The cryptocurrency industry is rare in that the strong returns from Bitcoin and Ethereum allow venture capitalists to avoid the early-stage risks they must make in other industries, according to a venture capitalist.
“VCs have slowed investing in crypto by a lot, and it’s a bit of a nuanced reason,” Adam Cochran, partner at venture capital firm Cinneamhain Ventures wrote in a thread of X posts on Aug. 9.
Cochran explained that most venture capital firms have Limited Partners (LPs) who are primarily interested in outperforming index fund returns. He added that, in the medium term, the risk-reward ratio of owning Bitcoin (BTC) and Ethereum (ETH) “will easily beat” index funds.
Over the past 10 years, Bitcoin has had an average annualized return of 60%, while the S&P 500 index has averaged a 13.20% return, according to Curve.eu data.
VC firms have time to avoid riskier bets in crypto industry
This allows venture capitalists to stay on the sidelines with Bitcoin and Ethereum, rather than take as many early-stage risks with Web3 startups as they do in other industries, according to Cochran.
“Normally, in an industry, you’ve got more VCs taking early shots because the idle gain that BTC/ETH provides doesn't exist in those markets,” Cochran explained.
He pointed out that during the last crypto cycle (2020 - 2024), VC firms “seemed active” by investing in applications that “had already broken out,” as they were hoping to “make up the multiple on late stages with consumers.”
“We've also burnt out the last few narrative trends (NFTS, AMM forks, defi, L2s) and it’s not quite clear what's next,” he claimed.
“While every VC firm brands themselves as pro-innovation and in the trenches with the builders, most of them don't actually pursue moonshots, they just throw capital at breakout trends.”
Crypto venture capital funding has exceeded $1 billion in three separate months in 2024 — March ($1.09 billion), April ($1.04 billion), and July ($1.01 billion), according to RootData.
This is a significant increase compared to the previous year, when it only reached that level once, in November 2023 ($1.29 billion).
However, it’s still significantly lower than two years ago, when the first four months of 2022 each saw over $4 billion in crypto venture capital funding per month.
Related: Here’s the 6 biggest crypto VC deals in Q1 2024 and late 2023
“Most crypto VCs are just tech VCs that call themselves crypto VCs because they can raise more money that way. But they don’t get the nuances and frankly don’t add enough value to get in early on things,” Beanie claimed on Aug 9.
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