VC Investment in Crypto Plunged Amid Scandal and Regulatory Issues

The year 2023 proved to be a challenging period for cryptocurrency startups, as scandal and regulatory issues took a toll on fundraising efforts.

Venture capital investment in the crypto industry plummeted to just $9.5 billion during the year, less than a third of the previous year’s total, Bloomberg reported Wednesday (Jan. 10), citing data from research firm PitchBook.

The fourth quarter of 2023 was particularly difficult for many crypto startups, with high-profile cases of fraud and money laundering impacting the industry, according to the report. FTX co-founder Sam Bankman-Fried was convicted of multiple fraud charges, while Binance CEO Changpeng “CZ” Zhao pleaded guilty to violating anti-money laundering requirements.

These events coincided with a drop in crypto venture funding, which fell to $1.8 billion during the fourth quarter, half of what it was in 2022, the report said.

The decline in venture capital investment can be attributed, in part, to the challenge of adjusting expectations, per the report. During the crypto bull run in 2021 and early 2022, startups enjoyed sky-high valuations and massive fundraises. However, those conditions are no longer sustainable. Founders are now grappling with that reality.

Non-fungible tokens (NFTs), a digital asset class that gained significant attention during the crypto hype cycle, also experienced a decline in sales, according to the report.

NFT sales plunged by 63% in 2023, reaching $8.7 billion, the report said, citing NFT data tracker CryptoSlam.

Startups in the NFT space are now exploring alternative use cases for these tokens, such as tracking carbon credits, per the report.

Despite the challenging environment, there were some positive developments for young crypto companies, according to the report.

Tres Finance, a crypto data platform, managed to secure $11 million in Series A funding, according to the report. Additionally, the approval of bitcoin exchange-traded funds (ETFs) by the Securities and Exchange Commission (SEC) and the anticipated initial public offering (IPO) of stablecoin issuer Circle Internet Financial provide reasons for optimism in the industry.

Experts anticipate that crypto venture funding will rebound in the first quarter of the year, per the report. Venture capitalists, particularly those at crypto-native firms, have raised capital that needs to be deployed in the coming years.