Venture capital (VC) funding for cryptocurrency and blockchain startups has plummeted to its lowest level since the fourth quarter of 2020. This continued downward trend in investment paints a gloomy picture for the crypto industry as it struggles to emerge from the ongoing bear market.
In a recent Twitter post, a crypto investor with close to 400k followers on X Miles Deutscher pointed out that crypto VC funding is now at its lowest point in nearly three years. Deutscher argued that this is not the time to turn bearish on crypto investments, however. He noted that the VCs who invested in crypto in 2019 and 2020 reaped huge rewards when the market peaked in 2021. Meanwhile, those who jumped on the bandwagon later ended up losing money. Deutscher believes that going against the herd and investing when others are fearful can lead to the greatest rewards down the line.
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Some Reasons for the Crypto Venture Capital Funding Decline
The sharp decline in VC interest comes on the heels of crashing cryptocurrency prices and high-profile crypto failures like Celsius, Voyager Digital, and FTX. The spectacular implosion of FTX in particular seems to have shaken investor confidence in the industry. The regulatory crackdowns and bear market of 2022 have also led to declining enthusiasm for crypto among retail investors.
Investors are conducting extra due diligence and vetting on crypto deals, wanting to avoid exposure to unnecessary risks in the current climate. Macroeconomic headwinds like rising interest rates have also made VCs more selective with their capital. Meanwhile, the evolving regulatory landscape, especially increased SEC scrutiny in the US, has introduced more uncertainty.
On top of all this, the valuations of crypto startups have collapsed as the market cratered.Startup valuations dropped a further 15% just in the first half of 2023 alone. With valuations down nearly 70% from their highs, deal terms that investors previously accepted look far less attractive now. The combined impact of all these factors has put a deep chill on crypto VC activity.
Could Be Good for the Crypto Industry
Some industry experts argue that the drop in VC funding is not necessarily a bad thing for crypto. The overheated market of 2021 attracted investors looking to cash in on speculative mania rather than projects with real utility. With speculators now shaken out, the startups able to attract funding in this climate are more likely to be focused on building real-world use cases. Once the market bottoms out and turns around, these projects could be well-positioned for growth.
For now though, the crypto winter shows no signs of letting up. Startups will need to hunker down and focus on product development rather than relying on easy VC money. As Deutscher noted, those VCs willing to take risks when sentiment is low could reap big rewards when the inevitable recovery comes. But in the meantime, the funding tap has been turned off as investors take a wait and see approach.
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