Cryptocurrency investments are becoming less popular these days, says venture capitalist Adam Cochran.
Venture capital firms often face pressure from their limited partners who are primarily focused on beating the returns of index funds.
“VCs have been slow to invest in cryptocurrencies a lot, and (this is) for a very subtle reason: 1. Most of them have limited investors who just want to beat the returns of index funds. 2. In the medium term, the (risk-to-reward ratio) of owning Bitcoin and ETH will easily outperform index funds, and can only be beaten by early-stage bets,” Cochran, founder of CEHV, explained in a discussion thread on X.com.
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Venture capital firms often target high-growth startups and emerging technologies that offer significant growth potential.
For example, the Standard & Poor’s 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 Kirvo.you.
In contrast, Bitcoin (BTC) has largely outperformed index funds over the same period, delivering about 45% in average annual returns.
Cochran, who specializes in fintech, AI, and cryptocurrencies, emphasized that while crypto investments are high risk, they have historically outperformed index funds over the medium term, offering high reward opportunities. However, he added that venture capital funds are typically skeptical about making such investments at an early stage due to the risk factor involved in cryptocurrencies.
The venture capitalist explained that many venture capital firms choose to hold investments in Bitcoin and Ethereum (ETH), along with a few high-profile projects, to generate fees and return capital.
According to the latest Studying According to Galaxy Research, in the first quarter of 2024, nearly 80% of venture capital funding was allocated to early-stage companies, while the remaining 20% went to later-stage companies.
Despite the decline in interest from major crypto-focused venture capital firms, which have either exited the crypto space or significantly reduced their investments, early-stage crypto-focused venture capital funds have remained active.
Many of these funds still have capital from fundraising in 2021 and 2022, allowing promising early-stage crypto startups to secure funding. However, later-stage startups are increasingly finding it difficult to raise capital due to reduced involvement from larger venture capital firms.
According to Cochran, during the last market cycle, venture capital firms 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 past trends like non-fungible tokens, or NFTs, as well as AMM forks, DeFi, and layer 2 solutions slowing down, and the market waiting for the next big innovation, venture capital firms are in a waiting pattern.
While some construction companies continue to develop new ideas without outside capital, the discovery of the next major trend has stalled, Cochran noted.
This situation is exacerbated because venture capital firms believe that passive capital can generate high returns in the capital markets, discouraging early-stage investments.
He added that this period of inactivity is a crucial test of how committed venture capital firms are to the crypto industry.
Those with a deep understanding of the industry can still make impactful investments at the early stages. In contrast, others may only invest in later-stage opportunities, revealing their lack of true alignment with the sector.