What Venture Capitalists Got Wrong About Bitcoin

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Of the over $1 billion venture capitalists have invested in blockchain businesses, that funding has focused primarily on bitcoin, since for years that seemed like the only option. But with the arrival of Ethereum and a surge of alternate coins and tokens such as Zcash into the market, the landscape is looking very different from what those investors signed up for.

Significant investment in bitcoin startups began in 2013, the year the value of the currency crossed the $1,000 mark before suddenly plummeting. With some wariness, investors returned and put $299 million into bitcoin companies in 2014 and $474 million in 2015.

Mostly, venture funding in this period went toward bitcoin wallet and exchange startups in geographically diverse areas. These companies focused on creating on-ramps and off-ramps for using the currency in jurisdictions where such trades are legally compliant, integrating with banking systems in those locations for more efficient payment pipes.

Bitcoin and Blockchain Investment Activity, The Purse of Fintech, 2015 in Review, by CB Insights and KPMG

A lot of capital has gone into the infrastructure for bitcoin to exist. In the venture world, this is typically used as an argument for bitcoin’s staying power as the premier cryptocurrency. But on the blockchain, this traditional business logic doesn’t stand up to scrutiny.

Instead, the infrastructure built for bitcoin can increasingly be co-opted for use by new tokens. These new tokens don’t necessarily add any value for the venture capitalists who originally invested in bitcoin. To illustrate what is happening: Imagine if a railroad company in the 1800s spent millions laying tracks, only to see a second (and third, and fourth) railroad come along and use the finished tracks for free, to ship more cargo in faster and safer cars.

Bridging technology implemented on Ethereum, such as BTC Relay, are like adding a track between the first railroad and the second railroad. With ZCash as the third railroad, Project Alchemy adds a track between it and the second railroad.

This co-opting of bitcoin is already happening; that the exchange infrastructure exists at all for Zcash is proof. Zcash operates on tracks that were laid with venture capital aimed years ago for bitcoin, since it’s much easier to add Zcash to an existing exchange than a new one. The same is more deeply true of ERC 20 tokens, which are even more trivial to add than Zcash.

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