Venture capital relationship with Bitcoin

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With the printing press in overdrive, there is an ever increasing amount of fiat looking for a home. In order to avoid degrading and losing purchasing power, capital distributors are tasked with finding investments capable of outperforming the rate of monetary inflation. As a result, more and more capital is allocated further down the risk curve. Enter venture capital. Venture capitalists provide financing to startups and start-ups. Given that 90% of start-ups fail (according to Investopedia), venture capital is certainly well right on the risk curve.

Record amounts of venture capital money have been poured into the ‘crypto’ ecosystem in recent years. However, Bitcoin-focused companies have only benefited from a small fraction of this influx of capital. In this article, we will explore the impact of venture capital on the crypto ecosystem in general, its impact on the Bitcoin ecosystem in particular, and discuss the main factors behind the disparity in the allocation of the market. capital between “crypto” companies and Bitcoin companies.

Impact of venture capital on crypto

With massive venture capital funds such as a16z, ConsenSys, Paradigm, Polychain and countless others pouring tens of billions of dollars into the ‘crypto’ ecosystem, it would be easy to assume that much of this capital is used to support business-driven Bitcoin, since bitcoin has, and always will be, the largest market capitalization of all cryptocurrencies. However, this assumption is extremely inaccurate. In reality, the vast majority of that capital is allocated to new cryptocurrency tokens (at a fraction of the cost paid by retail) and teams that build an infrastructure around these cryptocurrency ecosystems. This is evident when looking at the explosion of the Defi, NFT, Layer 1 and Layer 2 projects over the past few years.

Once these projects are bursting with cash, they spin the marketing and hype machines to grab attention and naïve crypto speculators and investors to their website. Many promises are made about how their project will change the world; thus, it must ultimately be worth hundreds of billions of dollars. Unsuspecting speculators and newbies alike are cramming into the Token of the Week, increasing the market value and setting in motion a feedback loop that only ends when insiders have emptied their tokens for a huge profit and switched to their next target.

So, what is the impact of venture capital on the “crypto” ecosystem? It’s about printing money (tokens) out of thin air, pumping up the price of that printed money, and then throwing it at the poor gutters who bought their cycle of hype. What a great benefit these venture capitalists offer the world!

Impact of venture capital on Bitcoin

The amount of venture capital focused solely on the Bitcoin ecosystem is paltry compared to the amount of capital focused on “crypto”. Rough estimates indicate that Bitcoin-focused companies have received less than 2% of the overall funding from the crypto ecosystem. We will discuss the reasons for this disparity in the next section. Due to their low base capital, most Bitcoin-focused businesses are started by the founding team. Typically, these start-ups just focus on building, not marketing or generating hype. Most Bitcoin companies have a live product or service before they seek outside investment. This is in stark contrast to “crypto” companies, which typically receive massive funding before shipping a product.

So what is the impact of venture capital on Bitcoin? Since the majority of capital is deployed elsewhere, Bitcoin-focused companies are generally left to build quietly, develop the product-to-market fit, and enter the market on their own. This reality has both advantages and disadvantages. The advantages are that, since most projects are self-funded, teams have an incentive to create a great product or service before releasing it to the world. Additionally, Bitcoiners are so passionate about Bitcoin that they will only build projects that they believe will benefit the entire Bitcoin ecosystem. The downsides are that it is difficult to achieve network effects with limited capital, and many start-ups may not have the track to achieve the speed of exit. So even products or services that can benefit the Bitcoin ecosystem can be removed before providing that benefit.

Reasons for the funding disparity

There are a myriad of reasons why the vast majority of venture capital is dedicated to ‘crypto’ and not Bitcoin, including a larger perceived addressable market, a flawed ‘crypto’ to ‘tech’ comparison, and valuations. higher “crypto” companies compared to bitcoin companies.

Larger perceived addressable market

Crypto venture capitalists love to rely on the idea that Bitcoin is ‘just’ money, and therefore every other use case in the world then needs to be prepared to be disrupted by d ‘other cryptocurrencies. Visions of decentralized finance, all symbolized, the metaverse, NFTs, and more, are easy to sell to a hungry base of investors who think they’ve missed the boat on Bitcoin and are looking for the next big thing. In reality, since money is the foundation of all economic activity, nothing else could have a larger addressable market. Everyone in the world needs money, no one needs a JPEG.

Erroneous comparison of crypto to technology

Many comparisons have been made between early crypto companies and early tech companies. Cryptocurrency projects love to compare their project to companies like Uber, Airbnb, or Apple. This framework is useful for venture capitalists to solicit funds from traditional investors. Who wouldn’t want to own a stake in the next Apple? In reality, this comparison is flawed in several respects. First, the simple fact that these cryptocurrencies are meant to be decentralized – and their future and mission aren’t meant to be run by any individual or group – makes comparison to a centralized tech company irrelevant. Second, the fact that these cryptocurrencies are printing their own money out of thin air is not comparable to real tech companies that need to create value in order to attract capital.

Higher ratings of crypto companies compared to Bitcoin companies

When venture capitalists examine the cryptocurrency ecosystem, they see companies, like Coinbase, ConsenSys, Crypto.com, Binance, and FTX, that have reached valuations in the billions of dollars. They then compare these companies to Bitcoin-only companies, which typically have lower valuations, and quickly deduce that in order to generate the best return on their capital, they need to invest in “crypto” companies, not Bitcoin companies. . This is flawed fiduciary thinking with a high time preference. Low Time Preference Bitcoin thinking looks like this: Bitcoin will one day be the world’s reserve currency, therefore, companies whose mission supports Bitcoin will thrive. The fact that there is less fiat capital allocated to Bitcoin companies is actually a plus, as it allows mission aligned capital to take up space on Bitcoin company cap tables. And finally, the fact that Bitcoin companies have smaller valuations than “crypto” companies means that the market has not accurately assessed the possibility of a hyperbitcoinized future world.

Conclusion

A massive amount of fiat is allocated further and further down the risk curve in an attempt to generate returns above the rate of monetary inflation. Much of this capital finds its way into the “crypto” ecosystem. Unfortunately, due to flawed comparisons, fiduciary thinking, and an underestimation of the future of Bitcoin, the vast majority of this capital is allocated to ‘crypto’ companies, not Bitcoin-focused companies. Fortunately, the winds can start to shift.

As bitcoin continues to appreciate, more and more Bitcoiners have started to allocate capital to support Bitcoin companies. Although they are still small compared to ‘crypto’, we are starting to see more Bitcoin-focused venture capital firms forming. Ten31, Trammell Venture Partners, Bitcoiner Ventures and Lightning Ventures join more established players such as Stillmark, Mimesis Capital and Fulgur Ventures. Additionally, many Bitcoiners (myself included) use their own capital to invest directly in supporting Bitcoin companies.

As bitcoin continues to suck capital from lower stores of value such as real estate, stocks, bonds, gold, and collectibles, more and more wealth will be transferred from high-preference investors. time to investors with low time preference. In this case, Bitcoin-focused companies should benefit from both a larger user base and increased amounts of investable capital in the Bitcoin ecosystem. Someday, in the not-so-distant future, we will see Bitcoin companies with valuations orders of magnitude higher than “crypto” companies. What a joy it will be.

This is a guest post from Don. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

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