VC Firms Have Time to Avoid Riskier Bets in Crypto Industry

The cryptocurrency industry is rare in that the strong returns from Bitcoin and Ethereum allow venture capitalists to avoid the early-stage risks

The cryptocurrency industry is unique 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 BTC ($60,833) and ETH ($2,635) “will easily beat” index funds.

Over the past ten 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.

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 provide 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,” 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.

Crypto venture capital funding crossed the $1 billion mark in three separate months of 2024 — March ($1.09 billion), April ($1.04 billion) and July ($1.01 billion), according to RootData.

This marks a significant increase compared to the previous year, when it only reached this level once, in November 2023 ($1.29 billion).

However, it is still substantially lower than two years ago, when the first four months of 2022 each saw over $4 billion in crypto venture capital funding per month.