Slowing crypto startup funding may still surpass 2021 record

Total funding at crypto startups this year is set to exceed investments in 2021, research firm Pitchbook said on Thursday though the pace of capital deployment is slowing as a series of crypto blowups sapped private equity investment appetite.

Crypto projects globally attracted $19.9 billion in venture capital (VC) investments in the first nine months of 2022, 41 per cent higher than a year ago, according to Pitchbook data. In total, last year drew in a record $21.2 billion.

The amount of capital deployed, however, has trended downwards through this year with only $4.0 billion invested in third quarter, representing a 38.3 per cent quarter-over-quarter decline and the lowest amount since second quarter 2021, Pitchbook said.

The collapse of FTX last month was the most shocking in a series of closures of key market players this year including Celsius and Voyager, major tokens terraUSD and Luna that have shaken investment sentiment and wiped out $1.5 trillion in cryptocurrency market capitalization.

“The lack of clear regulation and guidance remains one of the crypto industry’s greatest concerns and limiting factors,” said Robert Le, crypto analyst at PitchBook.

“Mainstream adoption is unlikely to occur until better guardrails in the form of established laws and guidelines are in place.”

A number of FTX backers including Singapore state investor Temasek Holdings, SoftBank Group Corp’s (9984.T) Vision Fund and Sequoia Capital marked down their investment to zero after the crypto exchange filed for bankruptcy.

“This bearish sentiment will continue for all of next year and you’re going to notice that the pace of investment and the amount of capital deployed is going to get lower and lower on concerns over contagion risk,” said Adam Struck, at LA-based venture capital firm Struck Capital.

VCs infused $1.5 billion in the so-called Web3 companies in third quarter, a 44.5 per cent growth sequentially, according to Pitchbook.

Web3 – a term used to describe a potential next phase of the internet – was the only crypto segment that saw an increase in capital invested for the quarter as it is relatively more insulated from the day-to-day price movements of crypto tokens, Pitchbook’s Le said.