Anchorage: $350M to further integrate digital assets into the global economy
Series D Announcement
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Last March, I wrote about the first federally chartered digital asset bank: Anchorage. Fast forward almost 10 full months, and Anchorage is back with a monster Series D fundraise.
The Announcement
First, let's discuss the actual announcement. Anchorage announced a $350M Series D fundraise that values the company at over $3B!!
The round is led by KKR, and additional participants include Goldman Sachs, Alameda Research, Andreessen Horowitz, Apollo credit funds, Blockchain Capital, Delta Blockchain Fund, Elad Gil, GIC, GoldenTree Asset Management, Innovius Capital, Kraken, Lux Capital, Senator Investment Group, Standard Investments, Thoma Bravo, and Wellington Management.
There are two major takeaways when I first saw this:
Huge jump in valuation
The institutional support from players like KKR, Apollo, etc.
Let's break it down.
The Context: Crypto growth in 2021
Crypto adoption and momentum has increased in 2021
In my original writeup, I highlight a few key market factors to watch:
Positive: Further crypto adoption & momentum
Uncertain: Regulation
In 2021, the early bullish trends of crypto have continued. Crypto is Pandora's Box, and 2021 is the year somebody opened it, and it will never return back to it's original state.
The overall market capitalization of cryptocurrency has grown tremendously. The market cap is (in my opinion) the best way to look at the overall production / inflow of wealth into the space (Note: this high-level view also has flaws). So consider a few of these metrics:
Since my last write up: ~60% (from ~$1.4T to $2.2T)
Year-to-date (YTD): +3x (from $0.7T to $2.2T)
Year-to-date to all-time highs (ATH): +4X (~$0.7T to ~$3.0T)
Sustained 3-4X growth YTD!! That is truly incredible.
Now, here is where every boomer in the country screams asset bubble at me. Maybe it is to some extent, but I already wrote about why we are likely very early in the macro trend.
And if you take a step back, consider the fact that the traditional assets under management market is valued at ~$100T (and growing). Then consider that crypto has utility. Entire companies will be built in this space. So the $100T is likely not even the full picture.
Net: Crypto is at most 2-3% of the total market. It is still a small chunk, and it likely has much, much more room to grow.
The growth has been driven by strong underlying factors
Many people like to point to crypto growth as just momentum trading... but that is very lazy in my opinion. I attribute it to jealousy, FOMO, or an overall lack of understanding of the technology.
The fact is, however, this market is exploding in growth because of many strong underlying factors. Will it ever have a correction? Definitely. But it is here to stay. Consider these three underlying factors:
Applications & use cases
a. Digital ownership
b. Community
Institutional adoption
Increased investment
#1: Applications and use cases
One of the first things to understand about crypto is that these are not just store of value assets. Sure, Bitcoin is a great store of value, but there are also layer 1 protocols that people can build systems on.
The complexities and details require an entirely separate writeup, but for now, just know that people are building on top of these protocols. Similar to how you could build a company on the cloud. Crypto is the new frontier.
A: Digital ownership
The first bucket of use cases is digital ownership. Blockchain can provide a clear ledger of digital ownership.
The trendiest example is the non-fungible token (NFT). NFT has become a buzzword, and for many, they joke about it, but the technology is actually quite important.
In Q3 alone, over $10B of volume occurred in NFTs. Most people associate it solely with people paying exorbitant amounts for JPEGs, but there is more to it.
Exhibit 3: The seven types of NFTs
At its core, NFTs allow for irrefutable documentation of ownership on the internet. Chris Dixon does a great job explaining many use cases for NFTs, including art, access, music, games, etc. Without going down a rabbit hole, here are four company examples to explore:
Art: OpenSea
Music: Royal
Access: Proof
Games: Axie Infinity
B: Community
The second bucket of use cases is community. Crypto can help scale communities very rapidly. NFTs can actually help create community. For example, you can access the Bored Ape Yacht Club community if you own a Bored Ape.
Another example is a Decentralized Autonomous Organization (DAO). With a DAO, people can contribute money to a preset, determined cause. By contributing tokens (e.g., Ether), they gain equitable level of ownership towards that cause.
