The Early Days: 2009-2015 Understanding Crypto Winters Crypto winters are characterized by: Sustained price declines across major cryptocurrencies (typically 70-90% from peak levels) Reduced venture capital activity with fewer deals and lower valuations Project failures and consolidation as weaker projects run out of funding Regulatory uncertainty often coinciding with market downturns Talent migration as professionals move to other sectors Historically, the blockchain sector has experienced several major downturns: 2018-2019: Following the ICO boom and subsequent regulatory crackdown 2022-2023: Triggered by macroeconomic factors and high-profile failures (Terra Luna, FTX) The Challenge for Fund of Funds Investors During crypto winters, fund of funds investors face unique challenges: 1. Manager Performance Dispersion Market downturns create significant performance dispersion among blockchain VC funds. While some managers struggle to maintain portfolio valuations, others use the opportunity to make high-quality investments at attractive valuations. 2. Limited Partnership Interest Institutional investors often reduce their appetite for blockchain investments during downturns, making fundraising more challenging for both underlying funds and fund of funds vehicles. 3. Due Diligence Complexity Evaluating manager skill becomes more difficult when most portfolios are experiencing mark-downs. Traditional performance metrics may not accurately reflect manager quality during these periods. Identifying Resilient Blockchain VC Funds Our experience managing through multiple crypto cycles has identified several key characteristics of resilient blockchain VC funds: Strong Fundamental Analysis Capabilities The most successful blockchain VC funds during downturns are those that: Focus on technology fundamentals rather than token price movements Conduct thorough technical due diligence on blockchain protocols and applications Understand the competitive landscape within specific blockchain sectors Evaluate long-term adoption potential beyond current market sentiment Disciplined Investment Approach Resilient funds typically demonstrate: Consistent investment criteria that don't change based on market conditions Appropriate position sizing to weather portfolio company challenges Stage-appropriate investing with sufficient capital reserved for follow-on rounds Geographic diversification across different regulatory environments Operational Excellence Top-performing blockchain VC funds during downturns exhibit: Strong portfolio support helping companies extend runway and pivot strategies Network effects that provide value beyond capital Regulatory expertise to navigate evolving compliance requirements Technical advisory capabilities to guide product development decisions Financial Discipline The best funds maintain: Conservative cash management with sufficient dry powder for opportunities Realistic valuation practices that reflect market conditions Transparent reporting on portfolio performance and challenges Appropriate fund terms that align interests through market cycles Strategic Approaches for Fund of Funds Based on our analysis of multiple crypto cycles, we recommend several strategic approaches for fund of funds investors: 1. Counter-Cyclical Investing Crypto winters often present the best vintage years for blockchain VC funds. Consider: Increasing allocation during downturns when competition for quality deals is reduced Focusing on emerging managers who may offer better terms and access Targeting specific sectors that remain resilient during market stress 2. Enhanced Due Diligence During crypto winters, standard due diligence processes should be enhanced with: Technical assessment capabilities to evaluate blockchain projects independently Regulatory compliance review given evolving regulatory landscapes Stress testing scenarios to understand fund performance under various conditions Reference checking with technical experts beyond traditional LP references 3. Portfolio Construction Strategies Effective portfolio construction during crypto winters includes: Vintage year diversification to smooth out cycle-related performance variations Sector diversification across infrastructure, applications, and enterprise solutions Geographic diversification to benefit from different regulatory approaches Manager style diversification between generalist and specialist approaches 4. Active Monitoring and Support Fund of funds should provide enhanced support during downturns through: Regular manager check-ins to understand portfolio challenges and opportunities Cross-portfolio insights sharing learnings across different managers Regulatory updates keeping managers informed of relevant developments Network facilitation connecting managers with relevant expertise and resources Opportunities in Crypto Winters While challenging, crypto winters also present significant opportunities: Quality Deal Flow Reduced competition for high-quality investment opportunities Attractive valuations for fundamentally sound projects Talent availability as teams from failed projects become available Infrastructure focus as attention shifts from speculation to building Manager Selection Emerging manager opportunities with better terms and potentially higher returns Team stability assessment identifying managers who retain talent through downturns Strategy differentiation separating skilled managers from market beta Market Education Regulatory clarity often emerges as governments develop comprehensive frameworks Institutional learning as traditional investors gain experience with blockchain cycles Technology maturation as focus shifts from hype to practical applications Case Study: Lessons from Previous Cycles Our analysis of blockchain VC funds from the 2018-2019 crypto winter reveals several important lessons: Top Quartile Characteristics Funds that performed in the top quartile during this period typically: Maintained disciplined investment pace throughout the downturn Focused on infrastructure and enterprise applications rather than consumer speculation Provided significant operational support to portfolio companies Had sufficient capital to support companies through extended development cycles Common Failure Modes Underperforming funds often exhibited: Over-concentration in speculative consumer applications Insufficient reserves for follow-on investments Lack of technical expertise to evaluate projects independently Poor portfolio company support during challenging periods Conclusion Crypto winters, while challenging, represent some of the best opportunities for sophisticated fund of funds investors. By focusing on manager fundamentals rather than short-term performance, implementing enhanced due diligence processes, and maintaining a long-term perspective, fund of funds can build portfolios positioned to benefit from the next cycle of blockchain innovation. The key is to remember that blockchain technology continues to evolve and find new applications regardless of token price movements. The most successful fund of funds investors are those who can identify and back the managers best positioned to capitalize on these long-term trends. At Brook Technology