The Breakdown - Crypto Venture Funding is Down; But Bitcoin Building Continues

Episode Date: September 17, 2023

A reading of: https://www.coindesk.com/consensus-magazine/2023/09/11/ai-is-killing-crypto-venture-capital-interest/  https://bitcoinmagazine.com/culture/a-bitcoin-maximalists-ode-to-ordinals Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Sunday September 17th, and that means it's time for Long Read Sunday. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy Sunday. Today we are reading parts of two pieces which on the surface aren't really about the same thing, but which I think have more in common than it might seem,

as I will try to prove to you by the end of this conversation. The first piece is by L. Asher Corset, a partner at UTXO Management and was originally published in Bitcoin Magazine. The piece is titled A Bitcoin Maximilist's Ode to Ordinals. El Asher writes, As a Bitcoin maximalist, I love ordinals. Other maximalists should also consider loving ordinals as they demonstrate Bitcoin superiority in ways not previously possible. Ordinals enable functionalities that undermine the need for other blockchains to even exist. The use cases that were demonstrated on other blockchains are now possible natively

on Bitcoin. Despite Bitcoin's strengthening position, some self-proclaimed maximalists on X, formerly Twitter, bizarrely celebrated decreased network fees and declared ordinals have failed. This seemingly implies that Bitcoin's, coin might somehow benefit from a failure of the Ordinals protocol and lower minor earnings. But Ordinals haven't failed, and the interest isn't nearly over. To the contrary, trading volume across digital artifacts, Unique Satoshi's, and BRC 20 tokens has been historic. According to CryptoSlam, which tracks on-chain NFT volume, Ordinals have done over $500 million of trading volume since

they were launched at the beginning of 2023. Despite volume and prices being down currently, investors in the ecosystem are writing big checks to Ordinals companies. X-Firsts in Ordinol's wallet just raised $5 million on a $50 million valuation from some of the most sophisticated investors in the ecosystem. It's far more likely we are at the beginning of this phenomenon than the end. Now, from there, the author goes into a little bit of a description about what ordinals actually are, which we will skip for the purposes of this piece, just because that's obviously something that we've covered here on the show, or if you need a refresher, you can go check out on Bitcoin Builders. Continuing, however, they write, Bitcoin maximalists understand that there have never

been serious contenders to replace Bitcoin as digital money. Absolute digital scarcity is unlikely to be discovered again because the circumstances surrounding Bitcoin's creation were so unique, in part because today's government understands the risks of letting a decentralized network grow too large and they won't let it happen again. On the other hand, viable alt-coin use cases are related to features that Bitcoin couldn't previously support. Some of the use cases that the market has indisputably embraced include decentralized trading, NFTs, stable coins, capital formation, borrowing and lending, and on-chain leverage. From there, the author goes on to share numbers from Dex's, from NFT trading, that reinforce their point that like them or not, the market has

validated these things as uses of digital assets that people really like. Indeed, they write, although many don't like it, these use cases will exist somewhere because the market has an appetite for them. My strong preference is that they exist primarily on Bitcoin and not on other chains. Ordinals have the potential to not only enable these use cases to be built natively on Bitcoin, but also to surpass their all-coin versions in terms of implementation. These would be better built on Bitcoin because the protocol itself is more decentralized and secure than all coins. Bitcoin is the largest market cap compared to all the other chains that can support the development of these use cases, but also better because these use cases will be tailored to the Bitcoin

community and will therefore embody Bitcoin ideals of decentralization, immutability, and permissionlessness. The other than quotes Danny Hoop describing the properties of a digital artifact. This is from July of this year. Danny tweets, A digital artifact has these properties. One, they can be owned. Two, they are complete without off-chain pointers. Three, they are permissionless. Four, they are uncensurable. Five, they are immutable. Almost all Ethereum NFTs do not satisfy all five of these. In particular, most Ethereum NFTs use off-chain pointers. And even for the few that do not, some of them are not immutable and can be changed by the creator. El Asher continues, imagine a piece of digital art worth

$1 million, or imagine politically sensitive information like classified documents that detail government atrocities. Should these valuable or sensitive assets be distributed using technology that can easily disappear or that can be easily changed? The answer is obviously no. It's also somewhat obvious that over time the best artists, developers, activists, and investors will gravitate towards technology with stronger immutability that is capable of protecting their creation, information, or investment for hundreds or even thousands of years. In the case of digital art specifically, they will migrate to digital artifacts on Bitcoin that store the actual artwork instead of NFTs that just point to where it's stored on an off-chain server that could go down

at any time. The piece concludes, Bitcoin stands atop the world of digital. money and the rise of ordinals only cements that standing. Okay, so before I get into how this relates to the second piece, let's actually just go read excerpts from that second piece. This one is by Chris Kohl-Beswick, the founder and managing partner at Transcend Labs, which is a startup accelerator. The piece, seemingly combining my daily podcasts in one, is AI is killing crypto venture capital interest.

