The amount of VC funding that has flowed into bitcoin this year is staggering. Last year was the best yet, but this year has already matched it. This is an extremely positive sign for bitcoin’s long term success. The “smart” money is flowing into bitcoin, and those companies and people don’t make a habit of throwing away hundreds of millions of dollars on a new technology unless it stands a good chance of returning their investment many times over.
The Bitcoin community understands this. Hundreds of millions of dollars don’t flow into an emergent technology if it is unlikely to break into the mainstream. But as nice as it is to see all this cash flow into the industry, it is even nicer when that cash is coming from the industry and community itself.
Shapeshift recently finished its second funding round, raising 1.6 million dollars. While it lacks the eye-popping numbers we have seen given to the likes of Circle and more recently Chain, it is in a way more impressive. According to Shapeshift’s CEO Erik Voorhees, roughly 90% of that investment came from individuals or companies that sit in or next to the bitcoin community. In fact, Shapeshift, which has quickly gained significant brand recognition within the cryptocurrency community since its founding a mere 14 months ago, had its initial seed funding in 2014 and that was also led almost exclusively by figures in the cryptocurrency market. Meaning, Shapeshift was funded almost entirely by members and figured in the Bitcoin community through two funding rounds.
This is significant for two reasons: The most obvious is simply that the Bitcoin space has enough cash flowing around that individuals and companies can afford to invest in itself. The other reason isn’t as obvious, but it is far more significant: Money always comes with a catch.
If you are running a bitcoin company, and a bank comes and invests 10 million into you, you will have some obligations to that bank, even if you don’t give up full control of your company. Nothing is free in this world, and those investments come with either implied or stated conditions. Oftentimes, the condition is as straight forward as a return on that investment, but it isn’t unreasonable to think they may want to influence decisions as well.
If a company like Merrill-Lynch invests millions of dollars into a bitcoin company, and then regulations are implemented in certain locales that threaten the decentralized or disruptive aspects of bitcoin, that company could be encouraged to conform to those regulations in order to not miss out on the potential market share that locale represents.
Shapeshift has very few obligations because it hasn’t raised tens of millions of dollars and the roughly two million it has raised overall, has overwhelmingly come from people and companies that are within the community and likely share many of the same values.
I asked Erik Voorhees if the two were related and what he thought about my theory.
“Yes, it’s possible that some outside investors from the traditional financial world wouldn’t have agreed with [our BitLicense decision], but those are the same entities who don’t really understand Bitcoin anyway and laughed at it as it rose up from nothing. They don’t perceive that money itself has changed fundamentally. They want it to conform to the environment to which they’re accustomed, but that’s not how [a] technological revolution works. To make the Bitcoin industry identical to the legacy system – that is not innovation, that is farce, and investors who invest in farce will tend to lose their money.”
Earlier in the email, Erik notes that all of ShapeShift’s investors at that time agreed with the decision to leave New York.
There is no doubt that for bitcoin to survive, it will need to continue courting outside investments, especially in years like this one when the price is in a general downward trend. But the more the community can invest in itself, the more resistant it will become to outside influences.
Bitcoin is often hailed by some proponents as the death knell for banks. The banks are used to challengers, none have proven as resilient as bitcoin, but their destruction is not a foregone conclusion, they are a worthy opponent, for Bitcoin or anything else. The super-wealthy are accustomed buying their way out of problems. Buying out competitors, buying politicians, buying threatening technology, I don’t know if “throw money at it” is their only solution, but it has been a powerful one.
And they have been throwing money at bitcoin recently, a lot of it. Not all outside money comes from potential enemies like the banks, much of it is from the tech industry and other sources that are agnostic or even favorable to Bitcoin’s success. But the finance and banking industry has been a big part of outside investment into the bitcoin industry.
It really got started this year, with USAA and BBVA being significant investors in Coinbase’s $75 million funding round in January. In August, Goldmann Sachs Groups and IDG Capital Partners co-led a $50 million dollar funding round for Circle and most recently Chain received $30 million with a list of contributors that included the likes of Visa, Capital One, Nasdaq, and a former Bank of America CEO.
Those companies have not been the only recipients of funding from the banking and finance industry, and I am certainly not accusing them of selling-out to those companies. I have no idea what kind of agreement they came to when those entities handed over millions of dollars. It could be that Goldmann Sachs and IDG and the rest are perfectly content to let those companies do what they want, and I doubt they have any official control over any of them, but what happens when Coinbase starts eating into BBVA’s “bread and butter” banking products? What happens if Bitcoin enables so many people to invest in commodities without Goldmann Sachs, that it starts eating into the profits generated by their IRAs and 401ks?
What happens when a major market, like New York, implements regulation that stands counter to many bitcoin users’ values?
The obvious conclusion is that the finance companies will use their investments in Bitcoin companies to profit off of those changes in the market. That isn’t necessarily a bad thing. After about a decade and a half of fighting it, the music industry got on board with this whole internet thing and we now have Spotify, Pandora and the rest. Arguably, that is better solution for the consumer than piracy and undoubtedly it is a better solution than paying 15 bucks for a CD at Tower Records. The important thing is that we have enough companies without that influence so that our influence acts as a counter-weight to the new comers with bags of venture capital cash.
That is why, despite it not quite reaching the lofty numbers of some of the companies above, the importance of Shapeshift’s $1.6 million funding round cannot be overstated.