{"id":51909,"date":"2025-11-21T16:25:39","date_gmt":"2025-11-21T21:25:39","guid":{"rendered":"https:\/\/www.cambridgeassociates.com\/?p=51909"},"modified":"2025-12-02T12:23:14","modified_gmt":"2025-12-02T17:23:14","slug":"blockchain-and-crypto-vc-funds","status":"publish","type":"post","link":"https:\/\/www.cambridgeassociates.com\/en-as\/insight\/blockchain-and-crypto-vc-funds\/","title":{"rendered":"Unlocking Innovation with Blockchain and Crypto Venture Capital Funds"},"content":{"rendered":"

Blockchain and crypto-focused<\/span> 1<\/a><\/sup> venture capital (BCVC) funds offer a compelling opportunity alongside traditional venture capital (VC) strategies. While some investors question the merits of blockchain technology and may overlook these funds, this could mean missing out on exposure to managers and innovations with the potential to transform industries and deliver outperformance.<\/span> 2<\/a><\/sup> However, investors should expect significant dispersion in blockchain-focused funds, similar to that of other VC funds. As such, rigorous diligence in fund selection and thoughtful integration into a well-diversified VC portfolio will be essential to enhancing overall portfolio returns. For investors with VC exposure, this may mean allocating up to 1%\u20132% of the total portfolio exposure to BCVC. In this piece, we explore the market dynamics shaping cryptoassets,<\/span> 3<\/a><\/sup> share our rationale for including BCVC in VC portfolios, and outline key considerations for integration into family and institutional portfolios.<\/p>\n

The evolving blockchain landscape<\/h2>\n

Since the first bitcoin block was mined more than 15 years ago, cryptoassets have grown from a niche experiment to a sector attracting major institutional capital (Figure 1). Early adoption was driven by technologists and crypto \u201clibertarians\u201d that sought financial sovereignty in a volatile, low-liquidity environment. Their efforts laid the groundwork for broader participation, which spurred the rise of exchanges, altcoins, and increased trading. Setbacks such as the Mt. Gox collapse\u2014when the world\u2019s largest bitcoin exchange lost hundreds of thousands of bitcoins to theft and mismanagement in 2014\u2014exposed critical security gaps and prompted industry-wide improvements. Today, the sector\u2019s maturation is evident in real-world applications like decentralized finance (DeFi), tokenized assets, and enterprise blockchain solutions, with major institutions and governments piloting blockchain-based systems.<\/p>\n

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\nA distinction exists between direct liquid token exposure and thematic blockchain and crypto investing. Liquid tokens, such as bitcoin, are as the name suggests, publicly traded. As such, they have exhibited a higher observed correlation to risk assets. They are also more directly influenced by retail investor sentiment, particularly as liquid crypto markets operate 24\/7 and are easily accessible to individual investors. This contributes to their high observed volatility. For example, bitcoin has experienced 11 drawdowns exceeding 50% since 2011, with the most recent\u2014a 77% decline\u2014occurring from November 2021 to November 2022.<\/p>\n

Thematic blockchain and crypto investing, typically accessed through VC funds, offers diversified exposure to companies and projects building in the space (Figure 2). Given the generally illiquid nature of these investments, their observed volatility tends to be lower. While these investments are subject to the typical risks associated with early-stage VC\u2014such as high failure rates, uncertain business models, and limited operating history\u2014they also offer the potential for outsized returns.<\/span> 4<\/a><\/sup> Venture structures foster strong alignment between limited partners (LPs) and general partners and suit the extended development timelines of blockchain innovation. Their legal and operational frameworks support patient capital, enabling managers to realize value as projects mature.<\/p>\n

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Thematic blockchain and crypto investing can also be implemented via a hedge fund structure. Most hedge funds pursuing early-stage crypto investments use side pockets to manage illiquid assets, isolating them from the main portfolio to help reduce asset-liability mismatches. These structures can offer more frequent liquidity for the liquid portion of the portfolio and provide access to both liquid and venture-style opportunities, allowing investors to target venture-like returns. However, investments held in side pockets may remain illiquid for extended periods\u2014sometimes even longer than the typical term of a VC fund. As a result, LPs should carefully evaluate the fund\u2019s structure and liquidity terms, as the flexibility of a hedge fund does not necessarily extend to all underlying investments.<\/p>\n

For investors seeking strong alignment, a defined investment horizon, and patient capital suited to the extended development timelines of blockchain innovation, the longer-term orientation of BCVC fund structures may be more appropriate for accessing early-stage opportunities in the space.<\/p>\n

Performance<\/h2>\n

BCVC funds\u2019 strong performance track record is a key reason we believe they merit inclusion in VC portfolios. Over the past ten years, BCVC funds delivered a pooled net internal rate of return (IRR) that surpassed that of other VC funds (Figure 3). We do not attribute this outperformance to differences in fund size, as sizes have been largely comparable. Rather, we believe it is partly connected to exceptional gains in the broader crypto market\u2014including bitcoin\u2014which have increased interest in the space and technology.<\/p>\n

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\nExamining BCVC fund vintages reveals how timing and entry conditions can shape outcomes. Vintages launched during crypto \u201cwinters\u201d\u2014periods marked by sustained declines in cryptocurrency prices, negative sentiment, and reduced market activity\u2014have often benefited from lower entry valuations, less competition for deals, and exposure to resilient projects. These conditions have positioned such funds for strong performance as markets recover. For example, the IRR for the 2018 vintage of BCVC funds has been 39% since inception, highlighting the potential for outsized returns when capital is deployed counter-cyclically.<\/p>\n

Beyond IRR, other performance metrics also highlight the strength of BCVC funds. Despite the relatively short history and limited universe of institutional-quality BCVC funds prior to 2018, available data indicate that total value to paid-in (TVPI) multiples have generally been robust (Figure 4). Realized returns (DPI) remain modest, but this pattern is not unique to BCVC; it reflects the long time horizons and exit dynamics typical of VC investing more broadly.<\/p>\n

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Beyond absolute return metrics, funds have also compared favorably to public equities in relative terms. Our modified Public Market Equivalent (mPME) analysis demonstrates that, over the past ten years, BCVC funds have outperformed major public equity indexes\u2014including US equities, which themselves have delivered strong returns\u2014highlighting their potential to enhance value within diversified VC portfolios (Figure 5).<\/p>\n

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Performance dispersion is another important consideration. BCVC funds exhibit a range of outcomes similar to the broader VC universe. The interquartile range of returns over the past ten years reached approximately 20 percentage points (ppts)\u2014slightly wider than the 15 ppts observed in non-BCVC funds, and much greater than the sub-5 ppt range typical of public equity strategies (Figure 6). This variability underscores the importance of rigorous manager selection and thorough due diligence, as well as thoughtful manager sizing and new fund commitment pacing, since the difference between top- and bottom-quartile performers can be substantial.
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Thematic drivers<\/h2>\n

Another key reason to include BCVC funds with traditional VC strategies is their unique exposure to new and evolving areas of innovation. Several key trends\u2014such as the convergence of crypto and artificial intelligence (AI), tokenization of real-world assets, and the rapid evolution of stablecoins<\/strong><\/a>\u2014demonstrate the unique value creation opportunities accessible through BCVC-backed ventures.<\/p>\n