Crypto companies have raised a record $30 billion in venture capital (VC) in 2021, and the number of deals in the sector is still high despite the recent downturn in crypto markets, Morgan Stanley (MS) said in a report Tuesday.
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However, the number of deals is likely to decline, mirroring trends in other venture capital categories, the report said.
The number of crypto investments by VCs peaked in December. If the crypto industry catches up with other sectors, levels could fall by as much as 50% by the end of the year, the bank said.
A slowdown is expected as "activity in eight of the leading VC markets has fallen 50% from the peak over the past 12 months; performance has deteriorated for some of the largest tech/cryptocurrency investors, who are prioritizing existing investments rather than deploying more capital; and outflows of "tourist capital" have increased as token and equity investments become more difficult during a bearish crypto market, a pattern similar to 2018/19," it added.
Venture capital is a form of private equity investment that provides funding for startups and small businesses with high growth potential.
Abundant U.S. dollar liquidity and rising cryptocurrency prices drove VC investment in the sector to record levels in 2021, with more than 1,800 deals, the report said. This represents a 160% increase over the average of previous years.
Crypto investments accounted for 7% of all VC investments globally, the report added.
Morgan Stanley noted that in the early 2020s, most investment flowed into crypto infrastructure and financial services, while decentralized financial applications (DeFi) were favored between late 2020 and mid-2021. From late 2021 to 2022, non-fungible tokens (NFTs) and gaming companies accounted for most of the investment.
DeFi is a general term for loans, transactions, and other financial activities conducted on a blockchain without traditional intermediaries. NFTs are digital assets developed on a blockchain that represent ownership of virtual or physical items that are sold or exchanged.
This article was translated by Marina Lammertyn.