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Venture Capitalists Rushing to AI Leaving Crypto Behind: Here’s Why

Published July 13, 2023 1:43 PM
Omar Elorfaly
Published July 13, 2023 1:43 PM

Key Takeaways

  • VCs are leaving crypto behind: Gold rush over?
  • Is Washington DC to blame for crypto’s demise?
  • AI has better publicity than crypto

Venture capitalists are running toward artificial intelligence companies, providing funding and shifting their focus away from crypto. Financial records show that VC spending on AI has more than doubled during the first quarter of 2023, while the same cannot be said for crypto.

The crypto market has been receiving numerous heavy blows, from company collapses, to regulatory litigation to potential corporate takeover. But, perhaps one of the most influential factors on the crypto market is the regulatory framework in progress which favors the focus on key select crypto tokens.

Crypto has also struggled to reach the public appeal that AI has quickly achieved. Tools such as OpenAI’s ChatGPT and Dall-E have redefined the concept of “user-generated content” and even threatened the survival of existing tech overlords such as Google.

Favoring A Winning Horse

A clear rule in finance and investments is that money goes where more money can be generated, with the least potential risks. Unfortunately, crypto does not provide a clear path toward such a goal.

The 2016 crypto crash really brought things into perspective. The world truly realized the volatility of crypto and the potential danger of betting an individual’s or organization’s future on it. 2023, has been no different.

Just this year, the SEC started a legal battle against the two biggest crypto exchanges, Binance and Coinbase. The regulating body is also on a crusade against any crypto token it does not find favorable. 

Naturally, the crypto market is seen as one that is not only volatile but also strictly regulated enough to the point where it may stifle innovation.

For that reason, PitchBook data  cites that Global venture capital funding for crypto dropped by 80% in the first quarter of 2023 compared to the previous year, from $12.3 billion to $2.4 billion.

In the meantime, AI has been enjoying a surge of attention from global investors, as $1.7 billion was generated across 46 deals in Q1 2023 . Another $10.68 billion worth of deals were not seen through. 

Change Of Management

As crypto is seemingly losing the interest of venture capitalists, it finds itself in the hands of a new source of financial wealth, Wall Street.

Although 2023 is a year headlined by countless legal battles between companies in the market and their corresponding regulating bodies, crypto suddenly became the new fad for Wall Street to focus on.

Earlier this year, BlackRock, the world’s biggest asset firm, threw its hat into the crypto ring. The company that manages assets worth more than $9 trillion filed for a Bitcoin spot ETF, essentially their way of facilitating investments in Bitcoin through the old ways of TradFi.

BlackRock’s application didn’t just send the value of Bitcoin up by over $4,000 it also enticed a tide of corporate interest in the space. Adjacent asset management companies such as Fidelity, Valkyrie, and WisdomTree followed in BlackRock’s footsteps, signaling the arrival of TradFi money into the DeFi world. 

The AI Market

Lu Zhang, the founder and managing partner of VC firm Fusion Fund reported, “It’s not a crowded market yet, but it is getting more competitive,” adding that “The barrier for entry is still quite low.”

Fusion has a portfolio includes the AI search engine You.com, which has seen an 80% increase in the number of pitches for generative AI startups in just the past two months.

Currently, the biggest names in the game are OpenAI, currently owned by Microsoft, and Google. OpenAI is most famous for its flagship product ChatGPT.

However, Elon Musk, the head of Tesla, SpaceX and X Corp just announced the formation of xAI, which Musk described xAI as a way to “understand reality”. 

“I’m definitely starting late, but I will try to create a third option,” said Musk, adding that “This might be the best path to safety, in that an AI that cares about understanding the universe is unlikely to annihilate humans, because we are an interesting part of the universe.”

It’s almost impossible to dismiss the potential change to the market Elon Musk will have on AI and investments in the AI field with his most recently announced company. 

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