According to venture capitalist Adam Cochran, there are fewer investments in cryptocurrencies today.
VCs often face pressure from their limited partners, who are primarily focused on outperforming index fund returns.
Cochran, founder of the firm CEHV, explained in a thread on x.com: “VCs have slowed down a lot on crypto investing, and (it’s) a somewhat nuanced reason: 1. Most of them have LPs who just want to beat index fund returns. 2. Over the medium term, the (risk/return ratio) of owning bitcoin and eth will easily outperform index funds, and can only be beaten by early-stage bets.”
See below.
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VCs typically target high-growth startups and emerging technologies that offer substantial growth potential.
For example, the S&P 500 index fund, a common benchmark for U.S. stocks, has generated an average annual return of about 15% over the past five years, according to data from bitcoin-vs-sp-500?currency=usd” target=”_blank” rel=””>curve.eu.
In contrast, bitcoin (btc) has vastly outperformed index funds over the same period, returning around 45% in average annual returns.
Cochran, a specialist in financial technology, artificial intelligence and cryptocurrencies, noted that while cryptocurrency investments carry high risks, they have historically outperformed index funds in the medium term, presenting high-return opportunities. However, he added that venture capital funds are often skeptical about making such investments at the early stage due to the risk factor of digital currencies.
The venture capitalist explained that many VCs choose to hold investments in bitcoin and ethereum (eth), along with some high-profile emerging projects, to generate fees and recover capital.
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According to a recent report crypto-and-blockchain-venture-capital-q1-2024/” target=”_blank” rel=””>study According to Galaxy Research, in the first quarter of 2024, approximately 80% of venture capital funding was allocated to early-stage companies, and the remaining 20% to later-stage companies.
Despite a decline in interest from large, generalist venture capital firms, which have either abandoned the crypto sector or significantly reduced their investments, early-stage venture funds focused on crypto have remained active.
Many of these funds still have capital from their 2021 and 2022 fundraises, allowing promising early-stage crypto startups to secure funding. However, later-stage startups face greater difficulties in raising capital due to lower involvement from larger venture capital players.
According to Cochran, during the last market cycle, VCs were more active in investing in apps that had already gained traction, such as OpenSea, in hopes of capitalizing on late-stage consumer growth.
Furthermore, he believes that with interest in older trends like non-fungible tokens, or nfts, as well as AMM forks, DeFi and Layer 2 solutions cooling off and the market waiting for the next big innovation, venture capital firms are in a holding pattern.
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Cochran noted that while some builders continue to develop new ideas without outside capital, discovery of the next big trend is stagnating.
This situation is exacerbated by the fact that VCs believe that idle capital can yield substantial returns in money markets, which discourages early-stage investments.
He added that this period of inactivity serves as a litmus test for the genuine commitment of venture capital firms to the cryptocurrency industry.
Those with deep industry knowledge can make impactful early-stage investments. In contrast, others can only invest in later-stage opportunities, revealing a lack of true industry alignment.
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