The last eight months have seen AI dominate the global tech space like never before. While there is still much excitement around generative AI and the future of AI in general, there are concerns about the level of dominance it will have in the next few years.
From new generative AI platforms to infrastructure plays to apps leveraging AI in specific verticals, there is a lot for investors to sink their teeth — and money — into. ChatGPT and GPT-4 have made the sector more entertaining than ever. We are witnessing a profusion of new firms working on creative solutions using Generative AI.
On the other side, FTX infection continues to send shockwaves through the ecosystem. Several crypto investment firms filed for bankruptcy because investors took out funds leaving crypto exchanges, like Coinbase, Kraken, Bybit, and so many more laying off personnel to minimize costs.
The current AI and crypto scenarios are two dissimilar storylines. While interest in the former keeps skyrocketing, the latter is garnering lesser attention. In the game of rock, paper, scissors: AI beats crypto.
Bankruptcy and Regulatory Scare
Since the run on the stablecoin terraUSD in the spring of last year, the instability engulfing the cryptocurrency industry has spread to several businesses. There are numerous continuing bankruptcy processes from 2022: FTX, Blockfi, Celsius, and Voyager.
The bankruptcy filings, in particular, have underlined how interwoven many of the industry actors were. Investors moved from blockchain to safer asset classes in response to the Federal Reserve’s continuing rate rises. Yes! Investors flocked to AI because it appears the safer asset class.
According to Evan Cheng, Mysten Labs founder, Crypto’s share of venture capital money is now flowing to artificial intelligence.
While several of the blockchain industry is facing an untenable regulatory and economic environment given the lack of regulatory clarity in the US [which] created a substantial negative economic impact on the digital asset industry and resulted in overlapping regulatory burdens and soaring regulatory costs, the AI industry provide a more assured sustainable path of investors to follow.
Regulations have hampered optimism around crypto, leading investors to AI. In a game of rock, paper, scissors: AI beats crypto.
Funding
It’s a numbers game, and investors are signing smaller cheques as they perceive lower valuations. Financing for cryptocurrency firms is getting harder to come by. Since Q1 2022, when the industry raised $11.3 billion, the amount of venture capital flowing into it has decreased for five consecutive quarters.
Following a spike in VC funding into the larger Web3 market through 2021, studies have noted consistent quarterly reductions in funding through 2022 and the first two quarters of 2023.
Crypto and AI Quarterly funding (in $billion) Source: TechEconomy
The cryptocurrency plunge might go on. Investors have been pulled away from the once-hot cryptocurrency market by the skyrocketing interest in AI. Plus, M&A has become more difficult as a result of the intense regulatory scrutiny placed on industry heavyweights Coinbase and Binance.
According to Crunchbase, the AI industry has received over a quarter of all global venture capital funding to date this year. Fintech and cryptocurrency are surpassed by AI as the most booming industry as investors continue to reduce their investments. In a game of rock, paper, scissors: AI beats crypto.
Businesses in Crunchbase’s AI category raised $25 billion in the first six months of 2023, or 18% of all financing done globally. Included in that is the $10 billion grant given to OpenAI in January which was mostly driven by Microsoft. Even while it’s less than the $29 billion invested in H1 2022, it is larger as a percentage of overall funding.
Decentralized Funding
Contrary to cryptocurrency, the funding model for AI investments is more decentralized, with businesses raising significant rounds anywhere there is a technology ecosystem.
AI-focused businesses lack a place that can be identified as the nexus for investment or company development. This is in contrast to funding waves with fintech and crypto where Silicon Valley was the unquestioned champion of startup fund-raising. Unsurprisingly, the fall of the Silicon Valley Bank led to a worsening of the cryptocurrency situation.
Technologies related to AI hold enormous potential. All of this makes sense as AI funding rate has stood out in the tech industry. It is claimed to be the real disruptive technology that will alter how people connect and conduct business. If this belief spreads further, then AI continues to beat crypto.
