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Why do traditional institutions like to invest in crypto wallets?

  1. What is a crypto wallet
  2. What kind of business model is an encrypted wallet?
  3. Why do traditional institutions invest less in other areas of cryptocurrency?
  4. Why do crypto funds choose wallets?

In the first half of 2021, a total of 404 companies in the cryptocurrency field received financing, with a total financing of 7.271 billion U.S. dollars. Among them, nine crypto wallet-related companies received US$863 million in financing, far exceeding the industry average. The crypto wallet industry has become one of the most gold-absorbing industries in the cryptocurrency field except for trading platforms. According to public statistics, 13 crypto wallet-related companies will raise funds in 2021, raising a total of US$890 million from the market. One of the largest financings was a $380 million Series C financing of crypto hardware wallet manufacturer Ledger. This was the second largest single financing in the cryptocurrency industry at the time, second only to Bitmain's $400 million financing in 2018.

There are many traditional investment institutions that have previously focused on Fintech (financial technology) in the list of institutions participating in the financing of the crypto wallet industry. However, this part of institutions rarely invest in DeFi, which is more suitable for their focus. This has to be curious, why do traditional institutions like to invest in encrypted wallets?

What is a crypto wallet

Encrypted wallets can be divided into cold wallets and hot wallets according to whether they can be connected to the Internet. Cold wallets can be divided into hardware wallets, paper wallets, etc. according to different storage media. Hot wallets can also be divided into mobile wallets, web wallets, etc. according to networked tools. Etc.; according to whether it is on the chain or not, encrypted wallets can be divided into decentralized wallets and centralized wallets. In addition, encrypted wallets can also be classified according to types of public chain ecology, custody, etc.

After years of development, the threshold of encrypted wallet technology is gradually lowering, and an encrypted wallet product has been able to perform many functions. For example, hot wallets can be added to support offline creation and other functions to create cold wallets when the network is disconnected; in December 2020, the decentralized encrypted wallet, which has just received Binance Labs B round of 12 million US dollars in financing, has supported more than 60 public chains. , And this year, the number of public chains supported by imToken, which also received $30 million in financing in round B, has reached 12.

Therefore, for investment institutions, a simple classification of encrypted wallets does not make much sense.

What kind of business model is an encrypted wallet?

Starting a business in the Internet field, if revenue has not yet been generated or the revenue is far below the cost paid, the company's story to the capital must be inseparable from the growth rate, PV/UV, retention rate and other data, and these data ultimately point to "flow". Similarly, encrypted wallets also use traffic to attract traditional institutions into the game.

Just before the two financings, the business model of the established crypto wallet and transaction provider Blockchain.com, established in 2011, has been continuously questioned both inside and outside the industry. At the same time, the company's longest-serving chief operating officer Liana Douillet Guzmán and executive vice president of finance Chris Lavery also announced their departure. In 2019 alone, Blockchain.com has five executives who have chosen to leave.

Although other businesses are not outstanding, 31 million authenticated users and 65 million wallets from more than 200 countries are the confidence that Blockchain.com can obtain huge financing. On the last day of the Chinese New Year holiday in 2021, Blockchain.com announced that it has received 120 million US dollars in financing. Subsequently, in less than a month, Blockchain.com received another 300 million US dollars in financing.

Of course, Blockchain.com is also actively exploring other areas of business. According to CoinMarketCap data, the daily trading volume of the trading platform created by Blockchain.com is only $13 million. The top 20 trading platforms have an average daily trading volume of more than US$1 billion.

The flow story is not only sought after by investment institutions, but the capital market is no exception.

Opera, a multi-platform web browser founded in 1995, announced on July 24, 2020 that the number of monthly active users of its built-in encrypted wallet reached 170,000. Six trading days after the news was announced, Opera Group had a cumulative increase of 13.37%. Sitting on the flow entrance, how to cash out has become a difficult problem for crypto wallets. At present, the main profit models of encrypted wallets on the market are mainly divided into two types: to B and to C.

To B field:

  • Undertake the cryptocurrency custody of some large institutions and users with large funds, such as the institutional-level custody of MetaMask Enterprise Edition and Cobo wallet custody;
  • Provide financial derivatives services for institutions. For example, BitGo provides institutional customers with digital wallets to help them perform asset portfolio management and loan operations.
  • Cooperate and integrate with some public chains, etc.

