The Funding: Inside the record VC rush to Bitcoin

What caught my attention the most in the last two weeks is Multicoin Capital's rare Bitcoin deal.

In the first edition of this newsletter, I discussed the Bitcoin ecosystem as one of the four big trends catching VC attention this year. Notably, the current allure of Bitcoin was compelling enough for Multicoin Capital to take an unusual route last week and lead a $7 million seed funding round for a Bitcoin-native application platform called Arch Network. Multicoin Capital recently also invested in the Bitcoin scaling network Mezo's $21 million funding round. Historically, the firm has been particularly active within the Solana and Ethereum ecosystems, having invested early in Solana Labs itself and notable Ethereum projects like StarkWare.

That shows that the recent growth of the Bitcoin ecosystem is prompting major VC firms to explore its opportunities further.

Kyle Samani, managing partner of Multicoin Capital, told me that the Bitcoin ecosystem is experiencing "a developer renaissance" with the advent of Bitcoin's Taproot upgrade and the Ordinals protocol.

For some developers, building financial tools on Bitcoin is much more attractive because it's the oldest and most secure blockchain, Samani said.

Bitcoin started as a peer-to-peer payment system in 2009. But things got a lot more interesting after the Taproot upgrade in November 2021, which brought smart contracts to the biggest blockchain by market cap. Then, in January 2023, developer Casey Rodarmor launched the Bitcoin Ordinals protocol, letting people create NFTs known as "inscriptions" on Bitcoin. A couple of months later, an anonymous developer known as Domo introduced BRC-20, an experimental token standard using Ordinals, which allowed for fungible tokens on Bitcoin. Just last month, Rodarmor launched the Runes protocol, similar to BRC-20, but even more efficient for trading new tokens on Bitcoin. These tech advancements have opened up new use cases for Bitcoin, sparking more startups and more VC investment.

Arch and Mezo are just two Bitcoin-related projects that have recently received VC funding. Other notable ones include Bitcoin scaling infrastructure developer Alpen Labs and Bitcoin-based DeFi platform ALEX. In total, we've seen over 90 deals related to Bitcoin this year — marking the highest number ever recorded in Bitcoin's history for a single year — according to The Block Pro's Funding Data Dashboard.

"We're seeing a surge of innovation as developers quickly build things like NFTs and lending markets on Bitcoin. This means there's more to invest in beyond just BTC,” Samani said.

Bitcoin's limited programmability

While the Bitcoin ecosystem is expanding, it is expected to consistently fall behind Solana and Ethereum due to Bitcoin's limited programmability, according to Samani.

"The programmability design space of Bitcoin is much, much smaller than Solana and Ethereum," he said. "Those platforms were designed to be programmable from the ground up, which means they will always have an inherent advantage over Bitcoin. Thus, we expect the Bitcoin ecosystem lag behind Solana and Ethereum in terms of applications simply because there’s a native handicap."

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