(Bloomberg) -- In 2015, as Vitalik Buterin was scrambling to raise money for a blockchain he’d created called Ethereum, he traveled to Shanghai to meet a group of Chinese crypto enthusiasts.
Among them was Deng Chao, then an investment manager for the Chinese cars-to-energy conglomerate Wanxiang Group. Mesmerized by the 21-year-old’s ability to field complex questions while coding on his laptop, Deng convinced his boss to buy roughly $500,000 worth of Ether, the digital coin that runs on the Ethereum platform.
It was a spectacularly timed bet. Ether, which then traded at just over a dollar, is worth more than $2,300 today. Ethereum has become the second-largest blockchain network and this time it’s Deng who’s raising money. The 39-year-old is now head of investment for Wanxiang spinoff HashKey, which has raised $360 million for its third venture fund. It’s seeking to bump that up to $600 million, creating the largest Asian crypto investment pool on record, Deng said in an interview.
Deng is raising the stakes at a fraught time. After a year in which Bitcoin and Ether -- along with a host of other cryptocurrencies -- rallied to records, expectations of tighter monetary policy have brought a reckoning. Ether is down roughly 50% from its November peak.
The venture capital industry, which plowed more money into crypto firms in 2021 than in all previous years combined, started 2022 with a raft of deals at multibillion-dollar valuations. But after January’s rout in technology stocks and digital tokens, some venture capitalists are sounding the alarm.
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Deng is taking the current market turmoil in stride.
“There are bubbles in crypto every once in a while, but as a new technology, the trend is clear it’s getting more and more mature,” he said in an interview. “When the market cools down, it’s actually a good time to go treasure-hunting.”
HashKey parent Wanxiang’s record with Buterin -- now chief scientist for the Chinese firm’s blockchain division -- may help spur a few deals.
As institutional participation in the cryptocurrency sector increases, HashKey has bet on startups that provide crypto services to financial firms. Foremost among them is Blockdaemon, which hosts the computer nodes that make up blockchain networks for clients like JPMorgan Chase & Co. and Citigroup Inc.
On Thursday, the U.S.-based outfit said it raised $207 million from investors like SoftBank Group Corp.’s Vision Fund 2 and Tiger Global, more than doubling its valuation to $3.25 billion in four months. HashKey invested in Blockdaemon in May 2020 when it had only 16 employees and attracted clients via little more than a website.
Founder Konstantin Richter was looking for investors at the time who could help him expand in Asia, ideally a firm that straddled crypto and traditional finance. The round HashKey joined valued Blockdaemon at roughly $30 million, according to people familiar with the matter. HashKey spokespeople and Richter declined to comment. Blockdaemon has since established an Asia team, including most recently hiring a former Amazon Web Services executive to run sales in the region.
“It all started with the HashKey investment,” Richter told Bloomberg News.
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HashKey also invested in a range of Ethereum-based projects, including digital wallet maker imToken and encrypted chat tool Mask Network, as well as the smaller Polkadot blockchain along with some of the most-used apps running on top of it. All told, HashKey’s first two funds -- which raised a combined $100 million -- have delivered an estimated 11 times return on clients’ capital to date, according to a spokesperson.
“Since 2015 we’ve been interacting a lot with the developer community, especially in the case of Ethereum,” Deng said. “Our network is a strong asset.”
Investors in Fund 3 include major institutional investors, corporations, venture firms and family offices, a HashKey spokesperson said, declining to identify them citing non-disclosure agreements.
Equity investments now represent about 20% of HashKey’s fund allocation while the rest is put into digital tokens, Deng said. But he expects that proportion to go up for the latest fund, as more crypto startups are trying to develop services for institutional players.
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Where it won’t be investing much is China. Since Deng’s 2015 meeting with Buterin in Shanghai, Beijing’s stance on crypto has gotten increasingly tough. The tightening culminated last year, when authorities effectively banned most of the industry, declaring Bitcoin mining and trading in cryptocurrencies illegal.
Based in Hong Kong, HashKey operates in a more tolerant environment. Parent Wanxiang still runs a Shanghai non-profit that backs blockchain technologies that don’t have freely-traded, untraceable coins attached. China allows blockchain technology, so long as it’s not used for trading speculative tokens.
HashKey’s third fund will be massive by Asian standards if it hits its target, but it’s dwarfed by some U.S. pools. In November, San Francisco-based Paradigm launched a $2.5 billion crypto fund, overtaking the $2.2 billion fund raised by Andreessen Horowitz months earlier.
And the influx of VC money has its critics. They include former Twitter Inc. boss Jack Dorsey, who last year dismissed the involvement of venture firms in a space he says isn’t supposed to be centrally controlled.
But Deng argued investors can serve as a bridge between crypto acolytes and traditional financiers and regulators. “VC firms should play a different role in the Web3 era,” he said.
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