What Do Crypto Exchanges Invest In and Why?

On May 16, OKX Ventures, the investment arm of the Seychelles-based crypto exchange, proudly announced that it had secured its position as the top crypto venture capital investor in Q1 2024, based on the number of deals closed. We often hear about venture investing by crypto exchanges, but the details of this side of business often go undisclosed leading to a lot of speculation. So what do crypto exchanges invest in, and how important is this sector for their balance sheets?

Among OKX Ventures' deals are a number of AI projects, such as the AI data layer OxScope and the on-chain AI co-creation platform FLock.io. The company believes that artificial intelligence in crypto might unlock significant market potential in multiple areas: intelligent investment, risk management, and anti-fraud systems, to name a few. The company’s latest investment is Pencils Protocol, a Scroll blockchain native gateway for yields, auctions, and multilayer rewards, technology that might be easily adapted to the exchange business.

"Our diverse investment portfolio, with a focus on the rapidly evolving Web3 infrastructure, AI and DeFi sectors, positions us at the forefront of supporting these groundbreaking technologies,” - commented OKX Ventures Founder Dora Yue.

According to Cryptorank, the fund mainly invests in DeFi and blockchain infrastructure and services. OKX Ventures closed 71 deals, with Singapore being the main funding location since last May. The company was the lead investor in 11 of them.

OKX Ventures' size is not significant compared to the main business. It had an initial capital of $100 million, but according to our estimates, only half of it was invested as of 2023.

Coinbase Venture, which used to be at the top of the leaderboard in 2022 and the first half of 2023, now 'underperforms' with only 35 deals. While its total revenue in Q1 was $1.2 billion, venture investments generated only $3 million despite the company having around 400 projects in its portfolio. When it comes to investments, crypto purchases and disposals are the most significant source of income for Coinbase Venture, with $52 million in revenue in Q1 this year. Last year, the company gained $24 million on strategic investments.

At the 2023 full-year earnings call, Coinbase Venture was called "a hidden gem that Wall Street doesn't seem to be taking into consideration in their valuation of Coinbase as a company." Coinbase's COO noted that the portfolio is held on the balance sheet at cost and not reported at fair value, which downplays its true value. The balance sheets show that in 2023, the company spent only $11 million on the purchase of investments, compared to $63 million in 2022 and a colossal $327 million in 2021.

Binance Labs signed 47 deals within the same period, with the latest investments including Zest, a lending protocol for Bitcoin, and liquid staking protocol MilkyWay. Binance Labs also offers an incubation program for early-stage founders of innovative Web3 projects, kicking off Season 7 a couple of months ago. It is separate from Binance Launchpad which supports blockchain projects in raising funds by issuing tokens.

An interesting project that both OKX and Binance invest in is from Movement Labs. They raised $38 million in a Series A financing round led by Polychain Capital. The team is working on a novel execution environment, open-source tooling, frameworks, and protocols to grow the Move language.

While the numbers show that crypto exchanges' venture arms are far from being as profitable, as companies that focus primarily on investment activities, they also had their moments of glory.

The above-mentioned Pencil Protocol gained $3.2 Million in TVL in just over a month.

OKX Ventures recently invested in Blast-based decentralized exchange protocol Thruster, which raised $7.5 million in a seed funding round led by Pantera Capital. Since its launch less than three months ago, Thruster garnered over US$300 million in TVL and facilitated close to US$2 billion in trading volume. The project has potential to revolutionize DeFi within the Blast ecosystem according to various sources.

Coinbase's seed stage investment in Yuga Labs, the company behind BAYC NFTs, in 2022 also proved successful for them.

Major crypto exchanges often invest in other companies as part of their strategic growth and diversification efforts. From what we observe in the Binance, OKX and Coinbase venture arms, however, those are relatively limited investments, mainly in technologies that can be further adapted to their needs or enhance the overall blockchain infrastructure.