Bitcoin BTC=BTSP has risen by about 55% this year, but investments in crypto startups have fallen for the fifth quarter in a row.
From April to July of this year, venture capitalists bet just under $2.3 billion on cryptocurrencies. This is the lowest quarterly amount in more than three years. From the first half of 2022 to the first half of 2023, spending dropped by almost three-quarters to $5 billion.
Investors in cryptocurrencies are still haunted by the chaos that hit the industry last year when the FTX exchange and other big firms, including the hedge fund Three Arrows Capital, went under.
The business has also become more closely watched by U.S. regulators.
The most significant difference from when the market peaked is that we have more time to research. There is only a little new, except that funds are doing their research now. No longer do deals close in just a few days.
PitchBook data showed that by the middle of 2023, 814 deals had been closed, less than half of the 1,862 deals that had been closed by the same time in 2022.
After the disaster of 2022, almost every company in space tightened up. Those raising money now are probably doing it because they have to. I wouldn’t be surprised if ‘have to have’ raises turned into ‘nice to have’ raises shortly.
If the price of Bitcoin is any sign, the investment slump might not last long.
According to PitchBook, there has been a correlation between VC crypto investments and the prices of crypto assets, with a lag of about three to six months. If current trends continue, VC investments will rise in the second half of 2023.
Bitcoin dropped by 65% last year but jumped by more than 90% in the first six months of 2023. At $25,881, it is now up about 55% for the year. Still, the price is only a third of the $69,000 high it will reach in 2021.
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The types of companies that venture capitalists invest in have also changed, according to statistics from PitchBook.
A year ago, the focus was on companies with speculative non-fungible coins and metaverse and Web3 projects that wanted to build a future version of the internet with crypto at its core, but it has yet to happen.
Now, though, crypto bets are more likely to be placed on companies that offer a platform for blockchain or coins or that support the technology behind them.
PitchBook says infrastructure companies like crypto exchanges, wallets, and other fintechs got $325 million in funding in 2023. Blockchain networks came in second with $220 million, and Web3 companies came in third with $274.6 million.
LayerZero, a platform that links two blockchains, and WorldCoin, a digital identity platform, got the only two funding rounds of over $100 million in the second quarter. Institutional investors are looking for things that will last longer. People are less willing to take risks and more willing to use technology that will last.