The fascination with crypto market seems to be fading among venture capitalists at a worrisome pace. Funding has plummeted by a staggering 63%, credits to the ongoing artificial intelligence (AI) fad. This dip in funding is alarming since it raises concerns of potential business closures
While crypto was ‘THE’ thing back in 2021, venture capital interest in the crypto market reached its Mariana Trench. VCs became suspicious and hesitant after the following bear market’s devastating losses in 2022 that shocked the entire sector.
In the third quarter of 2023, VCs only injected $1.9 billion into the market, which is a 63% drop compared to the same period in 2022. A PitchBook analyst, Robert Le says that this drop can be credited to lack of big investment deals.
That’s one of the drivers of the decline – deals are smaller
Robert Le
He further expresses concern over crypto companies failing to secure:
If they’re not able to raise a round, even a down round, they’re either going to go out of business or get acquired at a valuation that’s much, much lower
Further challenges like crypto firms laying off their workers due to market conditions is another signal of lack of funding. Data firms and startups like Chainalysis and Everledger have already laid off 15% pf their workers.
VCs choose AI over Crypto
The decline in cryptocurrency investments isn’t just a result of the bear market. The rapid development of AI has significantly shifted investor focus away from cryptocurrency. For example, Japanese investment giant SoftBank has abandoned its once-fervent interest in investing in cryptocurrencies and has been furiously pouring money into AI businesses.
This shift towards AI extends beyond VCs, as even entertainment conglomerate Disney formed a dedicated task force for AI, leaving its metaverse ambitions behind.
Entertainment giants and crypto executives pivot towards AI
Even entertainment conglomerates like Disney shut their metaverse plans and now have a dedicated task force for AI. Co-founder of Layer 2 solution Polygon Jaynti Kanani made a similar decision to leave the cryptocurrency industry to create a new AI firm.
Some Crypto VCs still committed
Nevertheless, some investment firms remain committed to the long-term vision of the crypto ecosystem. Blockchain Capital, a crypto VC company, recently raised an impressive $580 million to fuel its investments across six crypto sectors.
There is a glimmer of hope on the horizon with the impending Bitcoin halving, which could herald the start of a new bull market and attract fresh VC funding into the crypto space.
What contributed to the VC funding drop?
According to a recent Blockdata report, several factors contributed to the drop in VC funding for blockchain and crypto sectors in 2022. The report points to consecutive quarterly declines in funding, with particular attention given to two significant events as catalysts for the downturn.
It all started with the collapse of the Terra ecosystem in early 2022. It has a disastrous effect on the sector leading to a domino-like fall of lending firms lile Celsius and Three Arrows Capital.
Second, the implosion of FTX in November 2022 added further volatility to the crypto space. Beyond these specific incidents, global macroeconomic conditions played a substantial role, influenced by rising interest rates and inflation. And then after a pause, in November 2022 the implosion of FTX added further volatility to the crypto sector.
Global macroeconomic conditions like inflation and rising interest rates also played a substantial role in creating stronger headwinds for the sector. Due to these factors, venture capitalists have likely become more cautious while allocating their cash to high-risk investments like crypto and blockchain companies.
