Why Venture Capitalists Are Cutting Back on Cryptocurrency Investments: An Expert's Take
Date: 2024-08-12 Author: Henry Casey Categories: CRYPTO PAYMENTS
The cryptocurrency industry is unique in that the high returns from Bitcoin and Ethereum allow investors to avoid the risks associated with early-stage investing in other sectors. However, as venture capitalist Adam Cochran noted, venture capital firms have significantly reduced their cryptocurrency investments recently. The reason for this, in his opinion, is quite subtle and has to do with changing priorities in investment strategy.
Cochran, a partner at venture capital firm Cinneamhain Ventures, shared his thoughts in a series of posts on the X platform on August 9. He emphasized that many venture capital firms work with limited partners (LPs), who are mainly looking to beat the returns of index funds. With the medium-term returns of Bitcoin and Ethereum "easily beating" index funds, venture capital firms can afford to avoid riskier bets in the early stages of the crypto space.
Over the past decade, Bitcoin has averaged about 60% annual returns, while the S&P 500 has averaged 13.20% per annum. This data, according to Cochran, allows venture capitalists to stay on the sidelines and bet on proven assets like Bitcoin and Ethereum, rather than taking risks in the early stages of investing in Web3 startups, as is the case in other industries.
"In the traditional industry, more VCs are willing to make early bets because the passive income that BTC/ETH provides simply does not exist in other markets," Cochran explained. In the last crypto cycle (2020-2024), venture firms seemed to be active, investing in projects that had already achieved significant success, thus trying to compensate for missed opportunities in later stages.
“We’ve also exhausted the last popular trends like NFTs, AMM forks, DeFi, and L2,” Cochran noted. At the moment, he says, it’s not entirely clear what the next big thing in crypto will be. While most venture firms position themselves as supporters of innovation, in reality, they rarely back projects that could be “shots into the dark moon,” but rather invest in trends that are already gaining popularity.
According to RootData, venture capital funding in the crypto industry has exceeded $1 billion in three consecutive months in 2024: March ($1.09 billion), April ($1.04 billion), and July ($1.01 billion). In comparison, $4.6 billion was invested in the crypto sector in January 2022. Although 2024 is an increase from 2023, when such a level was reached only in November ($1.29 billion), it is still significantly lower than the figures from two years ago, when monthly funding exceeded $4 billion in the first four months of 2022.
Thus, according to experts, the decline in venture capital activity in cryptocurrencies is explained by their desire for more predictable and less risky investments, which makes them less inclined to invest in new crypto projects early.