For example, a DAO was formed to buy a copy of the constitution. Within 7 days, the crypto community created a DAO and raised $40M to bid on the copy!
These are just a few examples. People are innovating very quickly in this space, and in a world that is increasingly digital, the need for digital ownership and community will only increase.
As a result, people are taking notice. As use cases increase, crypto assets gain utility. People need help using crypto. In November, DappRadar estimated ~2.8M active digital wallets, across a variety of use cases. Overall, the crypto world is gaining in value ($$) and participation (# of people).
#2: Institutional Adoption
In 2021, institutions also began participating in crypto heavily. This is the second strong underlying factor.
In the section above, we discussed the NFT craze. In 2021, institutions even began participating with Visa spending $150,000 on a cryptopunk!!
But this trend extended beyond just NFTs. For the first time this year, Sotheby's began accepting ETH for physical art. In their first auction with ETH, Sotheby's sold $12M worth of art.
And Sotheby's is not the only one. Thousands of businesses accept crypto as payment, including huge names like Microsoft, Starbucks, and Tesla.
And more brands like Budweiser (Exhibit 6), Pepsi, etc. are leaning into Web 3.0 by selling NFTs and getting Ethereum Name Service (ENS) addresses.
So maybe these are just super forward looking brands? Maybe. But even legacy institutions turned a corner in 2021. Many of the largest banks have begun purchasing crypto and financial instruments, like Bitcoin ETFs, continue to evolve.
Overall, 2021 was the year institutions really began realizing they had to be involved in crypto.
#3: Increased investment
Now, let's consider what the next few years of crypto looks like.
FAST.
Crypto exploded this year, but the velocity will only increase. We are, of course, discussing a large crypto fundraise today, but up until this point, ~$27B had already been invested in crypto companies... this year. Andreessen Horowitz alone launched a $2.2B crypto fund.
As a result, it is a safe prediction to say we will see:
A) More Layer 1 protocols being created (think Solana vs. Ethereum)
B) More companies being built on layer 1 protocols
The two combined will accelerate compounding growth of the entire space.
So what could stop crypto? Regulation?
One of the biggest concerns I identified in my last writeup was regulation. So what has happened since then? A lot. And overall, it is has gone well for Anchorage.
The bad: China bans crypto
The biggest blow to crypto came when China banned crypto. As one of the (if not the) largest Bitcoin miners, it was clearly a devastating blow when China took this step... but not really.
Just a few months later, the hash rate for Bitcoin has already fully recovered, meaning the network is stronger than ever. Sure, a large source of value (Chinese buyers) has been banned, but the Bitcoin networks showed some antifragility... it seemingly only got stronger.
The uncertain: The US Federal Government
Lately, there have been Congressional hearings. For many, the question is: what will the US Government do?
So far, it has been directionally positive. Anchorage was federally chartered as a digital asset bank, breaking a technological barrier.
Since then, the US Government has given more modest signally. There have been Congress members pushing to support blockchain technology, but they are a minority (for now). Meanwhile, the Infrastructure Bill discussed strict crackdowns on crypto. Ultimately, the bill only required 1099 issuance, which is a relatively modest and reasonable step.
Finally, the OCC released an interpretation clarifying that generally says cryptocurrency is allowed, but banks need a non-objection letter to participate. As I understand, these are fairly laborious. Overall, this is a "yes, you can do it, but it won't be easy." Banks can, however, just use Anchorage for custody instead!
The good: The First-movers
During this same time period, there are some regulators leaning into cryptocurrency. Here are four quick examples:
Miami Mayor Suarez pledges to take his next paycheck in Bitcoin (source)
New York City Mayor-elect goes full 'Tommy Topper' and pledges to take next THREE paychecks in Bitcoin (Source)
El Salvador legalizes Bitcoin as tender (Source)
The creation of the Digital Euro (Source)
From American cities to European Unions, 2021 was a year of regulators across the world being early adopters of crypto.
The Solution: Crypto-as-a-service
Up until this point in the article, we have only discussed the crypto market. All of this has occurred in the last 12 months, and I only lightly scratched the surface.