Now, the TLDR of this piece is exactly what the title says. quote, the venture capital space has lost significant momentum over the last few quarters. Global venture funding is nearly half of what it was last year. Whatever remains of the market is now being directed towards AI funds. AI has become the golden goose for VC firms after the turbulence in crypto in the last year. Now, Chris's first discussion is about just the shift in VC in general. He writes, although AI has picked up pace, the VC market is nowhere close to where it was in 21 and 22. With higher interest rates in a sustained supply chain shortage, the global market isn't

ideal. In my field of startup incubation, I have experienced the shift firsthand. Back in 2020 and 2021, investors were much more likely to fund lofty ideas with very little supporting evidence. But today, even the most promising startups have a hard time gaining the attention of top VCs. According to CrunchBase, global venture funding in Q2 fell 49% compared to the second quarter of 2022. The overall deal volume has also decreased significantly by 37%. Now, as Chris points out, the big reason for this is macro. We are living through the transition of a zero or near zero interest rate world to a world of five, six, seven percent interest rates. The net impact of that is that capital that previously had to flow to more exotic and risky parts of the market,

private equity, venture capital, just to get yield in a zero interest rate world, now doesn't have to do that. It doesn't have to take on the same sort of risk. And so money is being withdrawn from the venture ecosystem and put to work in other places. I was myself at a venture firm for a while in the teens in San Francisco. It was remarkable the extent to which the venture capital industry didn't really understand or didn't seem to understand or at least didn't talk about how much of what was going on in our little corner of South Park was actually dictated by what was going on in the halls of the Fed. But to the extent that people didn't realize that, they are learning that lesson acutely now. In that environment, where there isn't necessarily a next big fund to raise, VC habits are

necessarily changing. Kevin Collarin, a co-founder at Slow Ventures, said, I haven't written any checks in the past 18 months. I have 30 portfolio companies that I need to help figure out how to survive. There is no point for me to add to the misery. Still, as Chris writes, quote, for crypto, the situation is worse. The total value of deals in Q2 of this year was $2.34 billion compared to $12.14 billion a year ago. So what caused this collapse?

After a hype-fueled bull run starting in 2020, Chris writes, a slew of disastrous events discouraged even the most pro-crypto VCs. Now, of course, Chris rightly points to the fall of SPF and FTX as the most significant factor. He writes, The FTX fiasco destroyed whatever investor confidence was left in the crypto industry, resulting in major investors moving away to greener pastures. Big VCs like Sequoia and investor in FTX are slashing their crypto funds. Now, it should be noted that Sequoia had a super.

super weird deal with Sam, where they invested in FTX, and inversely, Sam invested as an LP in them, which doesn't undermine Chris's point. In fact, it validates it that the weird things that were happening in the previous era are simply no longer happening anymore. At the same time, Chris points out that the other thing that happened in November of 2022 outside of FTX's collapse was the launch of chat GPT. He writes, the AI dominance started the same month FTX collapsed, filling the vacuum created in the market. Since then, AI has been unstoppable. Chris then recounts a number of more personal examples of where he's seen VCs turn away from crypto and towards AI and how crypto projects have tried to incorporate AI to try to be on trend.

He also points out that while sometimes that works and integrating AI actually strengthens the project, many times it doesn't. He concludes, so is there a way out for crypto founders? Of course there is. Unlike mainstream AI, which isn't even a year old, crypto has been present for more than a decade. Thanks to the cyclical movement of the crypto economy, we can confidently predict more innovation and investor interest as the bare market ends. Lower interest rates, globalized crypto regulation, Bitcoin ETF approvals,

and more Tradfai involvement in crypto could all reignite VC flows. Okay, so here's why I wanted to connect the dots between this piece and the Ordinals piece. It is very easy to look at overall statistics and see capital flowing into crypto being down as an inherently bad thing. Now certainly, anyone who's invested in this space should want great projects, to have access to aligned capital, capital that shares long-term vision and wants to support those companies through ups and downs. The reality is, a huge, huge amount of the capital that flowed into crypto, and indeed that flows into crypto at every cycle peak, was wildly misaligned, wildly

unproductive. Much of it was just arbitrage, taking advantage of tokens to make money faster than traditional venture capital otherwise would. This isn't to say that bull market funding didn't fund great projects too, is just to point out that the more capital sloshing around there is, the less of a quality barrier there's going to be. We are now in a very different, much more, more, one where it's going to take a lot more to peel venture capital dollars away from investors. The downside of that is that some projects that would otherwise have been great will simply not be funded. The upside is that the projects that do get funded and that do make it through this are likely to be much stronger, on average, than those that came out.

out of the top of the bull market. What's more, and this is the reason that I wanted to put the ordinal's piece alongside this, there is no law that says that innovation has to come from venture capital. As trite as it is to say, one project which never received any VC funding was, of course, Bitcoin itself. Yes, our author from the first piece pointed out that some Ordinals projects have been able to get VC funding because of the excitement around them, but the vast majority of people that are hacking on Ordinals, experimenting with it, aren't doing so with VC money backing them. They're doing it because the protocol is exciting to them, because it opens up new opportunities. Whatever one thinks of ordinals, it is exemplary of what's going to come out of this

bare market and the VC drought, which is interesting things that create real and new and differentiated value that people decide are worth working on even if they're not able to get big venture capital checks to do so. I don't want to undermine how hard it is to be in this type of environment, especially in one where there's been such a big shift and where many startups are and will die because of it. But there's a lot of good on the other side too, and a lot to look forward to in the strength that comes from going through this type of environment.

Anyways, guys, that is going to do it for this week's LRS. Hope you enjoyed it. Thanks once again to these authors for their great pieces, and until next time, be safe and take care of each other. Peace.