Crypto investment in freefall as VCs switch funds to AI

The cryptocurrency bubble has well and truly burst, with venture capitalists increasingly deserting the industry in favour of AI.

The Wall Street Journal reports that Sequoia Capital – one of Silicon Valley’s most renowned venture capital firms – is slashing its crypto fund following a year of turbulence in the industry.

Sequoia’s crypto fund will be cut by almost two-thirds, falling from $585m to $200m. It has also halved its ecosystem fund, designed to back smaller ventures, to $450m.

Sequoia was one of the many companies to have its fingers burned by the collapse of FTX, Sam Bankman-Fried’s cryptocurrency exchange. Sequoia’s $214m investment in FTX has been completely written off.

The FTX failure, for which Bankman-Fried is awaiting trial on multiple counts of fraud, has spread uncertainty across the entire cryptocurrency sector. Confidence has been further eroded by regulatory action against other high-profile crypto firms.

In March, the US Commodity Futures Trading Commission (CFTC) said it was suing Binance for violating the Commodity Exchange Act and other federal regulations, claiming the company was running an “illegal” exchange and a “sham” compliance program. Binance is pushing to have the case dismissed, with the Cayman Islands-based company claiming the CTFC is acting beyond its jurisdiction.

Money moves to AI

The other big problem for the crypto industry is there’s a new rising star in the tech industry: AI.

A survey of almost 100 venture capital investors conducted by financial data firm PitchBook in June found that 74% of them had made at least one investment in AI or machine learning in the past 18 months. Almost 14% of them had made at least seven investments in the sector.

By contrast, fintech and blockchain-related investments had slipped from the top spot a year ago to the fourth most invested in the category, with only around 7% of investors claiming to have made a recent investment in the sector. Climate tech and digital healthcare had both overtaken fintech.

Part of the slowdown in crypto investment is attributed to a wider decline in VC spending, with considerable uncertainty in the economy. Yet, as PitchBook’s lead VC analyst, Kyle Stanford, said last month, venture capitalists are still prepared to make bets on the right technology. “There is still significant dry powder available to deploy and it is encouraging to see investors report much of their existing funds are for new investments,” he said.