Cryptocurrency winter is not just coming to holders of the digital currency , but also to startups looking for funding.
Investment in venture capital-backed cryptocurrency companies slowed in the first half of this year, falling from a record $12.5 billion invested in the first half of last year to about $9.3 billion invested in the first six months of this year, according to Crunchbase data.
On the other hand, the number of deals has increased, with 534 deals announced in the first half of this year compared to 456 in the first half of last year.
However, some perspective and a slightly closer look does show some positivity in the numbers – especially given the negative headlines surrounding cryptocurrencies in the first six months of the year.
First of all, more money has entered the cryptocurrency space over the past year than this year, which should come as no surprise since venture capital investment has been declining almost everywhere. So far, the venture capital market in 2022 has proven to be very different from last year, which broke records in almost every way.
Secondly, the second quarter numbers remain strong. More than $4.2 billion in funding went into venture capital-backed cryptocurrency startups in the second quarter, about $1 billion less than the previous quarter and well below the all-time high of $6.1 billion set in the fourth quarter of last year. However, this also remains fairly stable from just under $4.2 billion raised in the same quarter last year. One of the reasons
's first-quarter numbers were higher is that it saw more large funding rounds. Six $400 million-plus funding rounds were announced this quarter, compared with just one such round in the second quarter. This is Circle Internet Financial, a Internet financial company headquartered in Boston, which completed a $400 million private equity investment round from investors including BlackRock, Fidelity Management and Research, Marshall Wace and Fin Capital.
Other big rounds in the second quarter include:
- Germany-based Trade Republic, which lets investors buy and sell different assets, closed a Series C round worth about $250 million in June.
- San Francisco-based cryptocurrency exchange Binance US closed a $200 million seed round in April.
- Unizen, a digital asset trading platform based in Liechtenstein, raised $200 million in venture capital in June.
Bad News
The results of these funding rounds are particularly impressive considering how brutal this year has been for the cryptocurrency market. The value of the two largest cryptocurrencies, Bitcoin and Ethereum, has fallen by more than 70% from their highs in November. And, one of the industry’s stablecoins completely collapsed. In addition, due to market uncertainty and liquidity issues, large lending platforms Babel Finance and Celsius Network suspended withdrawals and transfers, leading Celsius to file for bankruptcy this week.
Then, to top it off this quarter, prominent cryptocurrency hedge fund Three Arrows Capital (also known as 3AC) collapsed after the downturn in the digital currency left it unable to meet its obligations. The company, which had about $10 billion in assets under management as recently as March, filed for Chapter 15 bankruptcy protection on July 1. Now its co-founders appear to be on the run from creditors.
This news, along with shifts in the economy, has changed the cryptocurrency investment landscape. Yash Patel, general partner at
Telstra Ventures, said: "Yes, we have seen a pullback in cryptocurrency/blockchain investment, which is consistent with the problems experienced by the broader technology market." The company’s investments include Bahamas-based cryptocurrency exchange FTX Exchange, which is valued at $32 billion.
Patel said that the recent instability of centralized lending platforms for most cryptocurrencies, as well as concerns from retail and institutional investors about more systemic issues, have created a sense of fear in the market that has shifted from consumption to Investors and price speculators spread to venture investors in the space.
Patel said that not only were financial speculators scared away from the market, but consumer-oriented games such as NFT and blockchain-based games were also particularly hit. As a result, the prices of these NFTs and tokens have dropped significantly.
Patel said: "I think in the long run this is a good thing as it clears out the market noise and puts more focus on the utility/real entertainment capabilities unlocked by these tokens (and) NFTs. Similar to the Web2 world, gaming and Digital art is for fun, not a cumbersome financial tool. "
We've been here before
Others looking to invest in the industry reiterated that the cryptocurrency industry's decline is nothing new. However, attitudes toward this decline, and the industry as a whole, appear to be changing. "We've been through this story before," said Jordan Nof, co-founder and managing partner of
Tusk Venture Partners, which invests in cryptocurrencies. "If you think this is a big trend, you may walk away, but we won't listen to it again." Your voices are heard (you are so short-sighted). "
The big VCs clearly don't think it's a trend. In May, a16z said it raised $4.5 billion for its fourth cryptocurrency fund, bringing its total capital raised for cryptocurrency investments to $7.6 billion. And just this week, Lightspeed Venture Partners said it was creating the Lightspeed Faction, an independent team to invest in blockchain infrastructure, as part of its announcement of more than $7 billion in new funding.
Nof said he believes the dramatic zeroing of some stablecoins and the high-profile decline of mainstream cryptocurrencies is one of the main drivers of this year’s decline in the crypto market. However, more regulation and infrastructure around digital currencies should help ease investor fears and make consumers feel less troubled.
"Cryptocurrencies will continue to play an important role in financial markets," he added.
While Nof is not surprised by the slight decline in investment in the cryptocurrency space, he still sees some high-value transactions. Although the value of cryptocurrencies has declined, he will not withdraw funds from the market.
He said: "The price of Bitcoin does not affect the scope of our exit!"
