Andreessen Horowitz Went All In on Crypto at the Worst Possible Time
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Andreessen Horowitz Went All In on Crypto at the Worst Possible Time

Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’

By BERBER JIN
Thu, Oct 27, 2022 9:09amGrey Clock 5 min

As cryptocurrency prices soared last year, no investor bet more on the sector than Andreessen Horowitz.

The storied venture-capital firm had developed a reputation as Silicon Valley’s greatest crypto bull, thanks largely to a 50-year-old partner named Chris Dixon who was one of the earliest evangelists for how the blockchain technology powering cryptocurrencies could change business. His unit was one of the most-active crypto investors last year, and in May announced a $4.5 billion crypto fund, the largest ever for such investments.

The timing wasn’t good.

Prices for bitcoin and other cryptocurrencies have plunged this year in the midst of a broad market downturn, erasing billions of dollars in paper gains for Andreessen’s funds. Consumer demand has vanished for some of the firm’s most-prized crypto startups, while others are facing increased scrutiny from regulators.

Andreessen’s flagship crypto fund shed around 40% of its value in the first half of this year, according to people familiar with the matter. That decline is much larger than the 10% to 20% drops recorded by other venture funds, which have largely avoided the risky practice of purchasing volatile cryptocurrencies, according to fund investors.

Despite the record cash pile, Andreessen has dramatically slowed the pace of its crypto investments this year.

Now Mr. Dixon has to convince nervous investors that Andreessen didn’t overplay its hand for the May fund, which other crypto venture capitalists said is too large for a sector headed into a so-called crypto winter.

“They’ve just pushed it so far with crypto that I’m not sure they can rebalance,” said Ben Narasin, a general partner at the VC firm Tenacity Venture Capital.

In an interview, Mr. Dixon said he remains faithful to the crypto-centric vision of the internet called Web3 that underpins Andreessen’s push into the sector—a view that blockchain versions for a range of services will return financial control and power to users in the form of cryptocurrencies they can earn and trade.

Mr. Dixon said that the sector is still in the early stages of acquiring users and that he isn’t sure when mass adoption of blockchain services will occur. Crypto “is about the political and governing structure of the internet,” he said. “We have a very long-term horizon.”

Mr. Dixon’s path from the periphery of Andreessen mirrors the firm’s transformation into a crypto powerhouse.

A coder from childhood who earned master’s degrees in both philosophy and business, he helped found and sell two startups—one in cybersecurity and the other in e-commerce—and co-founded the VC firm Founder Collective. He also nurtured interests in such emerging technologies as virtual reality and 3-D printing.

He joined Andreessen in 2012. The firm, founded three years earlier by Marc Andreessen and Ben Horowitz, was quickly becoming one of the biggest and most influential tech investors, driven by Mr. Andreessen’s famed mantra that “software is eating the world.”

When many major investors still dismissed bitcoin as little more than a haven for money launderers and speculators, Mr. Dixon championed its possibilities, penning blog posts—something of a gospel among young crypto entrepreneurs—that described how bitcoin would create a new, decentralised financial system. Within two years, Andreessen had invested almost $50 million into bitcoin-related projects, including the cryptocurrency exchange Coinbase.

Mr. Dixon’s zeal for the area increased with the 2015 launch of Ethereum, which used the same type of blockchain-based, distributed record-keeping to let developers build applications beyond payments. Mr. Dixon likened Ethereum’s arrival to the creation of the iPhone App Store and said it showed that the crypto-investing universe was larger than imagined. He told Messrs. Andreessen and Horowitz that he wanted to shift his focus away from traditional investing and start a dedicated crypto fund, said people familiar with the matter.

The $350 million crypto fund, launched in 2018, was the first of its kind created by a traditional venture firm. Andreessen remained a bull that year as bitcoin and other cryptocurrencies lost the majority of their value, and raised a second crypto fund in 2020 totalling $515 million.

Mr. Dixon and his team also increasingly touted their vision for Web3. They argued that blockchain’s creation of currency-like tokens for users could give them more control and financial benefit for blockchain-based versions of services such as ride-sharing and social media, undermining the power of dominant tech monopolies.

In addition to investing in crypto companies, Andreessen purchased the tokens they created, effectively betting separately on the company and its product. The unconventional strategy delivered windfalls during the crypto bull market but also made the deals riskier.

As of the end of last year, the first crypto fund had multiplied its initial investment by 10.6 times after fees, making it the best-performing fund on paper in Andreessen’s history, according to documents viewed by The Wall Street Journal.

Andreessen returned over $4 billion of shares to its investors in the two months after Coinbase went public through a direct listing in April 2021, public filings show, making it one of the most-lucrative bets ever made in venture-capital history. Andreessen’s third venture fund, which backed Coinbase in 2013, saw a paper gain of 9.7 times after fees as of Dec. 31, trailing only the first crypto fund in terms of performance at the time, the documents showed.

Buoyed by the returns, Andreessen went on a fundraising blitz. It set out to raise $1 billion for its third crypto fund and ultimately raised $2.2 billion in June 2021.

Mr. Dixon said the crypto team’s strategy was to use its cash pile to write large checks into startups promising to reinvent everything from digital art to online gaming using the blockchain. The aggressive approach often precluded it from coleading rounds with other investors and made the firm a significant shareholder.

