A year ago, analysts at J.P. Morgan observed that venture capital was pouring into crypto at a breakneck pace. Now, the sector has seen a precipitous drop in investment. Why? The hot money is in artificial intelligence.
Elevated interest rates and an uncertain macroeconomic environment have weighed on venture capital activity this year, with the frenzy over AI representing rare buoyancy for the space. Almost 20% of global venture funding—worth some $28 billion—in 2023 has come from AI, Crunchbase reported earlier this month.
Flows into AI in the wake of OpenAI’s high-profile launch of ChatGPT last year have been one of the few brights pots in venture capital. In the U.S., venture investment fell 48% year-over-year in the second quarter, with fundraising plunging 55%, analysts led by Steven Alexopoulos at J.P. Morgan wrote in a July 10 note.
Crypto, which has weathered more than a year of a
Bitcoin
bear market and an increasing threat from U.S. regulators, has borne much of the brunt. Third-quarter U.S. venture investment in crypto is down 83% year-over-year, with crypto and blockchain companies seeing a 94% year-over-year fall.
The shift is a sign of how investors have quickly moved on from lofty ambitions linked to Web3—a vision of the internet based on decentralized blockchain networks and virtual experiences in the “metaverse.”
Take
Meta Platforms
(ticker: META), for instance. The Facebook and Instagram parent changed its name in late 2021 to reflect a focus on the metaverse, and began funneling billions of dollars into building out the technology. Its stock price fell some two-thirds between late October 2021, when the name change was announced, and the end of 2022, while the tech-heavy
Nasdaq Composite
index lost just a third by comparison.
Now, Meta, like chip maker
Nvidia
(NVDA) and OpenAI investor
Microsoft
(MSFT), is an AI play while metaverse ambitions appear to be quietly flailing by the wayside.
Meta stock is up 158% year to date, but it has far less to do with Web3 than hopes for things like AI-powered chatbots.
Of course, market trends are just that. Crypto is still filled with perma-bulls, and money that was on the sidelines may start to move in on signs that the regulatory outlook might actually be improving.
A recent court case between token issuer Ripple and the Securities and Exchange Commission delivered the industry a partial win—and, crucially, provided one of the first inklings of clarity over whether digital assets are securities. It may take some risk off the table for VCs.
Crypto will still have some convincing to do. Kate Laurence, co-founder and general partner at Bloccelerate, a Web3-focused venture fund, told Barron’s last month that regulatory pressures “do not make crypto uninvestible,” but many companies “have already adjusted their strategies and moved their operations overseas.”
More wins in court or a victory at the Securities and Exchange Commission—now considering several new applications for Bitcoin ETFs—might make Silicon Valley bullish on crypto again. Until then, the AI bubble shows no signs of stopping, hogging the spotlight as crypto tries to stage a comeback.
Write to Jack Denton at [email protected]
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