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No investor made more bets on the cryptocurrency market last year as prices skyrocketed than Andreessen Horowitz.

Thanks in large part to a 50-year-old partner named Chris Dixon, who was one of the first believers for how the blockchain technology underlying cryptocurrencies may alter business, the famous venture-capital firm had established a reputation as Silicon Valley’s greatest crypto bull. His unit was one of the most active cryptocurrency investors last year, and in May it announced the biggest-ever crypto fund at $4.5 billion.

It wasn’t excellent timing

In the midst of a general market downturn, the price of bitcoin and other cryptocurrencies has plummeted this year, wiping out billions of dollars in paper gains for Andreessen’s funds. Some of the company’s most treasured cryptocurrency firms no longer have any consumer demand, while others are being scrutinized more closely by regulators.

According to those familiar with the situation, Andreessen’s flagship cryptocurrency fund lost over 40% of its value in the first half of this year. According to fund investors, the loss is far more than the 10% to 20% drops noted by other venture funds, which have mostly eschewed the risky practice of buying volatile cryptocurrencies.

Andreessen has significantly decreased the rate of its crypto purchases this year despite the record cash hoard.

Now Mr. Dixon must persuade wary investors that Andreessen didn’t overplay its hand for the May fund, which rival cryptocurrency venture capitalists claim is excessively huge for a market entering a so-called crypto winter.

A general partner at the venture capital firm Tenacity Venture Capital, Ben Narasin, said, “They’ve really pushed it so far with crypto that I’m not sure they can rebalance.”

In an interview, Mr. Dixon stated that he is still committed to the Web3 vision of the internet, which is crypto-centric and supports Andreessen’s foray into the market. According to Mr. Dixon, blockchain implementations of a number of services will give users back control and power over their finances in the form of tradeable cryptocurrencies.

According to Mr. Dixon, the industry is still in the early phases of collecting users, and he is unsure of the timeframe for the widespread adoption of blockchain services. Cryptography, according to him, “is about the political and governing structure of the internet.” “Our time horizon is pretty long.”

The rise of Mr. Dixon from Andreessen’s periphery to the company’s status as a crypto powerhouse is mirrored by his career path.

He co-founded the venture capital firm Founder Collective and helped build and sell two firms, one in cybersecurity and the other in e-commerce. He has been coding since he was a young child and has master’s degrees in both philosophy and business. He also encouraged interest in cutting-edge technology like 3-D printing and virtual reality.

In 2012, he joined Andreessen. As a result of Mr. Andreessen’s well-known adage that “software is eating the world,” the company, created three years earlier by Marc Andreessen and Ben Horowitz, was swiftly becoming one of the biggest and most important tech investors.

When many large investors continued to view bitcoin as nothing more than a haven for speculators and money launderers, Mr. Dixon defended its potential by writing blog posts that have become somewhat of a creed among young crypto entrepreneurs. These posts explained how bitcoin would establish a new, decentralized financial system. In just two years, Andreessen had committed close to $50 million to bitcoin-related ventures, among them the Coinbase cryptocurrency exchange.

With the advent of Ethereum in 2015, which made use of the same kind of distributed record-keeping on a blockchain to enable developers to create applications beyond payments, Mr. Dixon’s passion for the field grew. According to Mr. Dixon, the arrival of Ethereum demonstrated that the world of cryptocurrency investing was much bigger than thought and compared it to the development of the iPhone App Store. According to persons with knowledge of the situation, he informed Messrs. Andreessen and Horowitz that he intended to move his emphasis away from conventional investment and launch a specialized crypto fund.

The first of its kind to be established by a conventional venture firm, the $350 million cryptocurrency fund was introduced in 2018. Even though bitcoin and other cryptocurrencies saw a significant decline in value that year, Andreessen remained bullish and raised $515 million for a second cryptocurrency fund in 2020.

Additionally, Mr. Dixon and his group have become more vocal about their Web3 vision. They stated that the development of tokens resembling currency by blockchain might provide people greater control and financial gain for blockchain-based versions of services like ride-sharing and social media, weakening the authority of powerful tech monopolies.

Andreessen not only made investments in cryptocurrency businesses but also bought the tokens they produced, thereby making separate bets on the business and its output. During the crypto bull market, the unconventional method brought in large profits, but it also increased the danger of the transactions.

The first crypto fund was Andreessen’s best-performing fund on paper as of the end of last year after multiplying its initial investment by 10.6 times after fees.

One of the most successful bets in the history of venture capital, Andreessen returned almost $4 billion of shares to its investors in the two months following Coinbase’s direct offering in April 2021, according to public disclosures. According to the documents, Andreessen’s third venture fund, which supported Coinbase in 2013, had a paper gain of 9.7 times after fees as of December 31 and was only second to the first cryptocurrency fund in terms of performance at the time.

Encouraged by the results, Andreessen intensified his fundraising efforts. In June 2021, it raised $2.2 billion instead of the $1 billion it had hoped to seek for its third cryptocurrency fund.

According to Mr. Dixon, the cryptocurrency team’s plan was to invest heavily in companies with the promise of utilizing its cash reserve to redefine everything from digital art to online gaming. The firm became a substantial shareholder as a result of the aggressive attitude, which frequently prevented it from leading rounds with other investors.

According to PitchBook Data Inc., Andreessen was the second-largest cryptocurrency investor in terms of investment volume after Coinbase Ventures last year, supporting 56 U.S.-based cryptocurrency deals. Some of the early investments appeared to succeed. Ten months after Andreessen led an early fundraising round, the value of OpenSea, a nonfungible token marketplace, rose by nearly 100 times to $13 billion.

Andreessen ignored accepted investment conventions in its drive to dominate the industry. Even though the company already funded OpenSea, its investors attempted—and failed—to invest in Magic Eden, an NFT marketplace, according to sources familiar with the situation. Because it harms their reputation among founders who disapprove of the practice, venture capitalists have long shied away from funding potential competitors. According to Mr. Dixon, the fund doesn’t invest in businesses that compete directly with its current portfolio.

The market changed within a few months

As investors sold off their crypto holdings, demand for many Andreessen-backed businesses vanished. In the midst of a wider slump in the NFT industry, OpenSea’s monthly trading volume has plunged since its December fundraising round, while Coinbase’s monthly active users have fallen 20% from last year’s fourth-quarter peak of 11.2 million. This year, both businesses have laid off about one-fifth of their workforce.

Andreessen must also deal with stricter regulatory control of cryptocurrency startups and the funds that supported them, which threatens to end the era of lax regulation that allowed for the birth of thousands of cryptocurrencies.

The business is changing. According to PitchBook, it announced nine cryptocurrency startup agreements in the third quarter, down from a high of 26 deals in the fourth quarter of last year. According to those with knowledge of the situation, the company also devalued the value of its second and third crypto funds this year, though the decreases weren’t as severe as those experienced by the first crypto fund.

The firm’s cryptocurrency investments are falling in the meanwhile. Over 80% of the value of Solana, a fledgling cryptocurrency that the company acquired in June 2021, has been lost since the start of the year. Andreessen lost $2.9 billion of its remaining Coinbase stake in the first half of this year as the stock price of the cryptocurrency exchange fell by more than 80%.

According to Mr. Dixon, the market’s decline presents the fund with an opportunity to continue supporting crypto entrepreneurs, as it had in prior down markets.

“Price is not what I consider. I observe the developer and entrepreneur activities,” Mr. Dixon remarked. That is the primary metric.

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