For venture capitalists, the scars of bitcoin’s disastrous 2022 run deep.

While breezy bitcoin has bounced back, leaping by about 55% this year, investments in crypto start-ups have dropped for the fifth straight quarter.

VC crypto bets totalled just under US$2.3-billion (R44-billion) in April-July this year, the lowest quarterly level for over three years, according to data firm PitchBook. In the first half of 2023, investments were down by almost three-quarters from a year ago to $5-billion.

“The lofty, exuberant valuation days are gone,” said Tal Elyashiv, founder and managing partner of SPiCE VC, adding that valuations place on crypto companies had fallen closer in line with their actual performance.

Crypto investors remain haunted by the chaos that descended on the sector last year when the implosion of the FTX exchange and other major firms, including hedge fund Three Arrows Capital, sent shockwaves through the industry.

US regulatory scrutiny has also tightened on the industry.

“The biggest change from the height of the market is more time to do deeper diligence,” said Cameron Peake, partner at Restive Ventures. “There’s not necessarily anything new that is happening, except that funds are actually doing diligence now. Deals are no longer closing in mere days.”

The number of deals that were sealed by the halfway mark of 2023 was 814, down by more than half of 1 862 from the same period in 2022, PitchBook data showed.

Read: African fintech start-up scene thriving, but crypto in decline

“Almost every company in the space tightened up in the aftermath of the carnage of 2022. Those that are raising capital now are probably doing it because they have to,” said Adam Reeds, CEO of Toronto-based crypto finance company Ledn. “I wouldn’t be surprised if in the near term that changes from ‘have to have’ raises to ‘nice to have’ raises.”

Crypto chaos short-lived?

If bitcoin prices are any indication, the investment slump may be short-lived.

VC crypto investments have correlated with crypto asset prices with a lag of roughly three to six months, according to PitchBook, and if current trends continue, VC investment would rise during the second half of 2023.

Bitcoin, which fell 65% last year, jumped over 90% in the first six months of 2023 and is now up about 55% year-to-date, at $25 881. Still, it is trading at a third of its 2021 peak of $69 000.

There has also been a shift in the type of VC investment targets, according to the PitchBook data.

Read: One area of crypto is still booming

A year ago, the focus was on companies tied to speculative non-fungible tokens, as well as metaverse and web3 projects that sought to build a future — but still unrealised — iteration of the internet with crypto at its core.

Now, though, crypto bets have shifted towards firms that provide the platform or support the underlying technology of blockchain or cryptocurrencies.

Infrastructure firms such as crypto exchanges, wallets and other fintechs attracted the most investments in 2023 at $325-million, followed by blockchain networks at $220-million and web3 companies at $274.6-million, according to PitchBook.

In the second quarter, the only two funding rounds over $100-million were scored by LayerZero, a platform that connects two blockchains, and digital identity platform WorldCoin.

“Institutional investors are looking for things that are more durable,” said Alyse Killeen, founder and managing partner of bitcoin-focused venture firm Stillmark. “We’re seeing less appetite for risk and more appetite for sustaining technology.” — Medha Singh and Lisa Pauline Mattackal, (c) 2023 Reuters