Andreessen backed 56 U.S.-based crypto deals last year and was the second-largest crypto funder in terms of investment volume after Coinbase Ventures, according to PitchBook Data Inc. Some early investments seemed to take off. The valuation of OpenSea, a nonfungible token marketplace, soared by over 100 times to $13 billion in January 2022, ten months after Andreessen led an early funding round.

In its push to dominate the sector, Andreessen discarded established investment norms. In November, its investors tried—and failed—to invest in Magic Eden, an NFT marketplace, even though the firm already backed OpenSea, said people familiar with the matter. Venture capitalists have long avoided backing potential rivals because it damages their reputation with founders who dislike the practice. Mr. Dixon said the fund doesn’t back companies that directly compete with its existing portfolio.

Within months, the market turned.

Demand for many Andreessen-backed companies vaporised as users dumped their crypto holdings. OpenSea’s monthly trading volume has plummeted since its December funding round in the midst of a broader collapse in the market for NFTs, while Coinbase’s monthly active users declined 20% in the second quarter from last year’s fourth-quarter peak of 11.2 million. Both companies have cut around one-fifth of their staff this year.

Andreessen is also contending with harsher regulatory scrutiny of crypto startups and the funds that backed them, which is threatening to put an end to the era of loose oversight that enabled the creation of thousands of cryptocurrencies.

The firm is making adjustments. It announced nine crypto startup deals in the third quarter, down from a high of 26 crypto deals in the fourth quarter of last year, according to PitchBook. The firm also marked down the value of its second and third crypto funds this year, though the declines aren’t as severe as what the first crypto fund endured, people familiar with the matter said.

Meanwhile, the firm’s crypto investments are plunging. Solana, an upstart cryptocurrency that the firm bought in June 2021, has shed over 80% of its value since the beginning of the year. In the first six months of this year, Andreessen lost $2.9 billion of its remaining stake in Coinbase as the crypto exchange’s stock price cratered by more than 80%.

Mr. Dixon said the market’s downturn is an opportunity for the fund to continue backing crypto entrepreneurs, similar to what it did in previous down markets.

“What I look at is not prices. I look at the entrepreneur and developer activity,” Mr. Dixon said. “That’s the core metric.”



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The End of Japan’s Negative Rates Will Be a Slow-Moving Tsunami

Long-term effects of positive Japanese rates could be profound—on everything from mortgage rates to U.S. government finances

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Japan’s stocks have reached levels that haven’t been seen for 34 years . The country is likely to hit another milestone soon: Its central bank could raise interest rates for the first time in 17 years as soon as Tuesday.

Higher, and positive, Japanese rates won’t reshape markets overnight. But the long-term effects could be profound, particularly if U.S. growth heads structurally lower for any reason, further narrowing the yield advantage of many U.S. assets. Japan is the single largest overseas holder of U.S. Treasurys, a major overseas lender, and an export heavyweight whose corporate earnings—and stocks—have been significantly supported by the ultra cheap Japanese yen. More Japanese capital staying at home could eventually impact the price of everything from U.S. mortgages to infrastructure finance in the developing world.

For much of the past two years, Japan has swum against global monetary tides, maintaining its ultra low interest-rate regime. But now, as most other major central banks are about to cut rates, the Bank of Japan is poised to break the trend again. Domestic media reported over the weekend that Japan’s central bank will end its negative interest rates, which have been in place since 2016, during its policy board meeting on Monday and Tuesday.

The decision would come after mounting evidence that the job market is on an increasingly strong footing , after years of stagnant wage growth. Unions secured an average salary increase of 5.28% , according to the first-round results of Japan’s annual spring wage negotiations, the Japanese Trade Union Confederation said last week. For the entire decade ending in 2022, the final annual increase never exceeded 2.4%.

Much likely won’t change in the short term. The Bank of Japan will probably pace its rate increases slowly: The past couple of years have, if anything, reaffirmed its reputation for moving slowly and deliberately. Moreover, while inflation is still high by Japanese standards—2.2% in January—it has already cooled from the peaks of last year.

Japanese bond yields have picked up, but they are still substantially lower than in the U.S. The rate differential between 10-year government bonds in the U.S. and Japan stands at 3.5 percentage points. That is significantly lower than the 4.2-percentage-point gap of a few months ago, but still way higher than the 1.5 percentage points of three years ago.

Even so, a narrowing rate gap—especially if the Fed cuts rates later this year, as seems likely—will support the Japanese yen . That could damp enthusiasm for rip-roaring Japanese stocks . They would become more expensive in dollar terms for foreign investors, who have been significant drivers of the rally. A stronger yen would also hit profits at some Japanese companies , especially big exporters.

Likewise, gradual interest-rate increases in Japan probably won’t change investment flows much in the short term. But it could be a different story down the road if the shift back to positive rates proves sustainable.

Japanese individuals and companies have been big investors abroad in search of higher yield for decades. The country’s foreign-portfolio investments stood at the equivalent of $4.2 trillion at the end of last year. A big chunk of that comes from Japanese pension funds and insurers, who would suddenly have more attractive options at home. Japanese investors, for example, hold around $1.1 trillion of Treasury bonds, making them the largest foreign owner.

Japanese investors have been scouring the globe for better returns for as long as most investors can remember. If that starts to change, the effects will be felt nearly everywhere—sooner or later.

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