In the first quarter of 2023, crypto companies raised $2.6 billion across 353 investment rounds, according to a PitchBook report. While the report indicates that the crypto space is still active, it also shows that the space is not as strong as it used to be. There was an 11% decrease in quarter-on-quarter deal value and a 12.2% decrease in total deals. The quarter also recorded the lowest amount of capital invested in the space since 2020.
The report also revealed mixed trends in valuation. Seed rounds are up 33.3%, and late-stage rounds are up 209.2% for the quarter compared with the entire year of 2022. However, early-stage rounds are down by 16.7%.
Despite the recent decline, the report identified some positive outlooks for the space, such as layer-2 scaling solutions that could continue their momentum from 2022. The report cited Blockstream raising $125 million to finance a Bitcoin mining infrastructure and Scroll raising $50 million in a late-stage VC round.
Although venture capital funding for the blockchain and crypto sector declined in 2022, investors are still looking to bankroll blockchain-based technologies, applications, and startups. The decline in VC funding was largely attributed to the collapse of the Terra ecosystem in May 2022, leading to the subsequent bankruptcy of cryptocurrency lending firms Three Arrows Capital and Celsius. The implosion of FTX in November 2022 further impacted volatility throughout the space, while global macro conditions in capital markets affected by rising interest rates and inflation also played a role in the decline of investments from venture capitalists.
The report also highlighted that venture capital investments are shifting toward “non-volatile innovations,” including cross-chain bridges, payments and remittances, lending, decentralized autonomous organizations, asset management, and digital identity management.
The slowdown in investment from general VCs can be attributed to the recent scandals in the crypto industry, which have resulted in a more cautious investment approach, leading to a slowdown in the pace of deals completed. The divide between general VCs and crypto-specific VCs highlights a change in mentality, with the latter staying committed to the potential of blockchain technology.
Despite the challenges faced by the crypto industry, high-profile VC firms such as Andreessen Horowitz and Union Square Ventures have established dedicated crypto funds to invest specifically in the industry. This highlights the diverse perspectives and risk appetites among VC firms and their approach to investing in the fast-evolving world of digital assets.
While the crypto industry may be facing headwinds, investors remain optimistic about the potential of blockchain technology. However, the recent scandals have resulted in a more cautious investment approach, leading to a slowdown in the pace of deals completed. Nonetheless, venture capital investments are still flowing into the industry, with a shift toward “non-volatile innovations” such as cross-chain bridges, payments and remittances, lending, decentralized autonomous organizations, asset management, and digital identity management.