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Good morning! It's Friday, December 29th. Today we’re looking at Chainalysis, an $8.6B security firm that’s bringing trust and credibility back to cryptocurrency!

THE FEATURE

Chainalysis: An $8.6B Valuation for Safeguarding the Crypto Frontier

The cryptocurrency space is full of innovation, but it's also home to plenty of fraud and criminality— look no further than FTX founder Sam Bankman, who's currently facing a maximum 110-year prison sentence. 

Chainalysis is a trailblazing security company looking to bring trust and reputability back to crypto, and it's already reached an extraordinary $8.6B valuation! 

The Founding Story

Chainalysis was founded in 2014 by a motley crew of New York entrepreneurs: computer scientist Jan Moller, economist Jonathan Levin, and quantum physicist Michael Gronager. 

The creation of Chainalysis was inspired by one of the biggest crypto heists in history, the Mt. Gox Incident. At the beginning of 2014, Tokyo-based Mt. Gox was one of the earliest and largest Bitcoin exchanges. However, that all came crashing down when hackers exploited a weakness in the exchange's security system. 

The Mt. Gox hackers stole approximately 850,000 bitcoins at a value of ~$450M. Today, those 850,000 bitcoins would be worth almost $23B!

Moller, Levin, and Gronager were all cryptocurrency enthusiasts who simultaneously saw the value of digital currencies and the gaping security and regulation hole in the new financial market. So, the trio founded Chainalysis just months after the Mt. Gox incident to bring trust back to blockchain. 

What’s the Business?

Chainalysis provides blockchain data and security services to government agencies, financial institutions, and cybersecurity firms in over 70 countries. Each customer segment uses Chainanalysis to monitor and investigate cryptocurrency transactions to prevent financial crime and ensure regulation compliance. 

They haven't disclosed recent revenue numbers, but the company generated $8M in 2018 and has seen continued 100% YoY growth in the private sector since then. Regarding the public sector, Chainalysis' contracts with the federal government amounted to $65M as of last April. 

The Products

Chainalysis has a suite of software products, each designed for a specific purpose and consumer segment.

Chainalysis Reactor

Reactor is an investigation software used primarily by government agencies that connects crypto transactions to individual actors. This makes it easy for investigators to follow the money and identify criminal activity. 

Chainalysis KYT

On cryptocurrency exchanges, using KYC (Know Your Customer) has near universal use as it requires buyers and sellers to verify their personal identification.

KYT (Know Your Transaction) is an extension of KYC but requires no input from the exchange user. Chainalysis KYT software tracks platform transactions to identify suspicious patterns commonly linked to fraudulent behavior, alerting the exchange and freezing accounts if necessary. 

Chainalysis Business Data

Business Data helps crypto exchanges understand their customers by collecting data on what cryptocurrencies are purchased and how they are used. 

With this data, crypto exchanges can create personalized marketing materials for their users and identify new revenue streams. 

Key Observation

Cryptocurrency, Bitcoin in particular, is commonly referred to as digital gold because it is not a fiat currency whose price is controlled by the government.

However, non-government-backed currencies and their exchanges are only useful in so far as they can be trusted. Chainalysis' founders were among the first to realize this, and their work to clear out criminality from the crypto world has been astonishingly successful.

For instance, in 2020, Chainalysis software was used by US federal investigators to bring down the largest child pornography website on the dark web by tracing crypto transactions back to it.

By focusing on transparency and regulation compliance, Chainalysis has profited greatly and solidified cryptocurrency's standing in the market.

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