Investments by institutional investors, private equity, and venture capital in cryptocurrency and decentralized finance have faded significantly over the course of 2022, a tumultuous year for both digital currencies and the digital financial system that emerges alongside them.
The swift November collapse of cryptocurrency exchange FTX Trading Ltd. and the subsequent arrest of co-founder Sam Bankman-Fried on fraud charges capped a year that began with the onset of the so-called "crypto winter." Total market capitalization for all cryptocurrencies peaked at $2.97 trillion in November 2021, but had declined nearly 73% to around $811 billion as of December 23, 2022, according to CoinMarketCap.
Trend in the same direction was the flow of capital towards cryptocurrency and decentralized finance, or DeFi, which is based on blockchain distributed ledger technology. Investments by institutional investors, private equity and venture capital in cryptocurrency and DeFi since the start of the fourth quarter totaled $917.8 million as of December 16, on track for the lowest quarterly total in two years.
investment in cryptocurrency and DeFi by private equity, venture capital, and institutional investors skyrocketed in 2021, rising nearly five times the prior-year total to $13.65 billion. Trading value and volume trended in only one direction last year, expanding in all four quarters of 2021.
That trend continued in the first quarter of 2022, when transactions backed by private equity, venture capital, and institutional investors in cryptocurrency and DeFi peaked at $5.07 billion before falling sharply. The second quarter total of $2.94 billion in investments represented a decrease of nearly 42% from the prior three-month period.
Investments continued to fall in the third quarter, a trend that seemed likely to continue into the fourth quarter.
Bitter deals for investors
The biggest deal of the last five years anywhere cryptocurrency o DeFi dates from March 2020: a $900 million Series B funding round for FTX that included participation from five dozen investors. At least one of those investors, Sequoia Capital Operations LLC, announced it was reducing the value of its stake in FTX to $0 following revelations about the alleged Bankman-Fried fraud.
Institutional investor Ontario Teachers' Pension Plan Board separately announced that it would divest its investments in FTX, which totaled $95 million, according to a statement. The public pension fund participated in an October 2021 funding round that raised $420.7 million for FTX.
The fallout from the FTX bankruptcy also affected BlockFi Inc., the target of the third-largest settlement in cryptocurrency o DeFi since 2018 that included the participation of institutional investors, private capital and venture capital. The cryptocurrency lender secured $572.1 million in a March 2021 venture capital funding round, but its financial entanglement with FTX led BlockFi to file for voluntary Chapter 11 bankruptcy protection in late November.
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In early 2022, as crypto But months before FTX's bankruptcy, a survey by Fidelity Digital Assets found positive perceptions of digital assets like cryptocurrency were booming among institutional investors. Fidelity engaged a firm to survey 1,052 global institutional investors during the first six months of 2022, with 81% of respondents indicating they see some role for digital assets in investment portfolios.
Enthusiasm for digital assets was higher among European and Asian institutional investors in the survey compared to those in the US, where only 71% saw a place for digital assets in their investment portfolio. Of the 397 US companies surveyed, 26% said that digital assets should not be part of a portfolio.
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While the collapse of FTX could have positive implications for cryptocurrency and DeFi, spurring necessary regulation and weeding out unsustainable companies, according to 451 Research analyst Alex Johnston, may also drive investors away from blockchain-based systems.
451 Research is part of S&P Global Market Intelligence.
