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Introduction

Crypto venture capital (VC) funding has seen a significant decline in recent months as the broader crypto market has experienced a bear run. However, while the short-term outlook may be uncertain, there are still many reasons to believe that crypto VC funding is here to stay.

In this article, we will take a closer look at the current state of crypto VC funding and discuss some of the factors that are likely to shape its future. We will also highlight some of the key trends that investors are watching closely and identify some of the most promising areas for investment.

Despite the recent decline in funding, crypto VC remains a significant force in the crypto ecosystem. In 2022, crypto startups raised a record $24.1 billion in VC funding, according to data from PitchBook. While this figure is down from the $32.5 billion raised in 2021, it is still more than double the amount raised in 2020.

The decline in funding in 2023 can be attributed to a number of factors, including the broader crypto market downturn, rising interest rates, and the ongoing war in Ukraine. However, it is important to note that VC funding is typically cyclical, and downturns are often followed by periods of renewed growth.

According to new data from Galaxy Research, venture capital (VC) funds are staying away from cryptocurrencies. With investments worth $1.98 billion in 376 deals, numbers like this haven’t been seen since the fourth quarter of 2020—an extension of a trend that has been going on for the past 18 months.

For example, according to Galaxy Research, over $6 billion was invested in 600 deals in the same period last year. And in the last quarter, the firm reported a sharp decline in funding allocated to cryptocurrency and blockchain firms, which has fallen to $2.3 billion this year.

There are a number of factors contributing to the decline in VC funding for cryptocurrency startups, including:

The bear market

The cryptocurrency market has been in a prolonged bear market since late 2021, with prices for Bitcoin and other major coins falling by more than 70%. This has made investors more cautious about investing in new crypto projects.

The Terra collapse

The collapse of the TerraUSD stablecoin ecosystem in May 2022 was a major blow to the cryptocurrency industry, wiping out billions of dollars in value and eroding investor confidence.

Regulatory uncertainty

Many governments are still grappling with how to regulate the cryptocurrency industry, which is creating uncertainty for businesses and investors.

The broader economic climate

The global economy is facing a number of challenges, including high inflation and rising interest rates. This is making investors less likely to invest in risky assets like cryptocurrencies.

But there is at least one crypto-native investor who is not losing faith. Kavita Gupta, founder of Delta Blockchain Fund, explained that the decryption industry is very vibrant and below the surface.

“Cryptocurrency projects are just not announcing their rounds,” she said, which is likely contributing to the narrative that VCs are no longer interested in crypto. Gupta said her fund closed three deals last month, and is in the middle of closing another — noting that several other firms are “actively deploying capital.”

For example, last month, Bitcoin bull Tim Draper announced a new cryptocurrency-focused venture studio called Draper Gorenstein Blockchain (DG). Alon Goren, one of the founding partners, previously told Decrypt that the negative sentiment in the market has not affected his conviction. He emphasized that the sector is still attracting a large number of entrepreneurs and that funding rounds are no longer oversubscribed as they were last year.

MEXC Ventures, the investment arm of the MEXC exchange, also announced that the company will make a major investment in Toncoin, showing that there is still significant interest in the crypto space.

Gupta also pointed to the overall market downturn as a reason for the decline in VC investment. She pointed to the frenzy of digital gold during the last bull cycle, which saw 1,300 deals worth $11.8 billion in its peak period in the second quarter. Funding rounds are no longer oversubscribed as they were last year.

In the opinion of investors, this is good, as it allows companies to “do a lot of deep due diligence,” as 99% of oversubscribed rounds were not happening before.

When asked about other industries that could replace crypto in investors’ portfolios, Gupta said that AI on-chain projects are gaining increasing attention, even though “people are still wondering if it will work.” For her, on-chain data aggregation services tapping into AI are still “one of the most broken parts.”

So what’s to come? Gupta stressed that two things need to happen. Regulatory waters need to be cleared, and until then, founders will likely face limitations in raising more capital. The second is mainstream adoption. She pointed to JPMorgan’s decision to shut down cryptocurrency operations at its Chase UK institution and said that it will likely create pressure on other companies to follow suit.

As far as entrepreneurs go to raise funds for their projects, things are a bit more complicated. “People will have to take more steps to raise money,” Gupta said. For her company, “the discussion phase is no longer enough.”

She concluded, “We’re looking for companies whose traction indicates that their product will be used.” “It takes a lot of credibility for that now.”

Some of the factors that could contribute to a rebound in crypto VC funding include:

Increased regulatory clarity

As governments around the world develop clearer regulations for cryptocurrency, it will be easier for investors to invest in the space.

Increased institutional adoption

As more institutional investors, such as pension funds and endowments, adopt cryptocurrency, it will lead to more funding for cryptocurrency startups.

Continued innovation

The cryptocurrency industry is constantly innovating, and new projects are being developed all the time. This innovation will continue to attract investors.

Overall, I think that the future of crypto VC funding is bright. The crypto industry is still young and growing, and there is a lot of potential for innovation. However, there are some challenges that need to be addressed before we see a major rebound in funding.

I would also add that VC funding for cryptocurrency is likely to become more selective in the future. Investors will be more likely to invest in projects that have a clear value proposition and a strong team. They will also be more likely to invest in projects that are aligned with their own investment thesis.

The crux

VC funding for cryptocurrency projects is down significantly from its peak in 2021.

Some investors are still optimistic about the long-term prospects of crypto, but they are taking a more cautious approach to investing.

The decline in VC funding is due to a number of factors, including the bear market, the collapse of Terra, regulatory uncertainty, and the broader economic climate.

Some investors believe that the decline in VC funding will lead to a slowdown in innovation and growth in the crypto industry. Others believe that it will weed out weaker projects and make the industry stronger in the long run.

What do you think about the future of crypto VC funding?

VC funding will rebound in the future, but it is difficult to say exactly when. The current bear market and other factors have led to a decline in funding, but there is still a lot of interest in crypto from investors.