Morgan Stanley Says Record Crypto Venture Capital Investment Will Slow

Crypto companies raised a record $30 billion in venture capital (VC) last year and the number of transactions in the sector remains high despite the recent fall in cryptocurrency marketsMorgan Stanley (MS) said in a report on Tuesday.

However, deal activity is expected to fall, mirroring trends in other venture capital categories, according to the report.

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

A slowdown is expected as “activity in eight of the largest flagship venture capital markets over the past 12 months has reset 50% from peak; the deteriorating performance of some of the biggest tech/crypto investors prioritizing existing holdings over deploying more dry powder, and the exit of “tourist capital” as token and equity investments become more difficult for a crypto bear market – a similar pattern seen during 2018/19,” he added.

Venture capital is a form of private equity investment where funding is given to start-ups and small businesses with high growth potential.

Abundant US dollar liquidity and rising crypto prices fueled record venture capital investment in the sector last year, with more than 1,800 deals, according to the note. This represents an increase of 160% compared to the average of previous years. Investments in crypto accounted for 7% of all venture capital investments globally, he added.

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

DeFi is an umbrella term used for loans, transactions, and other financial activities performed 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.

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