VCs Focus on Bitcoin & Ethereum, Sideline Risky Crypto Bets

VC funds are pivoting from early-stage crypto to established assets like Bitcoin and Ethereum for safe returns.
Bitcoin’s 60% annualized return contrasts sharply with the S&P 500’s 14.58%, making it an appealing investment for LPs.
Crypto VC funding has dipped from the 2022 high, with $1B+ monthly funding in 2024, reflecting a shift in investment focus.

Venture capital investment in the cryptocurrency sector has notably slowed down. This decline is influenced by a nuanced set of factors beyond the market volatility. Adam Cochran, a partner at Cinneamhain Ventures, highlighted that VCs are increasingly shifting their focus from early-stage crypto projects to more predictable returns offered by established assets like Bitcoin and Ethereum.

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VCs have slowed investing in crypto by a lot, and its a bit of a nuanced reason:

1. Most of them have LPs that just want to beat index fund returns.

2. Over a medium term the R:R of owning Bitcoin and ETH will easily beat index funds, and can only be beat by early stage… https://t.co/yOG4TPdkFx
— Adam Cochran (adamscochran.eth) (@adamscochran) August 9, 2024

The primary reason behind this shift is the investment priorities of Limited Partners (LPs). These LPs are predominantly interested in returns that surpass those of traditional index funds. Bitcoin and Ethereum stands as an attractive alternative owing to their returns.

Over the past decade, Bitcoin has yielded an average annualized return of 60%, a stark contrast to the 14.58% return of the S&P 500 index. This disparity made cryptocurrencies a compelling option for investors looking to outpace index funds.

Moreover, venture capitalists find themselves in a position where they can avoid the early-stage risks typically associated with new Web3 startups. The substantial returns from Bitcoin and Ethereum provide a buffer that reduces the urgency to take on riskier ventures. Consequently, VC firms can focus on more mature projects and establish trends within the crypto space rather than betting on emerging technologies.

Additionally, the crypto industry has seen a cycle of narrative trends, such as NFTs and DeFi, which have since lost their initial luster. With these trends now exhausted, venture capitalists face uncertainty about the next big innovation. As a result, many prefer to stay on the sidelines rather than move into uncharted territories.

Despite the slowdown, crypto venture capital funding has not completely dried up. In 2024, funding exceeded $1 billion in three separate months, including March, April, and July. However, this represents a significant drop from the record high of early 2022, when the monthly funding regularly surpassed $4 billion.