VCs Are All Chasing AI—Who Will Bet on Crypto’s Next Decade?
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VCs Are All Chasing AI—Who Will Bet on Crypto’s Next Decade?
Crypto VCs’ mass exodus: those rushing into AI are courting death—only those who stay behind will feast.
Navigating Web3 tides with focused insightsAuthor: Regan Bozman
Translated and edited by TechFlow
TechFlow Intro: The crypto venture capital market is shrinking sharply. Investors are either exiting entirely, pivoting to AI and deep tech (which are highly competitive and technically demanding), or doubling down on crypto. Crucially, the growth potential for stablecoins and global financial applications remains enormous—we may have completed only 5% of the journey. This article draws on observations from Regan Bozman, an investor at Lattice Fund, who notes that crypto VC is contracting. That’s a fact—but it isn’t necessarily bad news. After the bubble bursts, real opportunities often only begin to surface.
This week’s hot topic on Crypto Twitter seems to be a shared concern: Does the contraction of available capital mean the crypto industry is losing its appeal?
Crypto VC is clearly shrinking—this is undeniable. But why this is happening, and what it signifies, sparks considerable debate. Rob Hadick argues that crypto VC is concentrating around the very best founders and top-tier funds—a sign of industry maturity. Meltem, meanwhile, attributes the contraction to (a) a shortage of high-quality early-stage founders, and (b) crypto’s relatively small surface area compared with other high-growth sectors.
I have little to add to this specific debate.
Clearly, exceptional founders are still launching crypto ventures. Equally obvious, however, is that far fewer founders are building in crypto today than in 2021—and far more are launching in other sectors like AI. Is this due to lack of capital, or does it cause the gap? Likely both.
There’s no question this job has become significantly harder. As capital flooded the space, returns were compressed. Tokens are structurally more challenging than they were between 2017 and 2021. Since the AI boom, allocators interested in backing crypto VC funds have dwindled considerably. If you’re not genuinely passionate about crypto VC, now is a good time to pursue something else.
Last week I attended Disciplus’ Demo Day in El Segundo, focused on industrial technology. I was surprised to see so many crypto investors there. It felt like running into another married friend at a bar—neither of us should really be there. Industrial tech isn’t Lattice’s focus (though I personally invested in Disciplus), but I wanted to better understand what’s happening outside the crypto VC landscape.
The most interesting question is how crypto investors are responding to current market conditions—because their choices directly shape the future state of crypto capital markets. Clearly, some are heading to El Segundo. But not all. Right now, I see crypto investors adopting three distinct responses:
The first is leaving entirely to do something completely different—perhaps taking an operational role within crypto, or pursuing something entirely unrelated. Departures from established funds are becoming increasingly common across the broader VC industry, as many zero-interest-era funds continue to wind down. Yes, AUM at large funds is growing, but headcount growth is unlikely to offset the number of firms shutting down.
Some crypto fund managers have performed well enough to invest in whatever interests them—unconstrained by fund mandates. Kyle Samani is perhaps the most public example. Samani reminds us well that while underperformance may push people down this path, outstanding performers also sometimes decide that more compelling problems await elsewhere.
The second response is continuing VC work at your firm, but broadening your investment scope. This is easier for some than others. Not all firms active in crypto explicitly limit themselves to it. My sense is that Meltem’s mission is broader than crypto alone, allowing firms like Crucible to simply shift attention elsewhere. Paradigm launched with an explicit identity as a crypto fund—yet now describes itself as investing in “frontier technologies.”
Many firms—including ours—have a clear mandate to invest in digital assets and related businesses. Fund documents typically define this broadly, but I believe most crypto fund managers maintain very explicit understandings with LPs that they represent “crypto exposure.” So these peer managers either amend their LPAs to pursue non-crypto investments, obtain verbal LP consent, or proceed covertly. This is clearly a spectrum—you could argue that all AI businesses will eventually use stablecoins, and thus qualify as “crypto businesses.” I’m not saying that view is correct—only that the boundary may be quite blurry.
The third option is holding the line. If you believe the industry will grow 100x from here—with less competition and lower valuations—this is precisely the right time to invest. We’ve chosen this path.
Which Door Hides the Wealth?
I understand the appeal of the second option—but remain skeptical. Venture capital is both intensely competitive and a power-law business. There’s a reason Y Combinator accounts for roughly 90% of global accelerator returns. The top 10% of VC funds consistently capture the best deals—the ones generating most of the returns. That means unless you’re among the best, playing this game truly makes little sense—and becoming one of the best is damn hard.
The most common pivot from crypto is into AI. AI is massive, growing rapidly, and will reshape the world. It’s also almost certainly the most competitive VC market of the past two decades—more money chasing companies at higher valuations, with business models still shrouded in uncertainty. You’re competing against AI-specialized funds, every generalist VC firm, and virtually every risk capital source on Earth. So I’m deeply skeptical that most crypto funds possess any real edge here. Of course, exceptions exist—some crypto fund managers approach AI with remarkable depth and thoughtfulness. But my assumption is that most will fare very poorly.
Deep tech / industrial tech (like what we saw in El Segundo) may be less crowded—but it’s hardly without challenges. You’re moving away from perhaps the most capital-efficient business in history—open-source protocols—into highly capital-intensive domains. These businesses arguably require specialized technical expertise to evaluate effectively.
Opportunities That Remain in Crypto
This brings us back to crypto, which in certain ways mirrors broader VC trends today. Fewer companies are raising larger shares of available capital; the market is polarizing. In the past, many $100–200 million crypto funds existed. Today, the landscape consists mostly of early-stage specialist funds under $70 million and large platform funds. The key difference between crypto and traditional VC is that crypto VC is contracting, while traditional VC is expanding at a rapid pace.
Our focus remains on “sowing opportunities in industries or categories not yet recognized by large institutional players.” The current crypto market clearly presents challenges—but I believe the opportunities are equally abundant. Crypto-native financial applications are growing rapidly across many global markets. Non-USD stablecoin circulation remains minuscule. We may have completed only 5% of the journey to upgrade the global financial system—there’s still immense opportunity ahead.
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