Investing in Crypto: A Look into 2022

With more than $50 billion in capital commitments across over 200 investments throughout 2021, Insight Partners had a banner year. While we invest in founders across a wide spectrum of businesses, this series focuses on outlining our theses on four verticals that we’re particularly excited about in 2022: artificial intelligence, fintech/crypto, cybersecurity, and healthtech. 

While fintech had a standout year, we’d be remiss if we didn’t go into deeper discussion on one of its clear breakout segments: crypto. Although many areas of crypto are still in their early days and the overall market continues to see high volatility, the latest cycle brought many first-time participants into the Web3 ecosystem, from retail to workers. 

Developer activity in particular skyrocketed, with the number of monthly active Web3 developers reaching a new all-time high (ATH) of 18,416 as of December 2021. The use of programmable blockchains has similarly increased to new levels, with the Ethereum ecosystem’s ATHs hitting 1.7M average daily transactions and reaching over 180M unique wallet users across over 3,700 dApps. We view this cycle’s largest impact as bringing many crypto infrastructure platforms to sustainable scale and creating several new Web3 ecosystems for founders to build innovative applications on top of.

In 2021, Insight double downed on its conviction in crypto and made several investments across the space. For core infrastructure, we co-led Taxbit’s Series B to help scale up its crypto tax software for consumers and enterprises, and also participated in the Series B of FTX, one of the largest crypto exchanges specializing in derivatives and trading with leverage. 
We also invested in a number of application layer plays like Candy’s Series A to support a leading NFT-collectibles and fan engagement platform for major league sports.

Insight expects to see continued growth throughout the crypto and broader Web3 ecosystem over the next few years. There are many areas where we are particularly excited about partnering with exceptional founders in 2022 and beyond. One standout segment is crypto infrastructure, where new entrants are building out the necessary picks and shovels to enable the Web3 world. Within the broader segment, there are a few themes we are actively tracking:

• Scaling Solutions – We saw record-breaking network traffic and congestion levels across several Layer 1s, leading to high gas costs in the Ethereum network. For these chains to truly see mainstream adoption and usage, we are actively looking to support players in the ecosystem that are helping enable a multichain future. Players who are supporting the Ethereum 2.0 transition into the more environmentally friendly proof-of-stake (PoS) consensus mechanism and building new chain ecosystems entirely are of particular interest. Specifically, we see the potential for  outsized opportunities across optimistic and zero-knowledge proof rollup technologies, alternative Layer 1s, staking infrastructure, and interoperability solutions.
• Data & Analytics Layers – 2021 brought in new ATHs for crypto, at one point increasing its overall market cap to over $3T. Price surges, volatility, and growing network congestion highlight the importance of making both on-chain and off-chain data increasingly available and indexable for retail traders, builders, and institutions alike. We are seeing growing interest from TradFi players to get involved in providing crypto financial products and from crypto-native players to use third-party providers to reduce build times. We believe there’s a large market opportunity across both the TradFi and crypto native worlds alike for data providers to play in. We are excited by companies working to provide critical data (e.g., mempool) through API-first tooling and dashboard visualization.
• Security – We view the potential of DeFi as a generational opportunity to elucidate the inner-workings of the global financial ecosystem and establish new paradigms of trust. We are actively seeing it in motion as on-chain participants work to uncover bad actors. But with these new systems of record, we are also seeing increasingly complex attack surfaces introduced within DeFi and hacks continue to persist. Some $1.3B funds were lost alone in DeFi hacks in 2021, more than doubling since a year prior. Collectively with other crypto scams, $14B in crypto left the ecosystem in 2021. We expect increasing regulatory pressure for crypto entities to identify bad actors and push to strengthen KYC/AML solutions. There are exciting opportunities to build leading crypto security, risk analytics, and insurance solutions to help protect retail and institutions from the effects of bad actors.

At Insight Partners, we have consistently backed category defining companies enabling the infrastructure for core Web2 internet movements, from Shopify’s e-commerce digital storefront builder to Postman’s API tooling platform. We are excited to bring our 26 years of Web2 software investing experience into finding and helping the best crypto and Web3 builders create generational companies.