Why we invested: FalconX
March 16, 2021
In the last couple of years, outlying growth, innovation, and value accretion have thrust cryptocurrency and digital assets into the global spotlight. Over the last 12 months, Bitcoin saw an 11x increase in price — recently crossing $1T in market cap — spurring frenzied trading volume and broad consumer and institutional adoption. Today, more than 50 projects have scaled as multi-billion-dollar crypto unicorns while Bitcoin continues to spearhead the industry with over 60% in total market share. If you weren’t aware of the pervasiveness of Bitcoin before February, you likely know now after Elon Musk announced that Tesla plans to begin accepting bitcoin as a form of payment.
While mainstream consumer adoption is evident, it may not be apparent that institutions are also lining up to allocate capital to digital assets. Marquee names like Tudor Group ($38.4Bn in AUM) and Guggenheim Investments ($233Bn in AUM) have championed Bitcoin as an asset, and other large traditional players are expected to allocate as well. For example, MassMutual ($235Bn in investments) just entered the market by investing $100M in Bitcoin in November 2020, noting the investment gave them “measured yet meaningful exposure to a growing economic aspect of our increasingly digital world.” In the last year, the number of addresses holding over $50 million USD notional have tripled, and three publicly traded companies now hold more than 90K BTC (>$5Bn) on their balance sheets: Square, MicroStrategy Incorporated, and Galaxy Digital. Fidelity validated that Bitcoin has gone mainstream by declaring it as a legitimate hedge against inflation and a stable store of value as a form of “digital gold” that will, over time, take more market share from gold.
It’s becoming clearer that these traditional investors are catalyzing the legitimacy of cryptocurrency and digital assets. As illustrated below, the increase in Bitcoin price correlates with an increase in the M1 fiat in circulation. Digital assets also continue to de-correlate from other asset classes (e.g., traditional equity markets/indices like NASDAQ and the S&P 500 and real assets like gold).
Source: Kaiko December Market Report
As Bitcoin continues to de-correlate from other asset classes, we expect investors to buy Bitcoin and other correlated assets in bulk, highlighting a major need and burgeoning market size for institutional trading infrastructure. Although crypto capital markets rely on blockchain and distributed ledger technology, brokerage and trading infrastructure are still critical to ensure the markets operate as efficiently as possible. We have estimated the institutional digital asset prime brokerage TAM today to be approximately $30B, which is expected to grow roughly in line with the 32% CAGR that’s expected for the broader cryptocurrency market.
Traditional prime brokerage platforms built for equity capital and debt markets are unable to meet the 24/7 demands of the crypto asset class. Complex processes needed in these traditional capital markets to ensure regulatory compliance and secure trading typically rely on layers of middlemen, contributing to inefficiencies and the inability to meet demands on a 24/7 basis. In contrast, serving the needs of global retail and institutional crypto trading customers requires a technology-first, new approach that leverages machine learning and data science to build a full-stack prime brokerage platform.
This is why B Capital Group is thrilled to partner with Raghu Yarlagadda and Prabhakar Reddy at FalconX, an emerging market leader in institutional prime brokerage built specifically for the digital asset ecosystem. The company serves a wide variety of institutions — including corporate treasuries, hedge funds, venture funds, aggregators, lenders, family offices, and more — with a trading platform that allows customers to access deep liquidity through the flexibility of a single account via an UI platform, an API, or a full-service trading desk. The industry-first, end-to-end trading infrastructure platform leverages machine learning to aggregate data from hundreds of trading exchanges to offer the best pricing and liquidity options in a cost-effective and efficient manner. FalconX also provides a broad range of other services ranging from trading, credit, and clearing, to custody, payments, and white-glove services.
When we first met Raghu and Prabhakar in early 2020, we were highly impressed with their vision to build a global infrastructure to enable the adoption of tokenization — an idea that would require the true force of a best-in-class team. By working with them over the last year, we’ve learned how they are well positioned to be just that. Raghu previously spent his time at Google, where he led the launch and growth of Chromebooks and their first crypto project. Prabhakar previously spent his time at Accel helping lead investments in fintech and enterprise software and has spent years in the crypto space. The two have a long history of successful entrepreneurship. They have hired an extremely talented team at FalconX, including team members from market leaders in crypto (BlockFi, Kraken, Pantera), technology (Google, Paypal), and financial services (Goldman Sachs, Citadel, TD Ameritrade).
FalconX’s growth over the last 12 months has been even more impressive, and they show no signs of slowing down. The company has grown monthly trading volume by more than 12x from $460M to $5.7B, net revenue by 46x in the last year, and has more than doubled its number of customers. Given its superior platform and market leading execution, hundreds of leading institutional investors use FalconX to power their crypto and digital asset trading. We have repeatedly heard institutional customers praise FalconX for their unmatched reliability with built-in integrations to over 100 trading venues, ease of use, and a one-stop-shop infrastructure platform to meet all their long-term crypto trading needs.
At B Capital, we invest in companies that fundamentally shape and power global ecosystems. We believe FalconX is well-positioned to do just that in institutional prime brokerage for digital assets. As crypto continues to permeate throughout the institutional investment world, we expect prime brokerage and trading platforms to play a pivotal role in enabling and accelerating customer adoption. We are excited to partner with FalconX and look forward to working with Raghu and Prabhakar as they continue building the de-facto infrastructure platform for crypto capital markets and become the connective tissue that powers the global discovery, exchange and transfer of all digital assets worldwide.