Despite the FTX collapse and other recent failures in the crypto industry, VCs continue to pour money into cryptocurrency projects.
Let’s just keep throwing money at it
• Pitchbook reports that $6.5 billion has been invested in crypto over the last 12 months, with $879 million coming in just the last quarter.
• Many of these investments are going into “decentralized” technologies that are seen as more transparent and less likely to fail than their centralized counterparts.
• However, not all of these decentralized technologies are created equal, and some may be no better than those that have already failed.
• Additionally, many of the companies receiving funding are still risky bets by any normal standard — such as a company peddling adoptable dogs from outer space or a blockchain game based on an 80s football manga series.
Ever since Bitcoin surged in 2017, entrepreneurs have been scrambling to develop the next big project and investors have been trying to capitalize on the potential of cryptocurrency. Despite some high-profile failures, like FTX collapsing, venture capitalists are still eager to invest in cryptocurrency projects and believe that there is an immense potential hidden away in the crypto industry.
Despite the occasional setback and momentary dip, most VCs remain confident that investing in cryptocurrencies presents an unparalleled opportunity for high returns. With bitcoin trading at all-time highs again this year, interest in crypto investing shows no sign of abating, and many venture capitalist firms have made it known that they are keen to invest further into projects involving digital currencies, distributed networks, and blockchain-based applications.
Risky Bets by Any Normal Standards
Recent events have highlighted some of the potential pitfalls associated with investing in cryptocurrency projects. While there are certainly great opportunities in the space, investors must be prepared to do their due diligence prior to making any investment decision. This means analyzing a project’s team composition, evaluating its track record and scrutinizing its technology stack more closely than ever before.
Examples of Dubious Investments
The recent collapse of FTX serves as an example of why investors need to be cautious when it comes to investing in cryptocurrency projects. The company had raised $7 million from venture capital firms including Sequoia Capital just one year prior to its collapse due to suspicious activity by its founder and CEO. It is also important to note that this was not an isolated incident; other crypto projects such as QuadrigaCX and BitFunder have experienced similar issues due to inadequate oversight or poor management decisions.
The Need for More Rigorous Due Diligence
The past year has been a watershed for crypto-asset markets, marked by an astonishing amount of venture capital investment. According to Pitchbook, $6.5 billion has been invested in crypto-related projects since this time last year. Even more impactful is the impressive growth seen in the last quarter alone — a staggering 879 million dollars was pumped into the sector within three months. With such confident backing from investors, it’s no wonder that cryptocurrency markets remain strong — even amidst current global market turbulence. It seems that investors are convinced of the potential for long-term returns that cryptocurrencies as well as blockchain technology offers.
In order to avoid situations like those experienced by FTX, investors must ask themselves several questions before investing in any crypto project: Is this a legitimate business? What is the team composition? How transparent is their communication? How secure is their technology stack? Answering these questions will help investors determine whether or not they should invest in a particular project. Additionally, investors should research best practices for analyzing companies and projects before committing any capital.
Despite the recent failures in the crypto industry, there are still many potential opportunities for investors who do their due diligence. However, it is important to remember that even
many of the companies receiving funding are still risky bets by any normal standard — such as a company peddling adoptable dogs from outer space or a blockchain game based on breeding cats. While these projects may present unique opportunities, they also represent high-risk investments that investors should approach with caution.
To sum up, it is clear that decentralized technologies can provide tremendous benefits but they come with certain risks as well. Investors must exercise caution when considering investing in crypto projects by asking themselves important questions about a project’s legitimacy and conducting thorough research on its team composition, communication channels, technology stack, and overall track record. By doing so, investors can increase their chances of avoiding another FTX-style collapse while still reaping rewards from successful investments within the cryptocurrency space.
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Despite the FTX collapse and other recent failures in the crypto industry, VCs continue to pour… was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.
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