Compared to the to B field, the to C field is the source of profit for most encrypted wallets.

To C field:

  • Earn handling fees through built-in functions such as OTC, small currency exchange, and integration of Swap, such as Bitpie's OTC (now closed) and so on. However, in this part of the business, the amount of income varies greatly for different wallets.
  • Provide PoS project staking business, for example, most wallets support wallet users to participate in ETH 2.0 staking after charging a certain fee.
  • Sell hardware wallets. There are also some hardware wallets that are sold at low cost and profit through other channels.

Maizi Wallet, which has more than 2 million users, said to Ludong that the current main sources of income are Staking and Swap, but Maizi Wallet cares more about the cultivation of user habits than short-term business realization.

At present, we cannot obtain the internal data of encrypted wallets from the open market, but we can refer to Coinbase, which is already listed and related to the business type.

Judging from Coinbase's public statements, from 2019 to 2020, its pledge income increased by 5438.38% and custody income increased by 516.85%. The two businesses contributed approximately US$30 million in revenue to Coinbase in 2020.

Of course, there are also wallets that choose to set up an investment institution after obtaining institutional investment and rely on investment to make a profit. After all, wallets with massive amounts of user data may best understand the needs of users. After expressing that it would not set up its own investment institution at present, Maizi Wallet also agreed with the behavior of wallet companies to create their own investment institutions, just as Tencent discovered Pinduoduo through WeChat and invested in Pinduoduo.

Why do traditional institutions invest less in other areas of cryptocurrency?

According to CB Insights data, in the first half of 2021, a total of 404 companies in the cryptocurrency field received financing, with a total financing of 7.271 billion U.S. dollars. Among them, nine crypto wallet-related companies received US$863 million in financing, far exceeding the industry average.

In the field of cryptocurrency, the alternative investment fields are not only wallets. Why do most traditional institutions invest less in fields other than wallets?

Before answering this question, one must think about why the investment institution does not buy Bitcoin at 4,000 USD, or even 10,000 USD or 20,000 USD, but at 30,000 USD or 40,000 USD?

One of the most important points is that, whether as a risk asset or a safe-haven asset, the market value of encrypted assets is too small compared to other types of financial markets. Therefore, at 4,000 USD and 10,000 USD, the market value of Bitcoin determines that it cannot enter the asset portfolio of larger-scale capital under management. When the price of Bitcoin rises to $30,000, Bitcoin has become an asset that must be held in certain types of investment (even if the proportion is small). The general 500 fund needs to buy Tesla stock compulsorily.

Similarly, the market for other industries in the cryptocurrency field is still not big enough.

Take the lending market as an example. At present, the total borrowing volume of the entire DeFi field, including ETH, BSC, and Heco, is 23.2 billion U.S. dollars. Among them, the largest mortgage lending platform Compound has a total borrowing of 6.9 billion U.S. dollars and the total number of wallet addresses is 380,000.

Marcus, an online lending platform launched by Goldman Sachs in 2016, currently has US$97 billion in deposits and US$8 billion in consumer loans, and has more than 4 million users in the United Kingdom and the United States. Of course, Marcus's benchmarking of the DeFi lending market is not an appropriate example, but this indirectly shows that DeFi coverage is small and the market size is not large enough.

Why do crypto funds choose wallets?

If we say that traditional institutions only understand the flow and the small market size, they choose to invest in encrypted wallets. So for investment institutions that have been immersed in the cryptocurrency industry for many years, why do they choose to invest in wallets?

In the field of cryptocurrency, encrypted wallet is not a stand-alone product, but an essential part of the ecology, especially with the rise of DeFi, the use of decentralized wallets has become an essential skill.

For investment institutions working on cryptocurrency, investing in crypto wallets is more of a 1+1>2 investment.

The wallet is the traffic entrance of DeFi, and at the same time, the wallet is also an indispensable part of the encryption ecosystem. For example, although Solana attracts users in its public chain design, it lacks an easy-to-use wallet software. The emergence of the Phantom wallet has attracted investment from industry capital including a16z and Coinbase investors.

Published on February 18, 2022

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