After ~$30B of venture capital flowed into crypto/blockchain companies in 2021, Morgan Stanley strategists led by Sheena Shah expect a dramatic falloff by the end of this year, in part, because the era of "easy money is over."
Rising cryptocurrency prices and ample U.S. dollar liquidity triggered record venture capital investment in 2021, the strategists wrote in note to clients dated Tuesday. "Blockchain and crypto projects raised ~$30B across >1800 deals in 2021, 160% above the average of prior years and 7% of all VC investment globally," they said.
That amount is only company equity and doesn't include investors receiving projects' related crypto token instead, they said.
"We think that is all going to change — the number of VC crypto investment deal peaked in December 2021, and if it matches prior performance of other sectors, could fall as much as 50% into the end of the year," the team led by Shah said.
As investors searched for "the next big thing" in crypto and decentralized finance (DeFi), some crypto assets soared more than 10,000% in a year. Across a number of sectors, private companies were getting values at levels similar to larger public companies and approaching unicorn-type values, they noted. Now, the Nasdaq has fallen 25% YTD, and 61% of all software, internet and fintech companies are trading below their prepandemic levels — "evidence that growth at all costs is no longer being rewarded."
The strategists outline the progression of VC investment in crypto/DeFi/NFTs:
- Early 2020 — Investment mostly went to crypto infrastructure and financial services;
- Late 2020-mid-2021 — attention turned to DeFi applications; and
- Late 2021 into 2022 — non-fungible tokens and gaming companies saw the most investment.
Hedge funds' are pulling back, they said. After participating in more than 50% of capital raised in 2021/2022, this year hedge funds were only involved in 10% of the deals, and are focusing on unicorn-status larger companies.
Their argument for a likely slowdown: Activity across eight if the most important VC markets over the past 12 months has reset 50% from its peak; some of the largest tech/crypt investors, after suffering weaker performance, are focusing on existing holdings rather than further deploying dry powder; and "tourist capital" is heading for the exits as token and equity investments become more challenging during a crypto bear market.
Other analysts and strategists, though, are seeing signs that the crypto market is bottoming out. Bitcoin (BTC-USD) is rising 4.6% in Tuesday trading hitting over $32K, its highest level since May 11.
In another related read, more than $500M flowed out of crypto ETFs and ETPs in the year through April