Is the Venture Crypto Boom Over?

While Bitcoin has made a strong recovery, surging by approximately 55% this year, the world of crypto startups is experiencing a decline in investments for the fifth consecutive quarter. According to data from PitchBook, venture capital investments in the crypto space amounted to just under $2.3 billion in April-July of this year, marking the lowest quarterly level in over three years. In the first half of 2023, investments dwindled by nearly three-quarters compared to the previous year, totaling $5 billion.

Tal Elyashiv, the founder and managing partner of SPiCE VC, remarked, “The lofty, exuberant valuation days are gone,” noting that valuations of crypto companies have now aligned more closely with their actual performance.

The haunting memories of the chaos that engulfed the crypto sector in the wake of the FTX exchange’s implosion and the troubles faced by other major firms like hedge fund Three Arrows Capital still linger among crypto investors.

Moreover, U.S. regulatory scrutiny has intensified in the industry. Cameron Peake, a partner at Restive Ventures, explained, “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.”

PitchBook data revealed that the number of deals sealed by mid-2023 had dropped from 1,862 to 814 compared to the same period in 2022.

Adam Reeds, CEO of Toronto-based crypto finance company Ledn, commented, “Almost every company in the space tightened up in the aftermath of the carnage of 2022. Those raising capital now are probably doing it out of necessity. I wouldn’t be surprised if, in the near term, that changes from ‘have to have’ raises to ‘nice to have’ raises.”

The investment slump may be temporary if Bitcoin prices are any indication. PitchBook suggests that VC crypto investments have a lag of approximately three to six months compared to crypto asset prices. If current trends continue, VC investments could rise in the second half of 2023.

Despite a 65% drop in Bitcoin’s value last year, the cryptocurrency surged by over 90% in the first six months of 2023 and is currently up by about 55% year-to-date, trading at $25,881, albeit still far from its 2021 peak of $69,000.

Shifting Focus: From NFTs to Infrastructure

PitchBook data also highlights a shift in the focus of VC investments. A year ago, the emphasis was on companies associated with speculative non-fungible tokens (NFTs), metaverse projects, and Web3 initiatives aimed at creating a crypto-centric future for the internet, which is yet to materialize.

Now, the focus has turned towards firms that provide platforms or support the underlying technology of blockchain and cryptocurrencies. In 2023, infrastructure companies such as crypto exchanges, wallets, and other fintechs attracted the most investments at $325 million, followed by blockchain networks at $220 million, and Web3 companies at $274.6 million, according to PitchBook.

Alyse Killeen, founder and managing partner of the bitcoin-focused venture firm Stillmark, observed, “Institutional investors are looking for things that are more durable. We’re seeing less appetite for risk and more appetite for sustaining technology.”