With the printing press in full swing, there are more and more Fiat cars looking for a home. To avoid devaluations and a loss of purchasing power, capital allocators need to find investments that can outperform monetary inflation. This means that more and more capital is being allocated further outside the risk curve. Enter venture capital. Venture capitalists offer funding to startups and early stage companies. With 90% of companies failing early on (according to Investopedia), venture capital is certainly far to the right of the risk curve.
Record amounts of venture capital have poured into the “crypto” ecosystem in recent years. Bitcoin-focused companies, however, have only benefited from a small fraction of this capital inflow. In this article we will examine the impact of venture capital on the “crypto” ecosystem in general, and its impact on the Bitcoin ecosystem in particular, and discuss the main reasons for the different capital allocations between “crypto” companies and bitcoin companies.
Impact of Venture Capital on Crypto
With massive venture capital funds like a16z, ConsenSys, Paradigm, Polychain, and countless others pouring tens of billions of dollars into the “crypto” ecosystem, it is easy to assume that much of that capital will be focused in support of Bitcoin companies, since Bitcoin is the has and always will have the largest market capitalization of all cryptocurrencies. However, this assumption is completely imprecise. In reality, the vast majority of this capital is allocated to new cryptocurrency tokens (at a fraction of the cost that retailers pay) and the teams that build the infrastructure around these cryptocurrency ecosystems. This becomes clear when you look at the explosion of Defi, NFTs, Layer 1 and Layer 2 projects in recent years.
Once these projects are filled with money, they turn the marketing and hype machines into high gear to grab attention and draw speculators and naive crypto investors into their web. Many promises are made about how your project will change the world; Hence, it must be worth hundreds of billions of dollars after all. Speculators and unsuspecting newbies pile up in the token of the week, increasing the market value and setting a feedback loop in motion that only ends when insiders have thrown their tokens away for a massive profit and achieved their next goal.
What is the impact of venture capital on the “crypto” ecosystem? It’s about printing money (tokens) out of nowhere, pumping the price of that printed money, and then throwing it at the poor juices that have shopped into their constructed hype cycle. 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 pales in comparison to the amount of capital focused on “crypto”. Rough estimates show that Bitcoin-focused companies received less than 2% of the total funding of the crypto ecosystem. We’ll look at the reasons for this discrepancy in the next section. Due to the small capital base, most Bitcoin-focused companies are booted by the founding team. Typically, in the early stages, these companies focus solely on building, not marketing or generating hype. Most bitcoin companies have a product or service live before ever looking for outside investment. This is in stark contrast to “crypto” companies, which typically receive massive rounds of funding before ever shipping a product.
What is the impact of venture capital on Bitcoin? Since the majority of the capital is used elsewhere, Bitcoin-focused companies usually have to calmly build up, develop the product market suitability and go to the market themselves. This reality has both advantages and disadvantages. The benefits are that since most projects are self-funded, the teams are given an incentive to develop a great product or service before it is introduced 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 companies in the early stages may not have the runway to reach an escape speed. Hence, even products or services that could benefit the Bitcoin ecosystem can be scrapped before those benefits are realized.
Reasons for the different financing
There are a variety of reasons why the vast majority of venture capital is directed towards “crypto” rather than bitcoin, including a supposedly larger addressable market, a misguided comparison of “crypto” to “technology”, and higher ratings of “crypto”. ”Companies versus bitcoin companies.
Perceived larger addressable market
Crypto venture capitalists tend to turn to the notion that Bitcoin is “just” money and therefore every other use case around the world must be ready to be disrupted by other cryptocurrencies. The visions of decentralized finance, everything tokenized, the metaverse, NFTs, etc. are easy to sell to a hungry base of investors who think they missed the boat on bitcoin and are looking for the next big thing. Since money is the basis of all economic activity, nothing else could really have a larger addressable market. Everyone in the world needs money, nobody needs a JPEG.
Misguided Comparison of Crypto to Tech
Many comparisons have been made between early crypto companies and early technology companies. Cryptocurrency projects like to compare their project with companies like Uber, Airbnb or Apple. This framing is useful for venture capitalists when soliciting money from traditional investors. Who wouldn’t want to be involved in the next Apple? In reality, this comparison is flawed in several ways. First, the mere fact that these cryptocurrencies are supposedly decentralized – and that their future and mission are supposedly not determined by any single person or group – makes comparison with a centralized tech company irrelevant. Second, the fact that these cryptocurrencies print their own money out of nowhere is nothing like actual tech companies that need to create value in order to attract capital.
Higher ratings of crypto companies versus bitcoin companies
When venture capitalists examine the cryptocurrency ecosystem, they see companies like Coinbase, ConsenSys, Crypto.com, Binance, and FTX that have valued billions of dollars. They then compare these companies to Bitcoin-only companies, which typically have lower ratings, and quickly conclude that to get the highest return on their capital, they must invest in “crypto” companies rather than Bitcoin companies. This is flawed fiat thinking with a high time preference. Low Time Preference Bitcoin thinking goes something like this: Bitcoin will one day be the world’s reserve currency, so companies whose mission Bitcoin supports will thrive. The fact that bitcoin companies are being allocated less fiat-oriented capital is actually a plus as it allows task-oriented capital to occupy space on bitcoin companies’ cap tables. Finally, the fact that Bitcoin companies have lower ratings than “crypto” companies means that the market has not accurately priced in the chance of a hyperbitcoinized future world.
Further out on the risk curve, a tremendous amount of fiat is being allocated in an attempt to generate returns above monetary inflation. Much of this capital finds its way into the “crypto” ecosystem. Unfortunately, due to incorrect comparisons, fiat thinking and an underestimation of the future of Bitcoin, the vast majority of this capital is given to “crypto” companies and not to Bitcoin-focused companies. Fortunately, the winches can begin to turn.
As Bitcoin continues to appreciate in value, more and more Bitcoiners have begun raising capital to support Bitcoin companies. Although it is still small compared to “crypto,” we are seeing more bitcoin-focused venture capital firms emerging. Companies like Ten31, Trammell Venture Partners, Bitcoiner Ventures and Lightning Ventures are joining more established companies like Stillmark, Mimesis Capital and Fulgur Ventures. In addition, many individual Bitcoiners (myself included) use their own capital to invest directly in helping Bitcoin companies.
As Bitcoin continues to suck up capital from inferior stores of value such as real estate, stocks, bonds, gold and collectibles, more and more wealth is being transferred from fiat-minded investors with high time preferences to Bitcoin-minded investors with low time preferences. In this case, Bitcoin-focused companies benefit from both a larger user base and increased amounts of investable capital in the Bitcoin ecosystem. Someday, in the not too distant future, we will see Bitcoin companies with ratings orders of magnitude higher than those of “crypto” companies. What a joy it will be.
This is a guest post by Don. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.