Morgan Stanley says record crypto venture capital investment to slow

Crypto companies raised a record $30 billion of venture capital (VC) last year and the number of deals in the sector remains elevated despite the recent fall in cryptocurrency markets, Morgan Stanley (MS) said in a report Tuesday.

However, deal activity is likely to drop, mirroring trends in other VC categories, the report said.

The number of VC cryptocurrency investments peaked in December. If the crypto industry matches other sectors, the level could slide as much as 50% by the end of the year, the bank said.

A slowdown is expected as “activity across eight of the most important VC bellwether markets over the past 12 months has reset 50% from peak; worsening performance of some of the largest tech/crypto investors who are prioritizing existing holdings over deploying further dry powder, and the exit of ‘tourist capital’ as both token and equity investments become more challenging during a crypto bear market - a similar pattern seen during 2018/19,” it added.

Venture capital is a form of private equity investing where financing is given to startup companies and small businesses with high growth potential.

Plentiful U.S. dollar liquidity and rising crypto prices fueled record VC investment in the sector last year, with more than 1,800 deals, the note said. This represented an increase of 160% above the average of the previous years. Investment in crypto was 7% of all venture capital investment globally, it added.

Morgan Stanley notes that at the beginning of 2020 most investment was in crypto infrastructure and financial services, in late 2020 to mid-2021 decentralized finance (DeFi) applications were favored and from the end of 2021 into 2022 non-fungible-tokens (NFTs) and gaming companies saw the most investment.

DeFi is an umbrella term used for lending, trading and other financial activities carried out on a blockchain, without traditional intermediaries. NFTs are digital assets on a blockchain that represent ownership of virtual or physical items and be sold or traded.