2023-03-02 02:48:20 UTC
Narratives are major vectors of rapid change in the economic behavior of society. 2021 has been a defining year for the crypto industry as it potentially changed the narrative from the draconian 'just a bubble' to a 'probable technological revolution.'
Consequently, venture funding has taken great strides in the digital asset sector, as we observed massive growth in capital injection. 75% of the total capital raised by the industry attributes to the last two years.
Based on historical evidence, the bull markets have led to massive capital infusion in the industry. Investments in 2018 were 560% more than in 2017; investments in 2021 were 870% more than in 2020. As markets take a breather post-euphoria, investments wane off. However, some projects build through the bear market with funds gathered during the euphoria.
The surge in investments in Mid and Later stage deals is a testament to the crypto industry's abdication of its status as a nascent industry. Of the 114 crypto unicorns, 87 achieved the status in the last two years. 82% of the funds raised through the Mid and Later-stage funding rounds is from 2021 onwards, further demonstrating maturation in the industry. 66% of the Early Stage deals have occurred since 2021, which indicates a similar potential surge in Mid-Later stage deals in the future.
Foundational Categories have maintained their dominance over the years. The infrastructure category has persistently garnered interest from investors. NFTs/Gaming also has amassed huge investments in recent years. The investment boom in DeFi and NFTs/Gaming category has been narrative-driven, as the DeFi Summer investments of 2020 percolated into NFT Mania of 2021.
As interoperable infrastructure improves in a potentially multi-chain future, we hypothesize that Data/Analytics/Information and the intersection of Web3-NFTs/Gaming categories will gain momentum.
The United States is still the Kingmaker, as more than 50% of the total investments have been poured into USA-based projects. China's ban on cryptocurrency forced many companies to move their operations to different jurisdictions. Singapore, the crypto haven, has been the flagbearer for the Eastern hemisphere. However, in the aftermath of recent events of the Terra crash, 3AC's downfall, and the lenders' liquidity crisis, even the most crypto-friendly countries may implement stricter regulations.
There are more than 5000 private investors involved in the venture funding landscape. As veteran economists anticipate economic turmoil in the global financial sector in the near future, courtesy of growing inflation rates, the war in Ukraine, etc., we could expect more investors to broaden their horizons and magnify the capital deployed in the sector.
However, in light of the recent cathartic events surrounding FTX's bankruptcy, the market participants will most likely lose faith in the industry. We can expect a short to mid-term pullback on venture funding.
As mentioned at the very beginning, only 8% of the total venture investments correspond to the digital asset sector. As further infrastructure developments and technological sophistications transpire, the materialization of fundamentals-driven capital infusion accompanied by irrational exuberance among investors is inevitable. However, The Block Research will continue to strive to distill actionable insights from such information chaos.