The landscape of crypto investments has seen a shift, according to venture capitalist Adam Cochran. Venture capitalists (VCs) often face pressure from their limited partners (LPs), who are primarily focused on outperforming index fund returns.

Cochran, founder of CEHV, explained that VCs have significantly slowed their crypto investments. He identified two main reasons for this:

  • Most LPs prioritize beating index fund returns.
  • Over the medium term, the risk/return ratio of owning Bitcoin and Ethereum (ETH) can outperform index funds, which can only be surpassed by early-stage bets.

VCs typically target high-growth startups and emerging technologies with substantial upside potential. For example, the S&P 500 index fund has delivered an average annual return of approximately 15% over the last five years. In contrast, Bitcoin has largely outperformed index funds over the same period, achieving about 45% in average annual returns.

Cochran, a specialist in fintech, artificial intelligence, and cryptocurrency, noted that while crypto investments carry high risks, they have historically outperformed index funds over the medium term. However, VC funds are often skeptical about making early-stage investments due to the inherent risks of digital currencies.

Many VCs opt to hold investments in Bitcoin and Ethereum, along with a few high-profile breakout projects, to generate fees and return capital. According to a recent study, about 80% of venture capital funding in the first quarter of 2024 was allocated to early-stage companies, with the remaining 20% going to later-stage firms.

Despite a decrease in interest from large generalist VC firms, which have either exited the crypto sector or significantly reduced their investments, crypto-focused early-stage venture funds remain active. Many of these funds still have capital from their 2021 and 2022 fundraises, enabling promising early-stage crypto startups to secure funding. However, later-stage startups face increased difficulty in raising capital due to the reduced involvement of larger VC players.

During the last market cycle, VCs were more active in investing in applications that had already gained traction, such as OpenSea, hoping to capitalize on late-stage consumer growth. However, interest in previous trends like non-fungible tokens (NFTs), decentralized finance (DeFi), and layer 2 solutions has cooled down, and the market waits for the next big innovation.

While every VC firm brands themselves as pro-innovation and in the trenches with the builders, most of them don’t actually pursue moonshots; they just throw capital at breakout trends because they don’t have enough industry insights to take novel risks.

Some builders continue to develop new ideas without external capital, but discovering the next major trend is stalled. This situation is exacerbated because VCs believe idle capital can earn substantial returns in money markets, discouraging early-stage investments.

This period of inactivity serves as a test for VC firms’ genuine commitment to the crypto industry. Those with a deep understanding of the space can still make impactful early-stage investments, while others may only invest in later-stage opportunities, revealing a lack of true alignment with the sector.

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