The Recursive Thesis: A Retrospective Synthesis

As with a few other funds in the bitcoin space, our initial thesis wasn't entirely clear enough about the importance of bitcoin or clarified that it is our only focus. Nevertheless, with time, this became a noticeable change that needed to be made to course correct.

In hindsight, given the events recently in the crypto world and since 2020, we were lucky to have never invested in a crypto or web3 venture before publicizing our exclusive focus on bitcoin. A clarification that led us to our first portfolio investment—Bitnob—and our doubling down since then to remain focused on funding bitcoin companies, as reflected in our decision to invest in Fedi and Synota last year.

Shortcomings and Consequences of a Web3 Thesis

To preface, I do not intend to cast shade on any VC operating with a web3 or crypto thesis; instead, I outline what I believe are the issues around it, what we've learned, and why one might consider becoming bitcoin-only.

It is, therefore, essential to explore how we came to where we are today at Recursive. At the onset of our launch at block 615,823 (Feb 2020), we aimed in our blog post announcing Recursive to the world to contextualize what we felt was the technological revolution that bitcoin catalyzed in a generalist sense of the digital currency space—financial sovereignty—and the overall decades-yearning for a paradigm shift in how the web operates and safeguards on user data—online sovereignty.

In our attempt to provide this backdrop, in hindsight, it did come at the cost of framing bitcoin into the broader crypto industry, giving a false sense of equivalency that elevated the claims of other projects into the same class as bitcoin. Failing to provide a contradistinction between bitcoin and the overall space falsely legitimizes the other projects. Additionally, it gives some credence to their otherwise empirically and, in most cases, theoretically unsound fundamentals—a topic to which we dedicated a whole chapter in our Bitcoin Investment Thesis (circa 2020).

This kind of framing harms people, as they are often unfamiliar with the technicalities behind how projects, including bitcoin, work and their differences, and encourages misinformation. This misinformation puts unsuspecting people on a path of becoming bankrupt, ultimately disillusioned with the space, uninterested in any legitimate benefits of bitcoin, and only poisons the well.

Regardless, it has become increasingly clear that whatever the working definition of Web3 these days, it is either too broad or lacks specificity to form a solid foundation to extract principles to guide investing without succumbing to false promises, hype, and fraud, easily.

Crypto vs Bitcoin VC

There is an understandable hesitation from VCs to focus on investing exclusively in bitcoin companies, as VC orthodoxy prescribes maintaining portfolio diversification to reduce portfolio risk. On the surface, this does appear rational. However, in world of crypto it carries the following implicit assumptions:

• On average, projects across the space are of the same investment value.
• On average, bitcoin and other alternative networks have similar security levels and differ mainly in feature sets and capability.
• Bitcoin and its ecosystem has no unique attributes or differentiators that afford it its category.

The danger in these assumptions is that given the empirical evidence over the years, it is evident that the vast majority of projects across the space are of suboptimal security, offer no real value, in most cases, fail to live up to their claims, and take on trade-offs that would ordinarily make them resilient, decentralized, and reliable to instead market speed, climate friendliness, purported features, and more familiar governance models to organizations and governments.

As one can imagine, from the investment point of view, as we zoom out, it becomes evident that this assumption leads VCs to believe spreading out investments on the broader space would translate to derisking; however, given the high likelihood that these projects will be non-existent in the medium to long-term or uncovered as a fraud, it is a kin to placing multiple low-upside probability bets and expecting to have any feasible returns. Investing in bitcoin companies exclusively tunes out the higher levels of risk and fraud fraught in the broader space and maximizes returns overall across your portfolio.

The Bitcoin-only Distinction

Since our rebrand to a bitcoin VC, we have seen a significant increase in the quality of projects that come through our pipeline. Previously, the messaging of "crypto VC" only filled our inbox with projects that were either outright scams, well-dressed yet-to-be uncovered scams, or impractical ideas. Once entrepreneurs and builders sensed the focus we were projecting, naturally, mutual signaling occured that produced a filter that deterred many scams.

