Venture capital’s ICO gambits left Bitcoin ecosystem underfunded

Venture capitalists have favoured ICOs in recent years, but Bitcoin-related startups are seeing renewed interest from investors.

Initial coin offerings (ICOs) may have hampered the development of the Bitcoin ecosystem, with market research reflecting a massive slant towards non-Bitcoin investments by venture capitalists over the past five years.

Blockstream CEO Adam Back highlighted the juxtaposition between the lack of venture investment in Bitcoin in comparison to its dominance of the total cryptocurrency market capitalization in conversation with Cointelegraph’s Joseph Hall in Lugano, Switzerland.

Adam Back alongside Cointelegraph’s Joseph Hall in Switzerland.

Back, the inventor of Hashcash upon which Bitcoin’s proof-of-work algorithm was derived, pointed to market research published by Trammell Venture Partners which detailed venture capital flows into the ICO craze in the years following the launch of Ethereum and smart contract functionality.

Back said that venture capital spending on ICOs has wound down in recent years after an initial surge in attraction to ‘early liquidity:

“You know, buying discounted tokens, waiting for the company they invested in to do some marketing and then selling the discounted tokens on to retail investors before there’s even a product.”

Back added that ICOs had made investors a lot of money, but the phenomenon did not necessarily result in products that people can use and value getting to market because ‘incentives are misaligned’.

Trammell Ventures’ report surveyed market data which reflects that 97% of venture capital investments over the past few years flowed into ‘crypto’ and not Bitcoin. Back highlighted ICOs, altcoins, discounted tokens and other projects all attracting investors:

“That’s kind of shocking if you think about it, because the actual kind of real world uses stickiness, exchange volume is the other way around, it’s 90% Bitcoin or more.

Back said that while the Bitcoin space is being underfunded by this category of investors, builders within the ecosystem “produce more innovation and more product value” when compared to ‘crypto’ ICOs that have attracted the lions’ share of VC spending.

The failure of FTX and implosion of decentralized finance projects like Terra/LUNA may have played a role in a shift in VC funding behaviour as well. Back said that non-Bitcoin crypto products had not seen an increase in investments while Bitcoin startups were seeing renewed interest:

“Bitcoin related startup investment, I think particularly at an early stage, had doubled in the last year. So that’s a positive.”

Meanwhile Twitter’s co-founder and Bitcoin proponent Jack Dorsey donated $5 million to Bitcoin developer support nonprofit Brink.

Back’s Blockstream and Lightning Labs are attributed as significant resource contributors to the ongoing development of the Bitcoin protocol, both employing eight developers each dedicated to the preeminent cryptocurrency’s maintenance.

Magazine: Bitcoin 2023 in Miami comes to grips with ‘shitcoins on Bitcoin’