Dear clients,
For venture capitalists, the scars from bitcoin’s disastrous 2022 have yet to heal.
While bitcoin is recovering, having jumped about 55% this year, investment in cryptocurrency startups has fallen for the fifth consecutive quarter.
According to PitchBook, cryptocurrency investments totalled just under $2.3bn in April-July this year, the lowest quarterly total in three years. In the first half of 2023, investment is down nearly three-quarters from a year ago to $5bn.
Crypto investors are still haunted by the chaos that hit the sector last year, when the collapse of the FTX exchange and other major companies, including hedge fund Three Arrows Capital, sent shockwaves through the industry. U.S. regulatory scrutiny has also intensified. The number of deals executed by mid-2023 was 814, more than half the 1,862 for the same period in 2022, according to PitchBook data.
According to PitchBook data, VC investment in cryptocurrencies correlates to crypto asset prices with a lag of about three to six months, and if current trends continue, VC investment will increase in the second half of 2023.
Bitcoin, which fell 65% last year, jumped more than 90% in the first six months of 2023 and is now up about 55% year-to-date. Yet it is trading at only a third of its 2021 peak.
There has also been a shift in the selection of venture capital investment targets.
A year ago, the focus was on companies related to speculative tokens that were not cryptocurrencies, as well as metaverse and Web3 projects that sought to create a future but never realised iteration of the internet with cryptocurrency at its core.
Now, however, the cryptocurrency stakes are shifting towards companies that provide a platform or support the technology behind blockchain or cryptocurrencies.
From PitchBook’s data, infrastructure companies such as cryptocurrency exchanges, wallets and other fintech companies raised the most investment in 2023 at $325 million, followed by blockchain networks at $220 million and Web3 companies at $274.6 million.
In the second quarter, only two rounds of funding over $100 million were led by LayerZero, a platform that connects two blockchains, and digital identity platform WorldCoin.
