Will VCs give up on crypto?
Welcome to Nonrival, the newsletter where readers make predictions.
How it works
- On Sundays, read the newsletter and make a forecast by clicking a link at the bottom.
- On Wednesdays, see what other readers predicted and how your forecast compares.
- Over time, you’ll get scores based on how accurate your forecasts are.
In this issue
- Make a forecast: Will VCs give up on crypto?
Thanks for forecasting. Send feedback to firstname.lastname@example.org.
Even by the standards of crypto, phew, what a week. In 10 days, FTX went from one of the biggest, most mainstream players in the sector to announcing bankruptcy. Will the crash cause investors to rethink their interest in crypto? That’s the question animating this week’s forecast, and it’s a major piece of the narrative that this is “crypto’s Lehman moment.”
On the other hand, a lot of investors are bought into the potential of blockchain and web3. And the reports of mismanagement and potentially worse at FTX might convince even relatively risk-averse institutions that the problem was the company not the sector. Or, put it this way: If all the previous swings and scams and hacks weren’t enough to persuade an investor to steer clear, is this really going to change their mind?
This week’s forecast looks at this question through one key sector for funding crypto: venture capital.
Will venture capitalists give up on crypto?
Specifically: Will US venture capital investment in crypto exceed $2 billion in either Q4 of 2022 or Q1 of 2023?
Make a prediction at the bottom of this newsletter.
Last week, FTX was the third-largest crypto trading platform worldwide. Its 30-year-old founder, Sam Bankman-Fried (SBF) “was the most important person in crypto,” The Economist wrote this week. FTX, which he founded in 2019, was headquartered in the Bahamas, with a US-based affiliate, FTX US.
FTX and SBF spent billions on a major marketing push over the last year, to establish the company as mainstream and respectable among policymakers, investors, and consumers. (SBF took an interest in forecasting through his philanthropic efforts but has no financial connection to this newsletter.)
Along the way, FTX raised just under $2 billion from investors, including well-known VC firms like Sequoia and Wall Street staples like BlackRock. They did not receive any board seats and those investments are now worth zero.
FTX acquired multiple distressed crypto firms earlier this year. At least one of them is now searching for a new acquirer.
So… then what happened? FTX lent billions in customer assets to Alameda Research, a hedge fund also founded by SBF, according to the Wall Street Journal. A news report revealed that Alameda owned lots of the crypto token FTT, issued by FTX. After which a competitor—Binance—announced that it would be selling its FTT holdings, which seemingly set off a flood of withdrawals that took FTX down. The exchange held just $900 million in liquid assets—half of it stock in one company—against $9 billion in liabilities, the Financial Times reported Saturday.
Coinbase, the US-based, publicly-traded crypto exchange, told investors last week that it had no exposure to FTX and that it was not vulnerable to bank runs because it does not lend out customer assets. Its stock price dipped on the FTX news but has mostly recovered.
- Wednesday, Nov. 2: A report from the news site Coindesk raised doubts about FTX’s balance sheet.
- Sunday: FTX’s main competitor Binance announced it would be selling all its holdings of FTX’s crypto token.
- Monday: FTX’s founder said the company was fine.
- Tuesday: Binance said it planned to acquire FTX.
- Wednesday: Binance changed its mind.
- Friday: FTX filed for bankruptcy and its founder and CEO resigned.
From around the internet…
Nonrival also asked several VCs for their perspective:
For more on how VC is faring overall, beyond crypto, read Nonrival’s Oct. briefing.
How likely is it that US venture capital investment in crypto exceeds $2 billion in either Q4 of 2022 or Q1 of 2023?
Deadline: Make a forecast by 9am ET Tues. Nov. 15
Fine print: This question will be solved by PitchBook’s analysis of US VC Deal Activity in Cryptocurrency/Blockchain following the release of Q1 2023 data.