In recent times, venture capitalists have demonstrated a preference for ICOs, but the tide seems to be turning with Bitcoin-focused startups garnering fresh attention from investors.
Initial Coin Offerings (ICOs) may have inadvertently slowed the evolution of the Bitcoin ecosystem. Market research reveals a significant tilt towards non-Bitcoin investments by venture capitalists over the past half-decade.
Blockstream CEO Adam Back discussed the interesting contrast between the underrepresentation of venture investment in Bitcoin, priced at $30,810, and its commanding presence in the overall cryptocurrency market capitalization. He had this dialogue with Cointelegraph’s Joseph Hall at the Plan B Summer School in Lugano, Switzerland.
The ICO Fervor and its Aftermath
Back, the creator of Hashcash — the foundational element of Bitcoin’s proof-of-work algorithm, cited market research by Trammell Venture Partners. It presented the inflow of VC funds into the ICO frenzy following Ethereum’s launch and the advent of smart contract functionality.
Back noted a decline in venture capital allocation to ICOs in recent years after the initial buzz around “early liquidity.” He stated:
“Buying discounted tokens, waiting for the company they invested in to do some marketing, and then offloading these discounted tokens to retail investors before there’s even a product.”
Back acknowledged that while ICOs made significant returns for investors, the surge did not necessarily result in marketable products of real value. He suggested this was because “incentives are misaligned.”
The report by Trammell Ventures analysed market data showing 97% of venture capital investments over recent years went into “crypto” but not Bitcoin. Back spotlighted ICOs, altcoins, discounted tokens, and similar ventures drawing investor interest:
“It’s somewhat surprising when you consider that actual real-world use, stickiness, exchange volume is just the opposite, it’s 90% Bitcoin or more.”
Back suggested that despite Bitcoin-related endeavors receiving less funding, these projects “produce more innovation and more product value” compared to “crypto” ICOs that have attracted most VC spending.
Shift in VC Funding: Spotlight on Bitcoin Startups
Failures like FTX and collapses of decentralized finance projects such as Terra/LUNA could have influenced a change in VC funding behavior. Back highlighted that non-Bitcoin crypto projects haven’t seen an uptick in investments, whereas Bitcoin startups are experiencing a resurgence in interest:
“Bitcoin-related startup investment, particularly at an early stage, has doubled in the past year. That’s a positive.”
In a related development, Twitter co-founder and Bitcoin advocate Jack Dorsey contributed $5 million to Bitcoin developer support nonprofit, Brink.
Back’s Blockstream and Lightning Labs are recognized as key contributors to the ongoing Bitcoin protocol development, each employing eight dedicated developers for maintaining the premier cryptocurrency.
Additional Information: This shift in venture capital investment towards Bitcoin startups could indicate a broader trend towards recognizing the long-term value of Bitcoin over other cryptocurrencies. Despite the flashy promise of ICOs, investors are coming to appreciate the stability and potential of the Bitcoin network. This change also reflects an understanding that a solid foundation in Bitcoin technology can provide more sustainable growth in the long run.