Crypto & AI: Competition, Convergence or Both?

The convergence of cryptocurrency with artificial intelligence (AI) is attracting significant attention from builders and investors alike. “We’ve never been more excited about crypto and we continue to invest across all stages,” Paradigm co-founder Matt Huang said in a recent tweet, adding, “We’re also a group of curious nerds and the developments in AI are too interesting to ignore.”

As one example, AI-metaverse startup Futureverse raised a $54 million in Series A funding this month, with growth equity fund 10T Holdings leading the round, joined by Ripple Labs.

Naturally, it has also caused pundits to speculate on an exponential increase in crypto values. Arthur Hayes, BitMEx co-founder and former CEO, reasons that, “Bitcoin will be chosen by AIs as the currency in which their economic actions are denominated” and projects a potential BTC price of more than $750,000 by postulating that “the velocity of Bitcoin transactions will match the total amount of GDP [that] AIs capture”.

With AI being the most rapidly adopted technology in history – ChatGPT by OpenAI garnered 100 million monthly users in its first 60 days – it seems inevitable that at least some crypto projects will utilize the technology. Additionally, the emergence of AI crypto projects could become competition for more established currencies.

In this 5-part series we will explore the difference between AI and non-AI projects, balancing transparency with privacy, challenges to growth, and opportunities for innovation.

AI-based Trading

Traditional cryptocurrencies like Bitcoin rely on cryptographic algorithms and decentralized consensus to validate and secure transactions. These non-AI crypto projects differ from their AI counterparts in that they are unable to independently make decisions and adapt with new information. 

AI-based crypto trading projects, on the other hand, operate through a three-step process: collect data, develop a trade strategy, and execute. First, they gather and analyze data from various sources to identify trends and predict market behavior. Based on this analysis, the AI system autonomously creates a trading plan for buying, selling, or holding. Finally, using smart contracts, the system executes trades on the blockchain network when predefined criteria are met. Through continual learning, the AI-based trading strategies strive to enhance their performance and efficiency over time.

A Match Made with Data

In many ways, crypto and AI are a perfect match. Decentralized finance (DeFi) is built on blockchain technology which is essentially reams of data. AI eats data for breakfast; it requires vast amounts of information to learn and improve, and the more data it’s fed, the smarter it becomes. Additionally, blockchain can prevent the issues of fraud and deepfakes in AI due to its transparent and public presentation. In return, AI algorithms and techniques can be trained to enhance the crypto ecosystem by tackling challenges such as scalability, security, privacy, and interoperability.

Even though AI crypto has a comparatively small share of all crypto assets, events like the launch of ChatGPT and headlines such as Elon Musk’s new xAI venture have accelerated the growth of the sub-sector. Native AI cryptocurrencies are being joined by AI-versions of traditional coins such as AiDoge (Dogecoin) and SingularityNET (Cardano). Harnessed together, AI and crypto can make a powerful combination to offer new opportunities for those who are quick enough to jump onboard.

Competition for Venture Funding

Both technologies are competing for the same finite pool of funding and resources. Some Silicon Valley VCs are shifting their focus from crypto to AI companies, in part owing to the recent scandals and regulatory issues challenging the digital asset industry. While crypto offers a variety of new use cases and advancements, global VC funding in AI is growing, with investors recognizing its potential to transform various sectors. Pitchbook tracked the 4th consecutive quarterly decline in investment in crypto firms – a whopping 78% drop in Q1 compared with the previous year. In contrast, AI has seen a global surge of $1.7 billion of investment within the same time period.

Bigger picture, however, this competition between crypto and AI for venture investment belies the opportunity for symbiotic prosperity. The fusion of these two cutting-edge technologies may hold the key to reshaping the financial landscape by providing users with an enhanced experience and democratizing access to digital assets. As AI continues to mature, the wider crypto ecosystem will likely embrace its potential to unlock new opportunities.