For VCs, the negative impact of Bitcoin’s (BTC) disappointing 2022 run has had long-term adverse effects on the larger crypto and blockchain ecosystem.
Although the flagship cryptocurrency has recovered to some extent, surging around 55% during 2023, investments in crypto-related startups have declined for the fifth consecutive quarter.
VC crypto investments totaled just below the $2.3 billion mark in April-July 2023, notably the lowest quarterly level for over three years. This, according to data from PitchBook.
During H1 2023, investments had declined by nearly three-quarters from about $5 billion a year prior.
Tal Elyashiv, founder and managing partner at SPiCE VC, said that the “lofty exuberant valuation” days are behind us while also noting that valuations placed on crypto businesses had now dropped to levels closer in line or consistent with their real performance.
Crypto-asset investors remain concerned about the uncertainty that impacted the industry this past year when the spectacular collapse of the FTX digital currency exchange and other large companies, such as prominent hedge fund Three Arrows Capital, sent major shockwaves throughout the nascent sector.
US regulatory authorities have also increased their scrutiny of the speculative industry.
As first reported by Reuters, Cameron Peake, partner at Restive Ventures, shared:
“The biggest change from the height of the market is more time to do deeper diligence. There’s not necessarily anything new that is happening, except that funds are actually doing diligence now. Deals are no longer closing in mere days.”
The number of actual deals that have been finalized by H1 2023 stood at a modest 814, down considerably by over half of 1,862 from the same time period back in 2022, PitchBook data revealed.
Adam Reeds, CEO of Toronto’s crypto finance firm Ledn, remarked:
“Almost every company in the space tightened up in the aftermath of the carnage of 2022. Those that are raising capital now are probably doing it because they have to. I wouldn’t be surprised if in the near term that changes from ‘have to have’ raises to ‘nice to have’ raises.”
Should BTC prices be any indication, the investment decline could be a short-term situation.
Venture capital crypto-focused investments appear to have correlated with digital asset prices with an approximate lag of 3-6 months, according to data shared by PitchBook with Crowdfund Insider.
It’s worth noting that if the present market trends persist, then VC investment may increase in the second half of this year.
Bitcoin, the leading digital currency, which declined around 65% this past year, surged more than 90% during H1 2023.
The pseudonymous crypto is currently up around 55% YTD, at roughly $25,800.
However, BTC is trading at merely a third of its 2021 peak of nearly $70,000.
Notably, there has been a significant change in the kind of VC investment strategies, according to research shared by PitchBook.
About a year back, the primary focus seemed to be on firms that were linked to highly speculative non-fungible tokens (NFTs), and Metaverse/Web3 initiatives, which aimed to create a future (however, this has not yet materialized) version of the internet with crypto as its foundation.
But now, crypto investments have moved towards companies that offer the platform and support of the underlying tech of blockchain/DLT.
Infrastructure companies like cryptocurrency exchanges, digital wallets and other Fintech initiatives managed to get the most investments this year at $325 million, followed by blockchain networks at about $220 million and Web3 firms at $274.6 million, according to data from PitchBook.
During Q2 2023, the only two investment rounds of more than $100 million were finalized by LayerZero, a platform linking up two different blockchains, and the controversial WorldCoin initiative.
Alyse Killeen, founder at Stillmark, commented:
“Institutional investors are looking for things that are more durable. We’re seeing less appetite for risk and more appetite for sustaining technology.”