After FTX collapsed, this is perhaps time for VCs to start out utilizing ‘widespread sense’ once more

As cryptocurrency prices plummet, some withdrawals are halted, and FTX struggles for new investment after its surprising drop, it seems fair to imagine what will happen to venture investing in the sector.

The FTX debacle has already left its venture capitalists baffled, with VC titan Sequoia Capital telling its LPs it has reduced the value of its FTX stake to zero after investing more than $210 million in the exchange.

The crypto investment market has cooled off significantly since 2021 – like most other investment markets. Last year, a record $23.3 billion was invested in VC-backed cryptocurrency startups, according to data from Crunchbase. So far this year, just over half of that number — $12.8 billion — has been invested in similar startups.

That cooling off could continue as investors start asking questions they should have asked all along.

There’s a fine line between betting on the future – even when that means investing in concepts that, at least today, don’t quite match up – and just throwing money at a concept because everyone else is doing it.

While cryptocurrency is a useful asset class for people who are wary of central banks, that doesn’t justify all the money raised and invested in the sector. This could be what forces VCs to start using their common sense again – although this is the by-product of every downturn and always dissipates the minute the easy money arrives.

What happened?

While it could be argued that FTX’s troubles started years ago, the troubles began on Nov. FTT. Zhao said the decision is due to “recent revelations that have come to light” about the token.

Earlier this month, reports surfaced that Sam Bankman-Fried’s trading company Alameda Research had a large chunk of FTT on its balance sheet, possibly helping to sustain its value.

FTT prices dropped like a rock amid controversy and FTX was thrown into disarray as withdrawals mounted.

Binance seemed to emerge as the white knight for FTX when Zhao tweeted the news that his company would acquire FTX, but that deal quickly fell apart.

Earlier Thursday, Bankman-Fried tweeted the obvious as it was reported that he would shut down his Alameda trading platform and was seeking investors for emergency funding for FTX as it faces an $8 billion shortfall.

And now, how are the investments?

The collapse is impressive when considered earlier this year, FTX raised $400 million with a valuation of $32 billion. According to Crunchbase, FTX has raised nearly $2 billion in total. FTX investors include companies such as SoftBank Vision Fund, Temasek Holdings of Singapore, Paradigm and Lightspeed Venture Partners.

Despite the collapse and the ongoing “crypto winter” – which saw cryptocurrency prices drop substantially last November – venture capitalists say that while some faith may have been shaken in the market, they are not changing their long-term strategies. .

Cryptocurrency-based centralized finance companies – such as FTX – that offer cryptocurrencies in a way more similar to traditional financial services products will find it more difficult to obtain funding, as opposed to DeFi-based financial services, which will still be funded once they are funded. were unaffected by the FTX collapse.