If you're overwhelmed. Good. You should be. It's a full on revolution.
And you're not alone. The market is moving FAST, and it is really challenging to keep up with.
Imagine you are a financial institution (FI). Your clients either have digital assets or want them. You want to keep their business, but how do you begin to support them? The FI could do two things:
A) Let their business walk
B) Attempt to support crypto
Option A is not ideal, but it is safe. Option B is likely a disaster waiting to happen. Most FI's do not have the engineering talent required to build a crypto platform. Even if they did, they may have to support tens or hundreds of different assets... securely.
That is a HUGE lift, and it is very expensive.
Instead, imagine if they could just purchase a platform that solved for this. Instead of tens of hundreds of integrations, ongoing maintenance, building hyper-sophisticated security platforms, etc., they just deploy one platform.
That is Anchorage.
Anchorage currently support 90+ assets, and founders Diogo Monica and Nathan McCauley have years of security expertise. It is the platform designed to remove the tradeoff of usability and security of digital assets. They conquer the complexity for you.
Note: In my last write up, I cover the different lines of their business if you would like more detail.
For now, just to summarize:
Crypto is exploding in growth
The market is complex and changing rapidly daily
Financial Institutions want to participate, but they are underequipped
Anchorage is developing the crypto-as-a-service platform make it easy for them
Put simply, Anchorage is the pick and shovel company in the middle of a gold rush.
The update: They are executing extremely well
Anchorage is a solution in a rapidly rising tide, but do not let that fool you. They are not just raising at this valuation because they are in the right place at the right time. They are executing EXTREMELY well.
Over the past year, Anchorage has:
3x increase in customers → winning accounts
8x increase in assets under custody → growth outpacing # of accounts indicates growth and increased value within accounts
10x increase in ARR → ARR growth outpacing assets under custody, indicating increase in revenue from alternative product lines
Beyond that, look at some of the customers / partners they have made public. On the one hand, they are the trusted / preferred partner of a cutting edge protocol like Filecoin. At the same time, they are supported by traditional asset management powerhouses Apollo.
It is the perfect barbell execution, and Anchorage is the 200 lb stud lifting the weight in the middle.
So in summary, Anchorage is:
Winning accounts at a rapid rate, from protocols to institutional names
Accounts are expanding their Anchorage usage by entrusting them with an increasing number of assets
They are cross-selling customers into newer products like lending
Their execution to this point is truly elite.
What's Next: Scale, Scale, Scale
This round of funding will bring the next wave of scale for Anchorage. In my mind, this will have two dimensions:
Scale the core business
Expansion of the offering
For the first, Anchorage will continue to expand their fastball (to channel my former baseball career): custody. Anchorage is an extraordinary product for securely storing digital assets without compromising usability.
In this space, Anchorage has a massive head start on competitors like Paxos. While they have 3x'd their customers, there is 10,20,30,40x more whitespace. In reality, so few institutions have begun entering the space. Continuing to win key accounts and onboarding new customers to core products like custody and brokerage is a pretty linear, immediate path to growth.
The second part will be expanding the offering. The two immediate first steps are A) lending and B) increasing the # of protocols & assets supported. Both of these steps are already well into motion. If you follow Anchorage, you can see they are constantly adding new asset support. In addition, their lending offering continues to grow (and could debatably now be part of the core offering).
The next steps, however, will be to onboard partners. Anchorage could easily white label their product to other B2C companies. Anchorage's Federal Charter differentiates them.
If you are B2C brokerage (e.g., TDAmeritrade) or payments platform (e.g., PayPal), it makes a lot of sense to simply pay Anchorage for crypto-as-a-service. Almost immediately, those FI's could plug crypto capabilities directly into their existing footprint and consumer base.
All of these options, however, are primarily limited by one thing... engineering scale.
In the past two years, employee growth has grown ~2.4x. Still, Anchorage is fundamentally limited by the number of engineers they can get in the door. The #1 priority with this new funding will be talent acquisition.
Regardless, Anchorage is a rocket ship that began lift off in 2021. I am very excited to see what 2022 brings for this amazing company.