Recent trends suggest that crypto startups are going through a difficult phase in attracting private financiers. Venture Capital (VC) funding took a hit in the broader tech space towards the end of 2022, and the blockchain sector was not exempt from this downturn.
According to data from research firm Pitchbook, in the last quarter of 2022, investment in cryptocurrency startups fell 75% compared to the same period in 2021, and the lowest since 2020.
This has highlighted conversations about whether this is just a test of resilience for nascent blockchain technology or whether the hype and buzz surrounding it is finally dying down.
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More about the report
In the fourth quarter of 2022, only $2.3 billion was invested in cryptocurrency startups, a 75% drop from the same period in 2021. However, the numbers do not fully reflect how VC funding was in the cryptocurrency space in 2022.
Data from PitchBook says a record $26.7 billion was invested in blockchain startups in 2022, most of which came in the first quarter due to enthusiasm for cryptocurrencies that was high at the time. Compared to 2021, that number represents a slight increase from the $21.2 billion raised in the year.
Hype and enthusiasm for cryptocurrency was high in early 2022. Venture capital firms like Andreessen Horowitz, Haun Ventures, and Electric Capital raised billions of dollars to support crypto entrepreneurs, and FTX raised $400 million in a Series C funding round that gave the cryptocurrency exchange a mammoth valuation of $32 billion
And here in Africa, notable startups like Bitmama, Mara, Afriex, Jambo, Hashgreed and others generated sizeable numbers, especially in the first half of 2022. However, those numbers slowed in the second half of the year. With many crypto startups announcing layoffs and insolvency.
What could be the cause of the slowdown?
Although the FTX implosion may be considered the last straw for some VCs, previous setbacks like the Terra crash and the bankruptcy of cryptocurrency lenders like Celsius Network had already slowed investment in cryptocurrency startups.
The crypto market crash, initiated by Terra, pushed the prices of virtually all digital assets into the pit and spooked investors from the crypto scene. Generalist VC firms began paying attention to lower-risk tech sectors to invest large funds, while few if any crypto startups raised VC funds.
What to expect in 2023
The contagion caused by the collapse of several crypto empires last year made private investors realize just how shaky a burgeoning sector like crypto could be. A significant number of them were exposed to some of those big explosions, so now they are hesitating and waiting for what will happen next.
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Going into 2023, the market is showing early signs of recovery/stability, but there appears to be no rush to deploy capital. FTX and Alameda Research were active VC investors until the implosion. And there were reports that they pounced on deals and wrote fat checks while asking founders a few questions in a fast-paced process that often drove other venture capitalists out.
But now, venture capitalists who are still interested in cryptocurrencies are expected to take more time to carry out their due diligence. Valuations should also become more realistic, following the lessons of 2022, where startups with hackneyed products made outrageous numbers.
In this new year, VC investment from cryptocurrency startups will pick up as the general market recovers from the unfavorable conditions of 2022. Additionally, startups are expected to launch novel, unique, and innovative initiatives and products. of solving everyday problems with blockchain technology that would attract investors to the crypto space as the future of finance continues to go mainstream.