Joel Monegro, Union Square Ventures analyst. Source: YouTube

When cryptocurrency investors talk of influential work in the space, they often point to an August 2016 blog post titled "Fat Protocols," written by an analyst at Union Square Ventures. That analyst, Joel Monegro, is now getting out of the traditional venture world to invest solely in crypto assets. Monegro recently left Union Square to start a crypto fund, joining forces with Chris Burniske, a blockchain expert formerly at ARK Investment Management, according to sources familiar with the matter. The firm—Placeholder Capital—is being structured using the venture model with a 10-year commitment from investors, said the sources, who asked not to be named because the founders haven't publicly talked about their plans. Most sources wouldn't divulge the likely size of the fund, but one said the partners are targeting about $100 million. Crypto funds are opening by the week as investors look to bet on the wild fluctuations in the prices of cryptocurrencies bitcoin, ethereum and litecoin, while also getting stakes in new projects being built on blockchain.

Yet, it's a challenging market for venture capitalists. Cryptocurrency projects are not like typical companies with a founder or two and equity to sell. Rather, they're made up of disparate developer teams building blockchain technology and, instead of selling stock for financing, they're distributing tokens or coins through what's called initial coin offerings (ICO). The new currency allows buyers to participate in their network, whether it's buying storage or paying for transactions, and also serves as an investment opportunity. But unlike investing in a company, there's no board seat to be had or preferred shares to own. VCs, who are used to proprietary deal flow and access to non-public information, are now just like everyone else. Furthermore, the assets can be viewed as unregulated securities. "This is new territory," said Nicholas Chirls, a partner at venture firm Notation Capital in New York which is putting a small percentage of its money into crypto investments. "This ecosystem and market is still so early that the structure of these crowd sales look very different from project to project."

Top ICOs of 2017 Name Start date Raised (millions) Tezos July 1 $228.60 EOS June 26 $189.30 Bancor June 12 $153 Status June 17 $95

Union Square at the forefront

Among traditional venture firms, Union Square has been at the forefront of the crypto movement, investing in crypto hedge funds run by Polychain Capital and MetaStable, and providing early capital to Coinbase, an exchange for buying and selling cryptocurrencies. Union Square is now gearing up to invest directly in ICOs or crypto token sales as soon as this year, said Albert Wenger, a partner at the New York-based firm. "We do many different things because we don't yet know what's going to work," Wenger told CNBC. "This is a fundamental innovation and a lot of interesting things will get built over time. A lot of other things are unclear, to put it mildly." Wenger confirmed that Monegro has left Union Square to start his own fund, but he declined to provide any details. Monegro didn't respond to a request for comment. Burniske declined to comment on the new fund except to say that he's not working on a hedge fund as "some have speculated." Last week, Burniske tweeted that he's left ARK to "create something of my own in #cryptoland."

ARK was the first public fund manager to invest in bitcoin, and Burniske held the title of blockchain products lead. In an interview with CNBC last year following the Brexit vote, Burniske called bitcoin a "disaster hedge," due to its low correlation with other assets that sink in periods of uncertainty or crisis.

Monegro, meanwhile, was influential in the blockchain space at Union Square. His widely cited post from August argued that the lion's share of the value in crypto is being captured by the major protocols -- bitcoin and ethereum -- as opposed to the applications running on top. That's in contrast to the internet, which saw applications like Google and Facebook attract much more valuable than the web's building blocks. "Tokenized protocols become 'fat' and its applications 'thin,'" Monegro wrote. Placeholder won't be the first crypto-specific venture fund. Blockchain Capital and Pantera Capital were both founded in 2013 and invest in a combination of blockchain-based start-ups and crypto tokens.

The VC debate

Other investors are diving into cryptocurrency in a big way. Forbes published a piece this week highlighting 15 new crypto hedge funds that are launching between this summer and the end of the year. On Wednesday, Ari Paul, who previously managed money for the University of Chicago and regularly blogs and tweets about crypto, said on Twitter that he's getting ready to launch a new hedge fund called BlockTower Capital. Ari Paul tweet And some of the companies involved are raising IPO-sized rounds even as their technologies or networks are still in the early stages of development. In the past month, crypto projects Tezos, EOS, Bancor and Status have raised over $660 million combined, according to Smith + Crown, a blockchain research, data and consulting group. By way of comparison, ICOs brought in $101 million in all of 2016. That kind of growth is hard to ignore. But traditional VCs are split over whether crypto is worth the risk. Like Union Square, Andreessen Horowitz has invested in Polychain after backing Coinbase, and Bessemer Venture Partners has spent this year studying the market, putting money into some funds and exploring potential coin investments. Ethan Kurzweil, a partner in Bessemer's Silicon Valley office, is working with his New York-based colleague Alex Ferrara to develop the firm's roadmap. "Our goal is to invest in emerging technologies as early as we can," Kurzweil said. "This started out as a topic in January and February, and we're at a point where we can invest equity in tokens." Other venture investors don't want to touch this stuff. David Golden, a partner at Revolution Ventures in San Francisco, referred to the ICO phenomenon as a "house of cards" and said there's a "Las Vegas speculative run" taking place. Roger Lee of Battery Ventures is highly skeptical of ICOs because "there's not a lot of disclosure or regulation around these offerings right now," he said. In other words, they look a lot like securities but they're not registered with the SEC.

One thing virtually all tech investors acknowledge is that blockchain, the underlying technology behind cryptocurrencies, is here to stay. The digital ledger is already being used for real-world applications like payments, mortgages, legal files and incorporation documents. While the structure may be uncomfortable for venture capitalists, they've seen how much money is potentially at stake. The price of ethereum is up 200-fold since the end of 2015, even after plunging 45 percent in the past month. VCs have to figure out how to add value in a world without board meetings and where Silicon Valley connections carry much less weight. Union Square's Wenger said that investors engaged in these projects can provide the same sort of help they do with start-ups, by promoting them, recruiting talent and providing technical feedback. "It's many of the same questions," Wenger said. "How do we get people excited about it, make people know it exists, foster adoption of it? If you were able to help companies figure out answers to these questions, you should be able to figure out how to help teams with the same sets of questions."

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