There's an ongoing debate in the Bitcoin community about whether its innovation is radical or just incremental. Some folks argue that Bitcoin is simply a mix of existing technologies, like public key cryptography and computer networking, which have been around for a long time. They believe that while each of these components is innovative, putting them together isn't.
On the flip side, others see this combination as something special. They argue that using a chain of blocks to represent value transfers across a decentralized network is a true radical innovation. I tend to agree with this view. I think integrating different systems can be a valuable form of innovation. Just look at examples like the iPhone or Tesla Model 3. These are great cases of systems integration.
However, I don't think Bitcoin's biggest impact will come from just copying blockchain technology or inspiring new forms of computing. Instead, I believe Bitcoin's main influence will come from its monetary innovation. It will change how we think about investment and innovation.
Right now, innovation happens mainly in three areas: startups, large companies, and academic or non-profit labs. These places don’t operate in isolation; they all need capital. This capital helps buy equipment, hire talent, and navigate through red tape. Venture capital is the primary way startups get funding. It collects money from institutional investors, like pension funds and university endowments, and redistributes it to innovative startups.
Venture capitalists, or VCs, act as middlemen in this process. For instance, the head of a large investment fund might not know the specifics about the latest AI startups in San Francisco. While we can debate whether VCs are compensated fairly, their role in the economy over the last 50 years is undeniable.
Historically, the venture capital model relies on a few big wins to cover the many losses. It’s tough to predict which startup will be the next big thing, like Facebook. So, VCs spread their investments across many companies. The best VCs tend to have more successful exits, like IPOs or acquisitions, than others.
While a successful investment can yield returns of 20, 50, or even 100 times the initial investment, that’s not the average return across the board. Many investments fail, dragging down the overall average. If VC returns were consistently above 50%, pension funds would invest only in venture capital. But they diversify, showing that VCs compete with other investment options like stocks and real estate.
Now that Bitcoin is available to institutional investors, it will raise the stakes for capital investment. These investors are always looking for the best risk-adjusted returns. With Bitcoin on the table, they won’t settle for traditional returns anymore. This means that venture capitalists will need to offer returns that beat Bitcoin.
This shift will transform the venture capital landscape. Funding for incremental innovations—those that don’t lead to huge returns—will likely dry up. The days of B2B SaaS companies may be numbered, as those returns might not meet the new standards. However, groundbreaking investments, like generative AI, are likely to clear the bar, prompting VCs to seek out other high-risk, high-reward opportunities.
Ultimately, this will lead VCs to focus on funding innovations that can change the world. This is how the venture industry began in the 1970s, supporting internet infrastructure and personal computers. But over time, it shifted towards SaaS, social media, and mobile apps, many of which have delivered mediocre returns. While these sectors will still exist, future venture capital may not flow into them as much. Instead, they might continue through private equity or corporate ventures.
One of the most significant long-term effects of this change could be a shift in human capital. Young innovators might start aiming higher because that’s what the market will reward. This could be Bitcoin's most profound impact on society: inspiring the next generation to reach for extraordinary achievements.