Global venture capital (VC) investments in the cryptocurrency sector are down 63% during the third quarter, marking the lowest level of funding since 2020, Bloomberg News reported, citing PitchBook research.

A mere $2 billion was poured into the sector, contrasting sharply with the enthusiasm seen in previous industry peaks, based on data provided by PitchBook.

VC Retreat from Crypto Investments

The decline coincides with the ongoing legal tumult involving FTX co-founder Sam Bankman-Fried (SBF) and his alleged mismanagement of the cryptocurrency exchange, which received hundreds of millions in venture funding.

Once the driving force behind the meteoric rise of the crypto industry, venture capitalists are now retreating in the face of increasing scrutiny due to their association with the beleaguered FTX platform.

Robert Le, a seasoned analyst at PitchBook, said:

“We aren’t seeing the big deals anymore. That’s one of the drivers of the decline – deals are smaller.”

Le further delved into the predicaments now facing companies that once thrived during the crypto bull market, such as FTX, OpenSea, and Yuga Labs.

With VCs stepping back, these companies might have no choice but to cut costs, lay off employees, or, in dire circumstances, face acquisition at slashed valuations.

He added:

“If they’re not able to raise a round, even a down round, they’re either going to go out of business or get acquired at a valuation that’s much, much lower.”

While early-stage crypto companies still see some investment deals, many established tech investors have vacated the scene entirely. Adding complexity to the situation is the continued ripple effects of the FTX scandal.

FTX fallout on VCs

Prominent VCs, such as the renowned Sequoia Capital, once backed FTX with relatively substantial investments, which it had to write off when the exchange went under.

FTX and its trading division, Alameda Research, were prolific investors in their own right before legal challenges clouded their horizons. Their vast investment portfolio boasted industry heavyweights like Circle, Paxos, Aptos Labs, and Anchorage Digital.

As FTX and Alameda navigate bankruptcy proceedings, their equity stakes in various startups have become crucial lifelines. The buzz surrounding a prospective funding round for AI startup Anthropic, an FTX investment, offers a silver lining for FTX’s creditors, holding out the promise of recouping losses through potential equity sales.

However, the U.S. Department of Justice (DOJ) is opposing SBF’s attempt to present the current value of investments, like AI startup Anthropic, in court. Prosecutors argue this is irrelevant and could mislead the jury.

Meanwhile, the prospect of a broad liquidation sale looms large, which, if executed hastily, could further drive down the valuations of crypto startups. Le accentuated this concern, stating:

“Because FTX and Alameda have such a huge portfolio, it could further depress valuations in this space.”

The global crypto investment community now waits with bated breath, keeping a keen eye on developments surrounding the FTX saga and its possible ramifications on the sector’s future.