means that its potential is likely limited.

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Did you know ...

(zf L/Getty Images)

... That the changing nature of cybersecurity breaches is leaving gaps in corporations' insurance protections? That's creating opportunity for a gaggle of venture-backed insurtech startups looking to fill a need for cyber-specialized coverage plans.

Among the players targeting this market are Coalition, QOMPLX and Corvus Insurance. These three companies have raised more than $570 million in combined VC funding through Q1, according to PitchBook data. Read more in a preview of our latest piece of Emerging Tech Research.

Quote/Unquote

"Europe hasn't missed out on the SPAC boom; it's just coming a bit later compared with the US."

—Anthony Attia, global head of primary markets and post-trade at Euronext, on Europe's increasing SPAC activity

Datapoints

Global private capital raised dropped by 22% year-over-year in the trailing 12 months as of Q1, according to PitchBook's Q1 2021 Private Fund Strategies Report. Fundraising totals fell across all categories except for secondaries (which roughly doubled to $85.7 billion) and venture capital (up 4.3% to $126.6 billion).

Deal Flow

(Richard Drury/Getty Images)

Private equity firms' push into pro sports hit a snag this week when the operator of German soccer league Bundesliga reportedly abandoned talks with bidders looking to purchase a minority stake in the league's overseas media rights at a valuation of €2 billion (about $2.4 billion).

The good news? Buying sports teams is still an option for PE executives, and US soccer is a big focus lately. Blackstone exec David Blitzer has reportedly expressed interest in acquiring MLS club Real Salt Lake.

And Ted Segal, founder of real estate-focused EJS Group, is closing in on a deal to acquire the Houston Dynamo for around $400 million, Sportico reported.

For more insights about private equity's growing interest in pro sports, check out our recent research note on the topic by PitchBook analyst Wylie Fernyhough.

The Chatter

Not arguing for or against Bitcoin. But for all the Tweets laughing about the valuation falling so quickly, there still seems a pretty strong “glass is 4x full” story year-over-year pic.twitter.com/jEJS5rHgSP
— Mark Suster (@msuster) May 20, 2021

This edition of The Weekend Pitch was written by Andrew Woodman, Adam Lewis and Alec Davis. It was edited by Alec Davis and Angela Sams.

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PitchBook News - Bitcoin believers hold on for dear life

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