The enigmatic realm of crypto, with its flagship titans Bitcoin and Ether, presents an intriguing paradox for venture capitalists (VCs). Unlike other industries where early-stage ventures carry inherent risks, the lucrative returns of these digital currencies provide a rare opportunity for investors to sidestep the usual pitfalls associated with nascent startups.

Adam Cochran, a seasoned partner at Cinneamhain Ventures, recently illuminated this phenomenon in a series of insightful posts on X, dated August 9th. He articulated that VCs have noticeably tempered their enthusiasm for crypto investments, and the reasons for this shift are far from straightforward.

The core of this issue lies in the dynamics between venture capital firms and their limited partners (LPs). These LPs predominantly seek returns that surpass those of traditional index funds. Cochran elaborated that, in the medium term, the risk-reward calculus of holding Bitcoin (BTC) and Ether (ETH) has skewed in favor of these established cryptocurrencies. For instance, over the past decade, Bitcoin has delivered an impressive average annualized return of 60%, dwarfing the S&P 500’s 13.20% return, as reported by Curve.eu data.

Given these statistics, venture capitalists find themselves in a unique position. The considerable gains from Bitcoin and Ether allow them to remain on the periphery, avoiding the precarious bets typically associated with early-stage Web3 startups. Cochran astutely observed that in most industries, VCs are more inclined to take early risks because the assured gains provided by BTC/ETH are absent in those markets.

Reflecting on the previous crypto cycle (2020–2024), Cochran noted that venture capitalists appeared to be active participants by channeling investments into applications that had already demonstrated substantial promise. This strategy was driven by a desire to capitalize on the momentum of later-stage opportunities, hoping to secure significant returns with consumer-driven projects.

However, the landscape has shifted. The market has exhausted recent narrative trends such as NFTs, AMM forks, decentralized finance (DeFi), and Layer 2 solutions, leaving the path forward uncertain. Cochran pointed out that, despite branding themselves as innovators and advocates for groundbreaking technologies, many VC firms shy away from true moonshots, opting instead to allocate capital to trends that have already proven their viability.

While crypto venture capital funding has surpassed the $1 billion mark in three separate months of 2024—March ($1.09 billion), April ($1.04 billion), and July ($1.01 billion)—these figures pale in comparison to the boom of 2022, where the first four months each exceeded $4 billion in funding.

This tempered enthusiasm underscores a broader trend within the industry. As Cochran and other experts, like the influencer Beanie, suggest, many crypto VCs are, in essence, tech VCs who rebrand themselves to tap into the lucrative crypto market. However, they often lack the nuanced understanding necessary to identify and nurture groundbreaking innovations from the ground up.

The evolving landscape of crypto investments highlights a cautious approach among venture capitalists, who now prioritize established digital assets over the volatile terrain of early-stage ventures. This shift reflects a broader strategy of mitigating risk while still positioning themselves to capitalize on the next big trend—whenever and whatever that might be.