Bitcoin And Crypto Are Not As Dead As You Think, Says VC Firm

The VC firm published a new “state of crypto index” that claims to track the progress of the crypto industry by collecting metrics such as the number of active crypto wallets and the number of “smart contracts” in use. The idea, according to the firm, is that crypto token prices alone do not paint an accurate picture of the progress that decentralized finance is making.

“For people who don’t pay close attention to what’s going on in crypto, prices have remained volatile. It’s been that way since the beginning of crypto,” said a16z crypto Chief Technology Officer Eddy Lazzarin. “But if you look at the underlying technology, it continues to evolve.”

It’s easy to see why a16z would want to reset the narrative.

The last 12 months of the crypto industry have been marked by major bankruptcies, falling token prices and the collapse of the crypto exchange FTX amid fraud allegations. The price of Bitcoin, the largest token, has surged recently, even breaking through $30,000, but it is still down more than 50% from its 2021 peak of more than $65,000.

A16z says the “crypto state” is not nearly as serious. In March, the index had a reading of around 1,615, down from a peak of 2,159 in 2021, but still 25 times the reading in January 2020, before the Covid-19 pandemic took hold.

The firm itself has a lot at stake: a16z is one of the VC industry’s heaviest investors in crypto. The portfolio includes Anchorage Digital, Avalanche, dYdX, Solana and Uniswap, among dozens of others.

Among the metrics that a16z says are already above the 2021 peak are the number of active wallets used to store crypto; the volume of transactions of “stablecoins”, whose values ​​are most often linked to the dollar; and the number of “smart contracts”, which are crypto-powered contracts that execute automatically when certain conditions are met.

Lazzarin says that such metrics and others are a more appropriate measure of development in the ecosystem than token prices alone, and that they lay the foundation for the development of real use cases for crypto.

Bitcoin is mostly held by investors in the hope that it will increase in price. But a16z claims the crypto industry will have a much broader impact, describing it as an “evolution of the internet” and a “new computing platform.”

Similar stories have been told by crypto supporters for years, but have yet to come to fruition. Although the industry says it wants to cut out financial intermediaries such as banks and exchanges in favor of cheaper, decentralized alternatives, most analyzes have shown that a small number of firms, including a16z, hold significant power over the industry. A US regulatory crackdown, which has limited the ability of crypto firms to even get basic banking services, threatens crypto’s growth.

Perhaps the biggest short-term threat to many crypto projects is a lack of interest from venture capital firms themselves. Lazzarin says his firm still sees opportunities in crypto and continues to invest, though he admitted that “things may have slowed down a bit.”

A separate report released by Galaxy Digital on Tuesday said VC firms invested $2.4 billion in crypto-focused startups and protocols in the first quarter, the lowest amount in more than two years.

“The era of ‘growth at any cost’ is over, at least for now, and venture-backed startups must prepare for a difficult fundraising environment for the foreseeable future,” said the report, which noted that VCs have pulled back from other industries as well. “The founder-friendly environment of recent years is in the rearview mirror.”

Write to Joe Light at [email protected]