For context, we can synthesize the definition of a bitcoin company as the following, which is based on our internal work and especially material from—and discussions with—other bitcoin VCs:

An organization that operates with the core belief that bitcoin is an open global monetary network that hosts a revolutionary monetary asset and an internet-native digital cash. It develops products and services that utilize the bitcoin protocol stack, including associated layers like the Lightning Network and Fedimint, to create value for customers. The company's success is closely tied to the success of bitcoin itself, and it fosters innovation both technically and in its business models across the protocol stack.

There are numerous reasons behind focusing on these types of companies; for us, it is about backing companies and entrepreneurs building for the long-term, remaining unbothered by price action, perilous and problematic incentives that'll push them towards fraud, and have their target set on solving real-world issues and not solely chasing marketing. These companies aim to provide access to a fast, affordable, and accessible global monetary network without creating barriers. They prioritize quality services over silos and advertising money, and their success depends on meeting user needs; it is about who provides the best services.

Over time, our conversations with other VCs and investors have progressed from "Why the narrow focus?" to "What are the opportunities in the bitcoin ecosystem?". As more projects in the broader space took on unnecessarily fragile dependencies and marketed falsehoods, an increasing number of VCs have started to realize a pattern, where companies in attempts to raise capital position themselves as the shiniest venture in town and forget to build anything of value, end up attracting significant capital on undeliverable promises. These VCs find out and join in on the marketing to dump their stock on other unsuspecting VCs, creating a cycle of deception until everything comes crashing down.

The lesson, avoid hype and focus on long-term relevance. Watch out for fraud and don't succumb to "herd investing"—tagging along with other big brand VCs without doing your research and due diligence before investing.

The bitcoin ecosystem isn't exempt from fraudsters or those with misaligned incentives. Instead, the culture around the community makes it difficult for these companies to last or do the kind of damage we see in the broader space without being called out early or sticking out amongst the sea of legitimate companies.

Bitcoin is Money That Works

Over the years, the perspective shift has been the realization that bitcoin is a channel into not necessarily what money should be but what it could be. The alternative possibility it presents to those who use it globally, as we continue to see crackdowns on freedoms worldwide, highlights its importance and necessity as a potent tool to protect and safeguard one of the most fundamental civil rights—financial freedom. Without this, political power cannot be expressed or preserved.

Bitcoin is becoming a preferred tool in areas with unreliable state currency and exclusion from the global financial system. In Africa, where these are commonplace, in addition to the more than 55% of the population that is unbanked and facing currency inflation, bitcoin is being adopted by the general public. Despite regulatory uncertainty, Africans continue to use bitcoin for practical purposes like remittances, global commerce, and local retail. Over time, P2P has become a staple that protects users from disruptions in accessing bitcoin.

It may somtimes feel as though proponents of bitcoin may be selling a colossal promise when they say bitcoin has a wide range of applications such as a currency, store of value, and for instant micro-payments. However, when contextualized, it becomes apparent that it has a wide range of applications due to its core fundamental attributes, such as scarcity, security, and portability that make it such an excellent 21st-century money. At the end of the day, sound money naturally provides all these benefits.

But I digress. We have continued to see a relentless reliance and reversion to using bitcoin over time and a strong push from developers, catalyzed by programs like Qala, to build solutions that are Africa native to entrepreneurs re-imagining previously unsustainable solutions via the lens of bitcoin, such as electrifying communities using renewables-powered mini-grids via bitcoin Mining.

All these continue to strengthen our resolve as a bitcoin VC and the overall thesis we are guided by.

The Recursive Thesis

At recursive, through direct experience and observation, we have continued to fine-tune and adapt to new realities about where the bitcoin value proposition lies.

To this end, it has become evident that Africa is poised to become the global bitcoin development capital. The unique problem sets on the continent are natural areas where bitcoin can offer novel solutions.

We believe these two factors will contribute to Africa producing the most aligned and native bitcoin companies. Therefore, providing the funding to make this a reality is at the core of our investment thesis.

As we look forward, it is increasingly evident that with the combination of entrepreneurial and developer talent, necessity, and grit, Africa will cement itself as a beacon of the possibilities that bitcoin can enable.

This is an opinion post by Abubakar Nur Khalil. Opinions expressed are entirely their own and do not necessarily reflect those of Recursive Capital.