In 2021, venture capital (VC) investment flooded into the blockchain and crypto industry. So, which areas did they consider promising and invest in? We looked at areas that attracted ample funding and will grow in 2022.
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Crypto locked and loaded with VC funding
VC funds are pouring into the crypto industry.
According to market research firm PitchBook, VCs invested $27 billion in cryptocurrency as of November 2021. This is more than five-fold growth compared to the same period last year and more than what was invested over the previous 10 years.
Research by CB Insights also shows that global VC investment into cryptocurrencies and blockchain reached a record high, with $6.5 billion invested in Q3 2021 alone. The $15 billion invested in the first three quarters of 2021 represent 384% growth over the $3.1 billion invested in all of 2020.
The VC that has invested the most in the crypto field is Coinbase Ventures, a VC affiliated with leading American cryptocurrency exchange Coinbase. Coinbase Ventures made 24 investments in the third quarter, followed by CMT Capital, Polychain Capital, Andreessen Horowitz, Digital Currency Group, and Jump Capital.
The greatest share of crypto industry investments comes from the United States. Investments from the US amounted to a record high $2.97 billion in the Q3 2021. Asia followed at some distance with $1.4 billion, ahead of Europe with $1.1 billion.
Major VC investment areas are DeFi, NFT
So, with all this money rushing in, which crypto areas do VCs consider most promising and choose for its investments?
Data from Footprint Analytics shows that in Q1 2021, the main crypto market investment categories were decentralized finance (DeFi) and infrastructure. However, from September, non-fungible tokens (NFT) and Web3 projects grew as investment destinations.
Startup investments can be broadly grouped into seed/strategic investment, and series A, B, C, D, E, H funding. Last year, cryptocurrency investments overwhelmingly went to seed rounds and strategic investing. Seed rounds accounted for approximately 57% of VC crypto investments, strategic investment for around 18%, and series A for about 17%, while series B and above accounted for less than 10%. This means that cryptocurrency is still in the early investment stage and new projects are constantly sprouting up.
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The data shows that VCs are spreading small amounts among a large number of DeFi companies, while centralized finance (CeFi) companies are gaining large-scale investments. In early 2021, FTX, a centralized cryptocurrency exchange, was valued at $18 billion and raised $900 million, while New York Digital Investment Group attracted $1 billion in funding.
‘Forte’, which provides blockchain integration tools to game developers, raised $725 million last month, and NFT platform ‘Dapper Labs’ collected $350 million last March. Other notable cases include ‘MoonPay’, a crypto payment company that raised $555 million in late November, as well as Axie Infinity developer Sky Mavis, which led the NFT-based ‘pay to earn’ (P2E) craze and raised $150 million last October.
CB Insights’ data shows that the CeFi sector surged from $84 million in Q3 2020 to $2 billion in Q3 2021. Footprint Analytics’ research also shows that crypto exchanges, lending and other CeFi projects account for 48% of total investments. However, when looking at seed round investments, DeFi took up 60% of investments.
2022 will be the year of diversification for the crypto market and Web3
Industry observers believe that the ample funding attracted in 2021 will lead the crypto market to keep growing in 2022. Especially the areas of DeFi and NFT, in which investment has concentrated, are expected to develop by combining with the Web3 concept.
In a recent report, cryptocurrency data analysis company Messari predicted Web3’s development potential, comparing it to a country run directly by users. In Web3, the metaverse is like a territory, while DeFi acts as a new economic system and cryptocurrencies and NFT serve as digital assets used within it. To stay in the metaphor, Layer 1 networks are like power lines powering all facilities, and citizens make laws and run their country through organizations called DAO. The report defines Web3 as “a good all-encompassing term that captures cryptocurrencies (digital gold & stablecoins), smart contract computing (Layer 1-2 platforms), decentralized hardware infrastructure (video, storage, sensors, etc), Non-Fungible Tokens (digital ID & property rights), DeFi (financial services to swap and collateralize web3 assets), the Metaverse (the digital commons built in game-like environments), and community governance (DAOs, or decentralized autonomous organizations).”.
The report concludes that the term will make it easier for new users to enter and because it feels less threatening to regulators, ‘Web3’ will replace the term ‘cryptocurrency’.
Cryptocurrency asset management company Grayscale also expects projects connected to the metaverse or Web3 to develop organically. The company’s November 2021 Metaverse report concludes that “the market opportunity for bringing the Metaverse to life may be worth over $1 trillion in annual revenue and may compete with Web 2.0 companies worth ~$15 trillion in market value today. This potential has attracted companies like Facebook to pivot towards the Metaverse, which may serve as a catalyst for other Web 2.0 tech giants and investors to follow”.
Coinbase Ventures CEO Shan Aggarwal agrees: “We see a world where the best start-ups of tomorrow are all built on web3 blockchain infrastructure. That’s the future we’re building”.