VCs are down $9.3b in Crypto Business, Will they get cold feet?

Bitcoin Crypto Market Crash

The crypto market turned bloody with red trajectories this year, from the two largest cryptocurrencies by market cap — Bitcoin and Ether dropping over 70% from November 2021 highs to the Terra-Luna collapse. The series of unfortunate events in crypto which started from the very beginning of 2022 has only worsened with time. 

With lending giants like Celsius suspending withdrawals and filing for bankruptcy along with the crypto hedge fund Three Arrows Capital’s (3AC) crisis, it is obvious that venture capital (VC) firms have been taken aback by crypto investments.

According to the latest Crunch base report, VC investments in crypto companies were down to just $9.3 billion in the first six months of 2022, as opposed to $12.5 billion in the first half of last year. This in turn speculates a potential pullback in crypto/blockchain investments, mirroring the broader tech markets. 

Source: crunch base

VCs Practice ‘Once Burned Twice Shy’ After Terra-Luna Collapse

VCs caveating crypto investments are rather unsurprising given earlier this year industry giants suffered substantial losses post the terra-luna fiasco. 

Galaxy Digital’s Luna Losses

Crypto merchant bank, Galaxy Digital was amongst one of the largest institutions that became part of the Terra-Luna controversy after the company’s CEO, Mike Novogratz stepped up and revealed their Luna investments post the crash. 

Novogratz shared a post via Twitter that unveiled how Galaxy’s “principal investments team invested in Luna in Q4 of 2020 using balance sheet capital”, adding that the “initial thesis for investing in Luna was centered around the expansion of blockchain native payments systems”. Nevertheless, Galaxy’s CEO ascertained that the company stabilized despite the flash crash due to a diversified portfolio that weighted the possibilities of a black swan event like this. 

Hashed Was Trashed After Luna Crashed

South Korea was the hardest hit region after the Terra-Luna collapse and the country’s early-stage VC, Hashed secured a spot amongst the financially knocked down VCs globally. The Hashed wallet lost over $3.5 billion in the black swan event according to CoinMarketCap data from April. Additionally, according to a local news outlet, “about 200,000 investors in South Korea are presumed to have invested in TerraUSD and Luna” marking the highest number of investors in a region that suffered the terra-luna tumble. 

Furthermore, industry sources of the publication reported that the South Korean regulatory watchdogs including — the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) sought local cryptocurrency exchange operators to “share information on transactions linked to TerraUSD and Luna, including the volumes of their trading, their closing prices and the number of relevant investors”. 

Regulatory authorities across the globe closed in on the crypto industry, specifically, algorithmic stablecoins after the terra-luna event. The International Monetary Fund’s (IMF) managing director Kristalina Georgieva even argued that investment in stablecoins that are not backed by real-world assets is the same as investing in a Pyramid scheme. 

The IMF official said, “the less there is backing it, the more you should be prepared to take the risk of this thing blowing up in your face”. She added, “it [crypto] offers us all faster service, much lower costs, and more inclusion, but only if we separate apples from oranges and bananas”.