$250 million: the strategy behind two of China's largest and lowest-profile crypto funds

Two firms – Dragonfly Capital Partner and Hashkey Digital Asset Group – are under the radar for many despite investing internationally and managing sizeable funds that are on par with their U.S. counterparts.

Combined, the two firms have raised $250 million ($150 million for Hashkey, $100 million for Dragonfly) for their first funds and both are in the process of closing their second funds.

Both sport extensive ties in China and are staffed by people with notable backgrounds: Dragonfly was founded by one of China’s most influential tech venture capitalists, Bo Feng, and Bain Capital Ventures’ crypto lead Alexander Pack. Hashkey is owned by a multinational corporation that was at one time the largest auto-parts maker in China.

In this report, The Block examines the two funds' investment strategies, their areas of focus, and their overall outlook for the crypto and blockchain space.

Dragonfly Capital Partners

As a venture firm that bases half of its operation in China, Dragonfly Capital’s investment thesis is, perhaps, less in line with China’s regulatory direction.

Despite the “blockchain, not crypto” drum that the country seems to be beating, the venture firm primarily focuses on cryptocurrency trading, staking, and decentralized finance (DeFi). The firm recently invested in its first blockchain infrastructure project, Nervos, according to junior partner Mia Deng. 

“Our focus is very crypto native, which is a bit different from Xi’s blockchain-plus advocacy,” Deng told The Block. 

Although China and Asia in general play a crucial role in cryptocurrency mining and trading, the effort to build trading infrastructure in the region is overshadowed by interest in blockchain as a broader technology. As it stands, state-owned banks and tech giants are rushing to build their own blockchains, according to Deng.

As such, Dragonfly Capital is hoping to land moonshots in this undervalued market. 

“Crypto trading is definitely so under the radar, but... most of the volume [of crypto trading] still comes from Asia,” said Deng. 

The Beijing and Silicon Valley-based venture firm's bets in cryptocurrency trading in China include cryptocurrency exchange Amber, Bitmain OTC subsidiary Matrixport, and crypto bank RenrenBit. Dragonfly also invested in trading-related firms like crypto broker Tagomi and custodian Anchorage. 

In 2018, Dragonfly Capital had a high-profile debut when it announced its first $100 million fund, along with a range of top tier LPs from both the cryptocurrency market and traditional tech.

This group included Marc Andreessen and Chris Dixon of A16Z; Cyan Banister of Founders Fund; Neil Shen of Sequoia China; Eric Xu, founder of Baidu; Bob Xiaoping Xu, founding partner of Zhenfund; Annie Xu, head and general manager of Alibaba U.S. Crypto-native firms such as BitMEX, Bitmain, Huobi, OKEx, and Ripple were also named.

The running list of LPs not only shows Dragonfly’s influence that radiates beyond cryptocurrencies, but it also demonstrates its ambition to serve as a bridge between East and West (as the firm’s partners have stressed in the past). 

“The idea behind Dragonfly is that crypto is a global market that’s global from day one… West is more about tech innovation, the East is more about trading and liquidity and business model innovation,” Deng said. 

Now, the firm is in the process of raising a second fund that will be bigger than the first and will likely close in the next few months, depending on the market, several sources close to the matter confirmed to The Block. 

Hashkey Digital Asset Group

Hashkey Digital Asset Group assumed its current name in 2018 after operating as Wanxiang Blockchain for years. The company currently manages one fund and it’s in the process of raising another, which combined may exceed $250 million.  

Based in Hong Kong, the venture firm is a subsidiary of Wanxiang Group, an automotive component manufacturer and also one of China’s largest corporate players in the developing blockchain applications. 

Wanxiang’s first foray into blockchain venture investment took place in 2015, when it launched the first blockchain-focused venture capital firm in Asia, Fenbushi Capital, and became the only limited partner of the firm's first fund.

Today, Fenbushi is one of the most active crypto VCs, making more than 60 investments in total, per The Block’s research. 

Today, Wanxiang separates its blockchain investment arm from the technology development division. According to Chao Deng, the CEO of Hashkey Digital Asset Group's venture subsidiary Hashkey Capital, the company has migrated all of its blockchain investment-related operations to Hong Kong while keeping its development units within mainland China. 

Hashkey's two funds also have different emphases. The first focuses on token investment and the other on equities. Instead of having an investment thesis, the firm considers itself an ecosystem builder and aims to foster various aspects of the blockchain ecosystem with its investments, Deng told The Block. 

“We see ourselves more like an ecosystem investor rather than a thesis-driven investor. We see that the blockchain space is still very early. The thesis could change very frequently,” said Deng.

“There are new ideas and new concepts every month or every other month. Since 2017, after the ICOs there are IEOs, IFOs, staking, DeFi, cross-chain, interoperability," Deng continued. "There are all kinds of new ideas but not many of them stay popular for half a year.”  

As such, Hashkey roughly divides it into four sectors: blockchain infrastructure, middlewares, applications, and cryptocurrency finance infrastructure, said Deng.

To date, the firm has made over 200 investments, including Blockstack, Cosmos, Parity, Polkadot, Circle, Messari, Everledger and Zcash. That said, most of its investments are not disclosed. 

Additionally, as the Chinese government shows a warmer attitude towards blockchain, the firm is also looking into the mining sector for investments.

“Mining is one of the few areas we are very careful, this is also very regulation sensitive area especially in China…We start to look at the space and are trying to talk with several mining-related companies to see how we can get involved in the space in a regulation compliance way,” said Deng.