Crypto companies raised a record $30 billion in venture capital (VC) last year, and the number of deals in the sector remains high despite the recent decline in cryptocurrency markets, Morgan Stanley (MS) said in a report Tuesday.
However, deal activity is likely to decline, mirroring trends in other VC categories, the report said.
The number of VC investments in cryptocurrencies peaked in December. If the crypto industry is in line with other sectors, the level could drop by as much as 50% by the end of the year, the bank said.
A slowdown is expected as "activity in eight of the major VC bellwether markets has declined 50% from the peak over the past 12 months; the deteriorating performance of some of the largest tech/crypto investors, who are favoring existing holdings over deploying more dry powder; and the exit of 'tourist capital' as both token and equity investments become more difficult during a crypto bear market - a similar pattern seen during 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 crypto prices led to a record number of VC investments in the sector last year, with more than 1,800 deals, the statement said. This represents a 160% increase over the average of previous years. Cryptocurrency investments accounted for 7% of all venture capital investments globally, it adds.
Morgan Stanley notes that at the beginning of 2020, most investments flowed into crypto infrastructure and financial services; in late 2020 to mid-2021, decentralized financial applications (DeFi) were favored; and from late 2021 to 2022, most investments were in non-fungible tokens (NFTs) and gaming companies.
DeFi is an umbrella term for lending, trading, and other financial activities conducted on a blockchain without traditional intermediaries. NFTs are digital assets on a blockchain that represent ownership of virtual or physical items and can be sold or traded.