Record VC Crypto Investments May Halve in 2022 – Morgan Stanley

Updated by Geraint Price
In Brief
  • VC investments hit a record $30 billion in 2021.
  • Crypto bear market and declining tech sector investment to blame.
  • DeFi and Web3 investments may take longer to return profits.
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Venture capital investment (VC) has been flowing into crypto and Web3 startups at unprecedented levels recently, but one Wall Street bank is predicting that those flows may dry up this year.

A record $30 billion was raised by crypto startups from venture capital firms in 2021 and investments still remain high according to a report by Morgan Stanley.

However, the report continued to predict that VC investments will slow down for the remainder of the year mirroring other trends in venture capital. The Morgan Stanley strategists led by Sheena Shah said the era of “easy money is over,” according to reports. Morgan Stanley made its own investments into blockchain startups and deployed a crypto research team in 2021.

Not a week has gone by recently without headlines depicting a massive funding round for some Web3 startup, usually led by Andreessen Horowitz (a16z). According to the bank’s financial gurus, investment activity could drop by 50% by the end of the year.

VC bear market blues

The gloomy prediction has been based on the premise that crypto markets are entering a prolonged bear market that could last until well into 2023 or longer.

Activity across eight of the most important VC bellwether markets has fallen 50% from peak levels over the past 12 months, the report noted. It added that “worsening performance of some of the largest tech and crypto investors which are prioritizing existing holdings” rather than new investments could accelerate the decline as:

“Both token and equity investments become more challenging during a crypto bear market – a similar pattern seen during 2018/19,”

The major difference from the previous bear market is that crypto capitalization was just 20% of what it is today in 2018/19, even after the current 60% slump from its 2021 peak.

The bull market of 2021, combined with ample U.S. dollar liquidity, triggered the record VC investments which peaked in Dec. VC giants were quick to jump on the next big thing, which at the time was decentralized finance (DeFi). Moving into 2022, it has all been about Web3 which is essentially a similar concept – a decentralized and tokenized internet.

 Other sectors falling

The strategists based their predictions on what has happened in other sectors. The Nasdaq has fallen 25% since the beginning of the year, and more than 60% of software, internet, and fintech firms are trading below their pre-pandemic levels. This is “evidence that growth at all costs is no longer being rewarded,” they concluded.

Markets are cyclical and the bulls will return, however, those major VC investments into DeFi and Web3 may take a little longer to reach fruition.


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