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Token prices be damned, crypto is doing just fine. Or so goes the story told by an investor with one of the biggest stakes in the industry.

Thats the major takeaway from a report released Tuesday by a16z crypto, an arm of the prominent venture-capital firm Andreessen Horowitz.

The VC firm published a new state of crypto index that purports to track the progress of the crypto industry by aggregating metrics such as the number of active crypto wallets and the number of smart contracts in use. The idea, according to the firm, is that crypto token prices alone dont paint an accurate picture of the progress that decentralized finance is making.

For people not really closely following what happens in crypto, prices have remained volatile. Its been that way since the beginning of crypto, says a16z crypto Chief Technology Officer Eddy Lazzarin. But if you look at the underlying technology, it has continued to advance.

Its easy to see why a16z wants to reset the narrative.

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The past 12 months of the crypto industry have been marked by major bankruptcies, plummeting token prices, and the collapse of the crypto exchange FTX amid fraud allegations. The price of Bitcoin, the largest token, has rallied lately, even breaking through $30,000, but it is still down by more than 50% from its 2021 peak of more than $65,000.

In a16zs telling, the state of crypto isnt nearly as dire. In March, the index had a reading of about 1,615, down from a peak of 2,159 in 2021 but still 25 times as much as the reading in January 2020, before the Covid-19 pandemic took hold.

The firm itself has a lot at stake: a16z is one of the VC industrys heaviest investors in crypto. Its portfolio includes Anchorage Digital, Avalanche, dYdX, Solana, and Uniswap, among dozens of others.

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Among the metrics that a16z says are already above the 2021 peak are the number of active wallets used to store crypto; the volume in transactions of stablecoins, whose values are most commonly pegged to the dollar; and the number of smart contracts, which are crypto-powered contracts that execute automatically when certain conditions are met.

Lazzarin says such metrics and others are a more appropriate measure of development in the ecosystem than token prices alone and that they set the stage for the development of real-world use cases for crypto.

Bitcoin is mostly held by investors hoping it will appreciate in price. But a16z argues that the crypto industry will have a much broader impact, describing it as an evolution of the internet and a new computing platform.

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Similar stories have been told by crypto proponents for years but havent yet come to fruition. Even though the industry says it wants to cut out financial intermediaries like banks and exchanges in favor of cheaper, decentralized alternatives, most analyses have shown that a small number of firms, including a16z, wield great power over the industry. A U.S. regulatory crackdown, which has limited the options for crypto firms to even get basic banking services, threatens cryptos growth.

Perhaps the biggest near-term threat to many crypto projects is a lack of interest from venture-capital firms themselves. Lazzarin says his firm still sees opportunities in crypto and is continuing to invest, though he admitted that things may have slowed slightly.

A separate report released by Galaxy Digital on Tuesday said VC firms invested $2.4 billion in crypto-focused start-ups and protocols in the first quarter, the lowest amount in more than two years.

The era of growth at all costs is over, at least for now, and venture-backed start-ups need to prepare for a difficult fundraising environment for the foreseeable future, said the report, which noted that VCs have pulled back from other industries as well. The founder-friendly environment of the last several years is in the rearview mirror.

Write to Joe Light at joe.light@barrons.com

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Bitcoin and Crypto Aren't as Dead as You Think, VC Firm Says - Barron's