Why the largest crypto trading firms are becoming venture capitalists as well

The line that separates crypto’s venture capital investing world from the shadowy cadre of high-speed token traders is blurring. 

As private capital continues to move into the $2 trillion market, so-called market-making firms are expanding outside of their bread and butter trading activities and are ramping up their own participation in early-stage equity or token deals. 

Typically, crypto trading firms move quickly in and out of tokens, taking on risk only shortly, either on a proprietary basis or to provide liquidity to an exchange venue. 

Now some of them are becoming early-stage venture investors too. Data compiled by The Block shows that firms including GSR and Wintermute saw their deal activity surge during the third quarter of this year, with these two firms participating in more than 30 funding rounds. Jump Capital, a venture firm affiliated with Jump Trading, made more than 10 investments during that same time.  

The trend makes sense, considering the central role of market makers, which typically work with exchanges and token projects to provide liquidity and maintain sanguine market activity during boats of volatility. 

“In general, trading firms have a very decent deal flow, cause any trading-related project wants a MM (ideally more than one) on the cap table,” said Evgeny Gaevoy, the founder of market-making firm Wintermute, a firm that’s traded billions of dollars worth of crypto. 

Adding a trading firm to the cap table might also better align the startup or project with the market-maker they already use, said Aya Kantorovich, who leads institutional sales for FalconX. 

“Typically, these projects have to work with a market maker regardless,” said Kantorovich. “You’d probably rather give that market-making deal to an investor of yours because you’re already aligned.”

Besides that, trading firms are also users of the product these startups are hawking to the market.  

“Trading teams are natural users of a variety of products and services, so they have more first-hand knowledge and stronger opinions of new products,” said Richard Rosenblum, founder of GSR, which is investing mostly in the decentralized finance market.

Rosenblum added that GSR tries not to cast a wide net, targeting companies that they will be able to work with prior to the launch of the token and while it is trading on the open market. 

Still, trading firms making venture capital-like bets is not an entirely new phenomenon. In traditional markets, high-speed trading firms like Virtu and Jump Trading (which also is invested heavily in crypto) have long made bets on companies through affiliated venture firms. 

Similar to their crypto counterparts, they’ve backed firms in the brokerage and trading space. Virtu Financial and Jane Street, for instance, have backed an upstart stock exchange called Members Exchange. 

However, this is becoming a more apparent phenomenon in crypto among trading firms, and it has been ramping up. GSR’s Rosenblum said the number of investments the firm made in the third quarter is an order of magnitude larger than previous quarters. That includes bets on companies including Figment, Port Finance, and Eden Network. 

Venture capitalists aren’t going to give up their turf without a fight, however. One venture investor, who spoke on the condition of anonymity, told The Block that the network of a VC firm often is superior to a trading firm. 

VC firms tend to have wider distribution and invest in a more diverse set of firms that could give a project broader distribution, according to the investor.

“I have traditional fintech companies that want to distribute DeFi products or use DeFi as backend infra,” they said. "Trading firms can’t do the above.”