Blockchain Startups: Driving Innovation in Bitcoin and Beyond

Bitcoin investors have been hiding behind the sofa for the first half of 2022, as they’ve seen the cryptocurrency fall 70% since its all time high of an eye watering $68,990.90 last November. And while brave investors and bitcoin fans have been ‘buying the dip’, the dramatic drop will no doubt have scared off many more traditional investors who may be wondering whether long predicted crypto implosion has finally arrived.

But, while bitcoin's potential for fast rewards may be in question for now, don't write off the digital currency just yet. Many of the most exciting bitcoin opportunities are still in their infancy, with an exciting wave of startups coming through that are leveraging its unique properties for a range of products and services while building the foundations for an entirely new financial system. For VCs and LPs, it is a chance to get in on these innovative businesses when market activity is low.

Bitcoin isn't a cryptocurrency, but it's an important part of the crypto ecosystem.

Venture capital firms have poured billions of dollars into crypto startups in recent years, but their scattergun approach betrays a lack of in-depth expertise and a lack of certainty about the likely winners to emerge. Amidst all the noise, bitcoin has always stood out from the crypto crowd. It is well-established and widely traded - both by corporate and sovereign investors now beckoning it to rise again despite its current dip in value.

As Andrew Howard, Chief Business Development Officer at bitcoin brokerage firm bitcoin reserve, explains it, “Bitcoin is honest money. It is the most moral monetary system we have."

While the LPs are still interested in investing in bitcoin, it is not the only opportunity. The most significant investment opportunity lies elsewhere: developing the infrastructure that will enable bitcoin to become a global monetary protocol.

A major development in the world's financial system is the emergence of a new internet-based currency.

Howard writes, "The more users a network has, the more valuable it is, and there's a clear parallel between bitcoin, the monetary protocol, and TCP/IP, the internet protocol. TCP/IP was created in the 70s and was clearly dominant in its field by 1990s when its competitors were rendered obsolete. The Internet community could develop quickly - but not as quickly as Open Source Initiative - and it scared some potential adopters away because nobody seemed to be "in charge". Bitcoin is like TCP/IP of money."

Since its inception, Bitcoin's core design has been set in stone. The code is available as open-source for all to see, with no central power overseeing its development or manipulating monetary policy. Its scarcity cannot be replicated, helping it to retain its value over time, and it is also substantially more robust and more secure than many of its peers due to its decentralized nature.

One essential feature that's needed for Bitcoin to be the monetary protocol for everything is the ability to determine who owns what and when, precisely and indisputably. The immutable ledger of Bitcoin has this unique ability.

The role of infrastructure

Bitcoin is a monetary protocol that allows us to transmit value anywhere in the world at the speed of light, in an unrestricted manner, and for a minimal cost. From reengineering how governments make payments to enabling web creators to reclaim ownership of their content and IP, the potential applications are already extensive and likely extend beyond our current imagination.

One great example of startup activity taking place in this field is impervious.ai, which is building a data transfer layer on top of bitcoin that will enable censorship-resistant p2p data flows - an end to the wealth of problems relating to consumer privacy, data security, censorship and surveillance. Another is Bolt.observer, which creates tools to allow individuals and institutions to profitably interact with the Lightning Network paving the way for a range of use cases in the future.

In order to innovate, you have to put money into it

To make applications like those described above a reality, companies need to invest in the infrastructure that supports bitcoin, including scaling the "lightning network", which is necessary for bitcoin to be used for daily financial transactions. This is no easy task; it requires a lot of technical expertise and money, so startups need budgets to be able to hire top developers and engineers.

Bitcoin could be used to build a variety of other applications, but for that to happen, the startups creating the complex infrastructure behind those applications have to receive early-stage funding.

The opportunity to make a difference that will be felt for years to come

The founders of companies operating in this space need to have access to patient capital, which can come from venture capitalists, family offices, successful entrepreneurs, and other high-net-worth individuals who are passionate about innovation. These investors know that success will not only deliver huge financial returns but also enable macroeconomic and societal change.

As the last decade of bitcoin development has shown, infrastructure startups are likely to face strong opposition from - payment providers, the financial and political elite and anyone with a vested interest in maintaining the status quo. Founders will need to draw on a wide range of expertise to overcome these hurdles, and VCs and LPs with multi-generational sector experience would be valuable members of their Board.

A handful of startups in the space will go on to realize their full potential. In order to pick winners, a strong understanding of the technology and its real-world application is required, as well as the ability to tap into relevant professional networks. Specialized funds are working to plug the early-stage funding gap in bitcoin infrastructure development – including our spin-off fund, TimeChain.

Bitcoin's infrastructure is the best investment at the present time

In the current state of crypto confusion and misallocation of resources in the VC world, many high-potential bitcoin startup valuations are underpriced, making an attractive opportunity for LPs to invest in infrastructure.

Bitcoin gives us the opportunity to reconstruct many aspects of our financial system more efficiently and equitably. For LPs, investing in long-term bitcoin infrastructure projects could be the perfect bridge to the crypto category, granting them exposure to the crypto world in a context that still feels familiar and rewarding.