April Venture Capital Investment Market: Dead Cat Bounce?
A temporary resurgence or a true trend reversal? Many venture capitalists in blockchain technology are asking this very question, especially in the wake of a Cointelegraph report that showed a 168.7% increase in investment. What can be inferred from this sudden rebound after months of persistent downturn?
In financial circles, a "dead cat bounce" is a colloquial term used to describe a short-lived recovery in a falling market. As the adage among financiers goes, even a dead cat will bounce if it falls from a great height.
The looming expectation of a recession in the U.S. doesn't exactly boost confidence in riskier ventures, which inherently includes venture capital investments. But let's dissect this scenario systematically.
April's venture landscape: 50 deals and $2.71 billion in BTC options
“Bulls remain hopeful as market moves sideways”. This poetically titled report focuses on the state of funding in the blockchain industry as of May 2023. Whether the market moves sideways or not, medium-term industry expectations are slowly but surely shifting towards optimism. Nevertheless, the short-term market remains tense and unpredictable. Even in the face of revival signs, analysts caution against anticipating an immediate Bull Run.
As previously noted, venture investments in April saw a substantial increase—168.7% compared to March. This resulted in the total high-risk investment cash flow in the industry surging to $854 million spread across 50 deals.
The spotlight was firmly on infrastructure investments. Investors poured $451 million into the advancement of AI-related cloud technologies, streaming video, and visualization. CoreWeave, a cloud services provider, notably received half of this sum ($221 million). This was followed closely by investments in DeFi, which garnered $212 million across 15 transactions.
The persistently underperforming NFT sector warrants a separate mention. Month after month, the market has been in decline, showing a drop of 64.79% in dollar terms and a reduction of 50.91% in active wallets in May compared to April.
Blockchain investments in April 2023 Source: “Bulls remain hopeful as market moves sideways” report
Contrastingly, the investments into Bitcoin options seem far more robust, surpassing $2.71 billion in just a month. The trouble, however, is Bitcoin's notorious volatility. Simultaneously, the advent of the new BRC-20 standard tokens during the hype around the Ordinals protocol has already resulted in a considerable surge in commission revenues for miners.
Is 'Curly Sam' the cause of the venture capital slump?
The figures tell a different story. Looking closely at the venture capital investment dynamics from April 2022 through April 2023, the total capital inflow into the blockchain sector amounted to $24.82 billion.
We won't delve into whether this sum is large or small for now. The readiness of investors to take risks points to confidence in the economy and trust in the industry. So, as the saying goes, there can never be too much venture capital. The real concern lies in the distribution of these funds.
A whopping 75% of the entire amount ($19.73 billion) was invested during the initial six months of this period. From this, $15 billion was poured into the market between April and June 2022 alone.
There's a common perception that venture capital investments fell off a cliff due to the bankruptcy of the cryptocurrency exchange FTX. Indeed, the downfall of such a giant affected the entire market, but not in this instance. The venture market began its descent much earlier – during April to July 2022, the market was shedding between 30-50% of its investment volume each month.
In September and October 2022, the volume of investment crossed the psychological barrier of $1 billion (October's sum was $0.84 billion) and it didn't recover since. Nonetheless, FTX's bankruptcy was still a month away (it was declared in November 2022). Back then, the world's second-largest cryptocurrency exchange (third according to some) was awash with funds, with its asset value peaking at $32 billion.
Without a doubt, the bankruptcy of FTX led to an even steeper fall in venture investments, dropping to $0.46 billion in January 2023. However, the primary causes of the downturn don't appear to be the collapse of FTX nor the supposed swindler 'Curly Sam'.
Global venture capital investments in the blockchain industry, in USD billion Source: “Bulls remain hopeful as market moves sideways” report
Will this dead cat come alive?
What offers some hope is the analysis of venture capital investments over a more extended period (almost two years). A similar market downturn was observed a year ago, after which investors significantly increased their activity. The growth of venture capital investments to almost $1 billion in April 2023 could be indicative of a repeat of last year's situation. However, as the authors claim, although this growth is a positive sign of progress, it does not yet represent a trend. To assert a shift in trend, evidence of long-term investments would be necessary, which is not mentioned in the report.
In other words, the authors suggest that this "dead cat" may not have fallen from a great enough height to bounce back just yet. They appropriately observe that the macroeconomic conditions over the past two to three months have remained unchanged, with no driving force to propel the venture capital machine in the crypto market forward. On the flip side, the gradual tightening of regulatory rules in leading markets, along with the bankruptcy of FTX (which can't be overlooked), are not conducive to improving the investment climate.
