Bitcoin is suddenly cool again for VCs

Venture capital funds, ever the lifeblood of crypto startups, have lately honed in on projects building in the Bitcoin ecosystem.

It’s a trend that predates bitcoin’s current price run and potential for institutional investment unlocked by spot bitcoin ETF approval earlier this year.

A report from Trammel Venture Partners found that pre-seed Bitcoin startup transactions climbed by 360% in 2023 compared to 2022. Bitcoin startup deals were also up 69.2% and the total number of Bitcoin startups funded jumped 56.9%, according to the report. TVP excluded mining companies from its report.

TVP says the total amount of capital raised by Bitcoin startups was down 12.5% compared to 2022. By way of comparison, crypto venture funding in general fell by 64.5% in 2023, according to the report.

Matt Luongo, the founder of the Bitcoin-focused venture production studio Thesis*, spoke to Blockworks about the impact of Bitcoin ordinals. Introduced in early 2023, this concept of data-inscribing Bitcoin, while not new, took pent up venture interest in Bitcoin’s ecosystem and “cracked it open.”

“We have a bunch of VCs who haven’t been actively investing in the Bitcoin ecosystem since around 2014,” Luongo said. “A lot of them see it as just ‘old tech,’” he said of the former lull in venture capital funding. Thesis* announced $21 million in funding for its Bitcoin utility-focused app named Mezo earlier this week.

Newsletter

Subscribe to Blockworks Daily

The Bitcoin venture boom has centered on ways to put bitcoin to use outside of just buying and selling the asset. One buzzy concept has been so-called Bitcoin layer-2s, which enable things like DeFi and staking for Bitcoin holders.

Bitcoin layer-2s can be controversial. The blockchain is constructed differently from Ethereum, which is the most common blockchain supporting layer-2s. Bitcoin layer-2s do exist, like the payments-focused Lightning Network, but other projects blur the lines a bit more.

“There is an increasing amount of noise level,” Christopher Calicott, managing director at TVP, said of the Bitcoin venture boom. “A smart investor is going to pump the brakes just long enough to ask, “What does [layer-2] really mean?”

Bitcoin sidechains are independent blockchains that establish a connection to the main Bitcoin blockchain via a two-way bridge. This allows for the innovative use of Bitcoin on platforms with diverse rules and capabilities.

However, sidechains operate on their own security protocols and do not inherit the robust security features of the Bitcoin blockchain. Consequently, referring to them as layer-2 solutions is not entirely accurate.

Layer-2 solutions are typically meant to increase a blockchain’s scalability and efficiency directly atop its existing framework, a criterion sidechains do not strictly meet due to their independent operational structure.

Some layer-2 projects might just be trying to benefit from Bitcoin’s “halo” without meaningfully interacting with the layer-1, Calicott told Blockworks.

Miko Matsumura, managing partner of gumi Cryptos Capital, called Bitcoin’s Nakamoto consensus the “gold standard” for blockchain security — and said Bitcoin ecosystem investors should look before they leap.

“I’m open-minded about Bitcoin ecosystem investment but I would like to see systems that harmonize better with what makes Bitcoin great. Many of these systems really just bridge bitcoins into a less secure sidechain,” Matsumura said in a text.

Read more: Roger Ver was right about Bitcoin

Luongo agreed that Bitcoin’s security is paramount to its value, saying some US venture capitalists are “hugely discounting” the premium those under more oppressive economic regimes place on Bitcoin’s proof-of-work mechanism for securing the blockchain.

“For [users outside the US], it’s like, ‘Well, I would rather buy an NFT or I would rather buy a token if it’s on Bitcoin because I’m more confident it’s not going to get taken away from me,’” Luongo said.

Despite the buzz, Bitcoin ecosystem startups may still have a long way to grow. While Bitcoin accounts for more than half of crypto’s market capitalization, it made up just 3.23% of venture dollars invested in 2023, TVP’s report notes.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.

Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. Subscribe to the Forward Guidance newsletter.

Get alpha directly in your inbox with the 0xResearch newsletter — market highlights, charts, degen trade ideas, governance updates, and more.

The Lightspeed newsletter is all things Solana, in your inbox, every day. Subscribe to daily Solana news from Jack Kubinec and Jeff Albus.