As Bitcoin Depreciates, VCs Turn to Blockchain Technology

     Blockchain technology is beginning to influence the investment strategies of venture capitalists as interest in using the distributed ledger underlying bitcoin rises, a new survey shows.

According to CoinDesk, some industry investors believe they are now working more closely with banks and have increased the number of key projects using bitcoin, blockchain technology, or other projects that use distributed ledgers as a payment method or distributed database.

For example, Bart Stephens, managing partner of Blockchain, recently changed the name of his company to Crypto Currency Partners, indicating that the industry has formed an awareness of the use of blockchain technology and has a broader analysis and understanding of it.

“Blockchain is an incredible technology, there’s no denying that, but it has a lot more potential, and it’s already expanding into financial services, identity management, smart contracts and international trade,” Stephens told CoinDesk.

Others, such as Eden Shochat, a partner at Aleph Ventures, whose investments include blockchain technology company Colu (Israeli startup), said there is greater interest in distributed ledger applications, and several new startups in the industry such as Blockstack, Eris and Multichain are looking for opportunities to expand their businesses, but there is a lack of leaders.

Shochat also said: "We are not particularly interested in Bitcoin's fast payment system, such as using Bitcoin as an intermediary for payment and remittance. Generally speaking, this is to optimize transaction costs, but there are more opportunities, such as replacing the supply chain between companies through Bitcoin payments." Marc van der Chijs of Trans-Pacific Capital (CPC) is more direct in assessing his company's interests in the industry. He said: "We expect more blockchain technology startups to emerge, not just like Bitcoin payment companies, which can only perform wallet savings and currency exchange." Van der Chijs suggested that CPC should only focus on the technical applications of international remittances and distributed databases. However, not all investors agree that this is a good opportunity.

For example, Lightspeed Venture Partners partner Jeremy Liew told CoinDesk he believes bitcoin’s savings value remains the most compelling in the short term.

Wall Street Interest

Elsewhere, Stephens spoke about a general increase in interest in technology among the big banks, about 15 of which he briefed the board on.

He said: "Two years ago, banks were focusing on Bitcoin. They were worried about the development prospects of Bitcoin because they thought it was dangerous and were at a loss as to how banks could cooperate with Bitcoin. A few years later, the importance of banks to the blockchain is obvious to all."

Stephens said he spent a lot of time introducing blockchain companies’ investments in several major banks. So far, blockchain companies have made 37 industry investments, including Blockstream, Chain, Circle and Xapo.

He went on to say: “Banks have business forces in blockchain, and they expressed their desire to learn more about blockchain technology. Based on their needs, we provide face-to-face Q&A services.”

Given the recent profits that major banks have made from Bitcoin and blockchain, many investors are convinced that financial institutions will soon begin acquiring companies.

“I think banks cannot innovate, and once they realize this, they will start buying bitcoin and blockchain startups, and some banks may also buy bitcoin intellectual property and experienced teams,” Van der Chijs said. He added, “It is very likely that these will be the first bitcoin companies to exit the market, although it is unlikely to happen in the next four to five years.”

Shochat doesn’t think banks can’t innovate, suggesting he believes banks can use their existing knowledge to help entrepreneurs solve their value chain problems. He continued: “There are many opportunities to liquidate bank-sponsored wallets and replace them quickly. This is not the same role as venture capitalists, but banks can invest directly in promising projects.”

Stephens further stated that he believes that financial institutions are slow to develop, especially in technology, and that they are merely collecting information. Liew, an investor who has worked in blockchain, BTCC (formerly known as BTC in China) and Ripple Labs, was even more dismissive of the role that banks play in technology transition, saying that banks cannot replace the role of venture capital firms in the industry.

Trading Volume

Although venture capital firms have reduced their investments in bitcoin and blockchain companies, most investors surveyed said that this is unlikely to cause a decline in profits in the industry. For example, Shochat said Aleph usually only invests 3% of a company's market value and actively seeks deals in bitcoin startups. Van der Chijs echoed everyone's observation that CPC is not concerned about the transition of early-stage companies and is currently more focused on late-stage investments.

Additionally, he advises industry observers to put the VC firm’s activity in the context of its overall deal flow. “Four investments may not seem like a lot of investments, but considering we only do five investments in over 300 companies a year, it’s actually pretty significant for us,” he explains.

Most of those surveyed do not believe the industry is facing a funding crunch. Despite the lack of Series B and C rounds, Stephens attributes the trend to easier access to seed funding in the venture capital space.

“Generally speaking, in technology, you see a lot of early-stage companies, but once you have it, it becomes a challenging Series A or Series B,” Stephens said. “Bitcoin is not particularly popular because the price of Bitcoin has dropped 75% in the last 15 to 16 months.”

Stephens said he believes smart money will continue to gauge the industry’s growth through wallet growth and GitHub engagement, but that these are unlikely to have much of an impact.

He also said: "Generally, venture capital firms are more concerned about the price of Bitcoin." Liew once said that the price of Bitcoin has led to a decline in investor interest.