Capital VCC, we leverage our experience across multiple crypto cycles to identify resilient blockchain VC funds that can deliver strong returns through all market conditions. Our disciplined approach to manager selection and portfolio construction has enabled us to navigate previous downturns successfully while positioning our investors for the next wave of blockchain innovation. This analysis is based on Brook Technology Capital's proprietary research and investment experience. Past performance does not guarantee future results. For more information about our investment approach, please contact our team. Individual angel investors with technical backgrounds Small, specialized funds focused exclusively on crypto Corporate venture arms of tech companies exploring new technologies During this period, total annual blockchain VC investment rarely exceeded $100 million globally, with most deals being seed or Series A rounds for infrastructure projects. The First Wave: 2016-2018 The period from 2016 to 2018 marked the first major wave of institutional interest in blockchain ventures. Several factors contributed to this shift: ICO Boom and Regulatory Clarity The Initial Coin Offering (ICO) phenomenon brought unprecedented attention to blockchain projects, with over $20 billion raised through ICOs in 2017 and 2018 combined. While many ICO projects ultimately failed, the massive capital flows demonstrated significant market interest in blockchain technology. Infrastructure Maturation Key infrastructure projects like Ethereum, which launched in 2015, began to demonstrate the potential for programmable blockchains and smart contracts. This opened up new categories of investment opportunities beyond simple payment systems. Institutional Entry Major venture capital firms began dedicating resources to blockchain investments: Andreessen Horowitz launched its first crypto fund in 2018 Union Square Ventures increased its blockchain allocation New specialized funds like Pantera Capital and Digital Currency Group gained prominence The Maturation Phase: 2019-2023 Following the crypto winter of 2018-2019, the blockchain VC ecosystem entered a maturation phase characterized by: Professional Fund Management Specialized blockchain VC funds began operating with institutional-grade processes, including: Rigorous due diligence frameworks Professional fund administration Compliance with regulatory requirements Sophisticated portfolio construction strategies Sector Specialization Funds began specializing in specific blockchain sectors: DeFi (Decentralized Finance): Funds focusing on lending, trading, and financial infrastructure Infrastructure: Investment in layer-1 blockchains, scaling solutions, and developer tools Web3 Applications: Consumer-facing applications built on blockchain technology Enterprise Blockchain: B2B solutions leveraging distributed ledger technology Geographic Expansion Blockchain VC activity expanded beyond Silicon Valley and New York to include: Asia-Pacific: Singapore, Hong Kong, and South Korea emerged as major hubs Europe: London, Berlin, and Zug became significant centers of activity Emerging Markets: Increased activity in Latin America, Africa, and Southeast Asia The Current Landscape: 2024-Present Today's blockchain VC ecosystem is characterized by several key trends: Institutional Adoption Traditional asset managers, pension funds, and endowments have begun allocating capital to blockchain VC funds. This institutional adoption has brought: Larger fund sizes (many funds now exceed $500 million) Longer investment horizons More sophisticated risk management practices Regulatory Evolution Clearer regulatory frameworks in major jurisdictions have reduced uncertainty and enabled more institutional participation. Key developments include: The EU's Markets in Crypto-Assets (MiCA) regulation Singapore's comprehensive digital asset framework Ongoing regulatory clarity in the United States Technology Convergence Blockchain technology is increasingly converging with other emerging technologies: AI and Machine Learning: Projects combining AI with blockchain for various applications IoT Integration: Blockchain solutions for Internet of Things devices and networks Sustainability Focus: Green blockchain projects and carbon credit systems Implications for Fund of Funds Investors The evolution of blockchain VC presents both opportunities and challenges for fund of funds investors: Opportunities Diversification Benefits: Blockchain VC funds often have low correlation with traditional asset classes Access to Innovation: Exposure to potentially transformative technologies Global Reach: Access to investment opportunities across multiple geographic markets Emerging Market Exposure: Blockchain adoption is often faster in emerging markets Challenges Volatility: Blockchain investments remain highly volatile Regulatory Risk: Ongoing regulatory uncertainty in some jurisdictions Manager Selection: Difficulty in identifying skilled blockchain VC managers Due Diligence Complexity: Technical complexity requires specialized expertise Best Practices for Fund of Funds Based on our analysis of the blockchain VC ecosystem, we recommend the following best practices: Portfolio Construction: Maintain diversification across blockchain sectors, geographies, and vintage years Manager Due Diligence: Focus on technical expertise, regulatory compliance, and institutional processes Risk Management: Implement appropriate position sizing and risk controls Ongoing Monitoring: Maintain close relationships with underlying managers and portfolio companies Looking Forward: The Next Phase As we look toward the future of blockchain VC, several trends are likely to shape the next phase of evolution: Mainstream Integration Blockchain technology is increasingly being integrated into mainstream business applications, creating opportunities for more traditional VC approaches. Regulatory Standardization Continued regulatory development is likely to create more standardized frameworks for blockchain investment. Technology Maturation As blockchain technology matures, investment focus is shifting from pure infrastructure plays to application-layer opportunities. Conclusion The blockchain VC ecosystem has evolved from a niche, speculative market to a sophisticated investment category worthy of institutional consideration. For fund of funds investors, this evolution presents compelling opportunities for portfolio diversification and exposure to potentially transformative technologies. However, success in this space requires careful manager selection, robust due diligence processes, and sophisticated risk management. As the ecosystem continues to mature, we expect to see continued institutional adoption and further professionalization of blockchain VC funds. At Brook Technology Capital VCC, we leverage our deep understanding of this evolving landscape to identify the most promising blockchain VC funds for our investors, providing access to this exciting asset class while managing the associated risks. This research report is prepared by the Brook Technology Capital Research Team. For more information about our blockchain investment strategies, please contact us.