Making the investment case for bitcoin infrastructure
Family offices have a rich tradition spanning many decades of investing in emerging categories and companies. And although it’s not always widely acknowledged, they’re well-accustomed to evaluating – and tolerating – risk as part of their long-term decision-making. So it’s no surprise to see that more than two out of three family offices are considering diversifying into cryptocurrencies as part of their overall investment strategy. Crypto is a vast and rapidly growing category capable of delivering lucrative returns to savvy investors. But it’s also a world that is crowded, complex and, at times, deeply confusing. There are 1,000s of competing cryptocurrencies and many different avenues for gaining entry into the market, from public market ETFs to venture investment.
As Simple’s 2022 Cryptocurrency Review concludes, “Probably the single biggest difficulty of investigating cryptocurrency for family offices is the sheer quantity of noise and hype… Filtering through the ocean of information requires a clear understanding of the underlying technology and the value propositions of service providers.”
Of all the breakthrough technologies vying for market supremacy, few rival the blockchain for their perceived complexity. This could explain why just 15% of family offices currently have any crypto exposure. Entering the crypto world is harder than one might think, and family offices are not the only ones finding the category difficult to navigate. Venture capital firms are ploughing billions of dollars into crypto startups, but their scattergun approach betrays a lack of in-depth expertise and a lack of certainty about the likely winners to emerge.
Backing the right horse
Amidst all of this noise, bitcoin stands out from the crypto crowd. It is well-established and widely traded – with both corporate and sovereign adoption now beckoning. Over a prolonged period, it has proven itself to be stable, secure, and technologically unique.
And while bitcoin represents a compelling asset class for family offices looking to diversify into crypto, perhaps the most significant investment opportunity lies elsewhere: building the infrastructure needed to establish bitcoin as the monetary protocol for the entire planet.
A unique opportunity
According to Howard, “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, battled in the ‘protocol wars’ during the 80s, and clearly had the winning network effect in the 90s, rendering its competitors obsolete. The Internet community was nimble – able to develop in months what took the Open Source Initiative committee-based process years – but it scared off some potential adopters because nobody seemed ‘in charge.’ Even more so, absolutely nobody is in charge of bitcoin. Bitcoin is the TCP/IP of money.”
Bitcoin’s core design has been set in stone from day one. It is available as open-source code 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, while it is also substantially more robust and more secure than many of its peers, thanks to its decentralised nature.
But to become the monetary protocol for everything requires one further feature – the ability to determine who owns what and when, precisely and uncontestably. Again, bitcoin’s immutable ledger stands alone in this respect. It’s a one-of-a-kind technology capable of establishing time flow (and thus, the transfer of value) in the digital realm.
Infrastructure in action
As a monetary protocol, bitcoin allows us to transmit value anywhere in the world at the speed of light, in a permissionless fashion and for a negligible cost.
From rearchitecting how governments make payments to allowing web creators to reclaim ownership of their content and IP, the potential applications are already vast and likely extend well beyond the current limits of our imagination.
One great illustration of startup activity already underway in this space is impervious.ai, which is building a data transfer layer on top of bitcoin that will enable censorship-resistant p2p data flows – a panacea for the wealth of issues pertaining to consumer privacy, data security, censorship, and surveillance.
To make such applications a reality requires investing in bitcoin infrastructure, significantly. Similarly, scaling the ‘lightning network’ necessary to allow bitcoin to be used for everyday financial transactions is no easy task. A high degree of technical expertise is required to architect and scale the network in a commercially viable way, and this in turn means startups need the budgets to be able to recruit the very best developers and engineers.
Many other potential applications will themselves require additional protocols to be developed on top of bitcoin, in much the same way that TCP/IP gave rise to the IMAP, STMP and POP protocols that serve as the foundation for email.
The chance to affect once-in-a-generation change
Bitcoin’s transformative potential will only be realised if the startups responsible for developing highly complex bitcoin infrastructure receive the early-stage financial backing they need.
There’s a notable alignment between these infrastructure-oriented startups and a typical family office. Founders operating in this space require patient capital. They’re in it for the long game and know that success will not only deliver outsized financial returns but more importantly, enable transformational macro-economic and societal change.
From an investment perspective, family offices understand this type of long-term venture better than anyone. It’s in their DNA, and investing in bitcoin infrastructure would certainly not look out of place in a generational VC portfolio.
And, as the past decade of bitcoin development has proven, infrastructure startups are set to meet with hefty resistance en route – from payment providers, the financial and political elite, and anyone with a vested interest in maintaining the status quo. Founders will need to tap into a wide range of expertise to clear these hurdles, and the presence of a family office with a wealth of multi-generational sector experience would be very welcome at the Board table.
But as ever with venture investing, only a handful of startups in the space will go on to realise their full potential. With so much noise enveloping the category, picking winners requires a strong understanding of the technology – its real-world application and commercial viability – and the ability to tap into relevant professional networks to unearth the early-stage bitcoin businesses with the strongest foundations and prospects.
Without this network access, directly investing in infrastructure projects may be a step too far for some family offices. Instead, they should look for opportunities with their existing VC partners, or consider speaking to the growing number of specialist funds working to plug the early-stage funding gap in bitcoin infrastructure development – which includes our spin-off fund, TimeChain.
It’s a good time to consider investing in Bitcoin infrastructure
Such is the current level of crypto confusion and misallocation of resources across the VC world that many high-potential bitcoin startup valuations are under-priced, presenting an attractive opportunity for family offices looking to make a move into infrastructure investment.
Of course, there is always a tendency for evangelists to overpitch new technology, and bitcoin evangelists are undoubtedly guilty of hype and hyperbole – selling us the promise of a future utopia without always acknowledging the amount of work and effort required to get us there.
However, utopian ideals aside, bitcoin certainly offers us an opportunity to rearchitect many aspects of our monetary system more efficiently and equitably. And for family offices, 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 inherently familiar and inherently rewarding.