Cryptocurrency Funding in 2023: Research Report on The Financial Downswing

Being in the longest market ever witnessed in the crypto industry for more than 500 days, the crypto funding landscape faces a downfall. Making newer lows in 2023, it was once bustling with venture capital and individual investors. 

The web3 space is facing a financial crunch with a noticeable decline as the decrease in the numbers becomes evident. According to the recent data, it seems like a long trend, moving along with the bear market over the past one and a half years. 

With this decline in investors, the prices of many altcoins and Bitcoin took a huge hit and fell from 60% to 90% from their all-time high. Bitcoin plunges to almost $14,000 from its all-time high of $69,000 in 2021. 

Let’s look closely at the factors that lead to such a change in the funding numbers.

The Decline in Numbers

According to the recent Crunchbase data, the investment in the crypto market has taken a sharp hit, falling to $1.3 billion in Q3 2023, in contrast to the $2 billion investment in Q1 and Q2 of last year. 

Moreover, the declining numbers of Unicorns in the crypto and web3 space are at an alarming rate. The number of unicorns has declined from 22 in Q2 2022 to just 5 in Q3 2023. 

When we take a closer look at such numbers, the decline becomes more alarming. Taking a quarter-to-quarter comparison, the $2.1 billion invested across 297 deals in Q3 2023 represents a 36% QoQ decline in both metrics, dropping to levels not seen since Q4 2020.

Such a high percentage fall signals a significant loss in investors’ confidence, or at the very least, this plays a cautious approach from crypto investors. 

We must look back at the golden days to understand the severity or importance of this decline in the crypto market. From Q3 2021 to Q2 2022, the crypto markets raised almost $8 billion every quarter, setting new records and driving the bull run on a hopium rally with the craze of blockchain technology worldwide. 

Looking at such declining numbers after the golden days when Web3 startups raised nearly $16 billion H1 2022 makes it unbelievable. Such a downfall marks the golden days behind us, and the numbers are spiraling downwards for seven consecutive quarters. 

On the other hand, Artificial intelligence (AI) startups are gaining the attention of institutional and individual investors, leading to $25 billion in funding in the first half of 2023.

Notable Fundings of 2023

Despite a long-coming downtrend in crypto funding, a few significant funding rounds make it to the highlights of 2023, one of them being Worldcoin. A crypto project fueled by the CEO of OpenAI, Sam Altman, after his success with the ChatGPT steps into the crypto world. 

Bagging $115 million in funding in a series C round in May 2023, led by Blockchain Capital, remains a highlight of 2023 in crypto funding. 

Following the Worldcoin project, the second company bags nine-figure funding, a crypto protocol called Layerzero. This project has raised $120 million from a16z, Christie, and others. 

So, despite the crypto funding spiraling downwards, specific projects highlight a positive perspective of many prominent financial investors towards the crypto market. Furthermore, the web3 sector shows strength in the gaming sector.

Mythical Gaming, a web3 gaming company, raised $37 million in funding from ARK Investment and Animoca Brands in June 2023. This made it one of the year’s most talked-about web3 gaming companies. Mythical Gaming is optimistic about the future of web3 gaming, and their NFL rival apps, which have been downloaded over 1 million times, support this optimism.

The Interest Rate Dilemma

With the world’s biggest economy, the U.S. struggled to control interest rates in 2023 after the pandemic. As the rates of borrowing increase, startups have a difficult path to secure more funding. According to a recent report shared by Messari, a 36% decline is seen over quarter-to-quarter in both the funding amount and the number of deals closed in Q3 2023.

Investors maintain a backfoot stance despite the reports showcasing no direct relation with higher rates. 

Binance Labs, for example, completed 23 deals in Q3 2023, which is twice as many as the next closest investor, Robot Ventures. This indicates a more selective and cautious strategy.

Most funding activity in Q3 2023 occurred in the seed stage, with over $488 million raised across 98 rounds. This indicates that investors are becoming more cautious and are hedging their bets on early-stage projects that promise high returns in a potential bear market.

Messari reports that, on average, chain infrastructure and DeFi projects received $207 million and $191 million in funding each month over the past year.

Vessel Capital, for instance, has recently launched a $55 million fund aimed specifically at crypto startups. This is a significant development because it shows that even in a bear market, investors are willing to bet on the long-term potential of the crypto industry.

MoonPay’s venture arm is another noteworthy development. While details are still emerging, the very existence of this new venture arm indicates that MoonPay sees enough potential in the crypto startup ecosystem to warrant a dedicated investment vehicle. These new funds could serve as much-needed lifelines for startups struggling to secure funding in the current climate.

Conclusion

The crypto funding landscape in 2023 is a mixed bag. While there’s a significant decline in funding, new investment vehicles like Vessel Capital’s $55 million fund and MoonPay’s venture arm and innovative strategies from companies like Pudgy Penguins offer glimmers of hope.

Despite the overall downturn, certain sectors within the crypto industry, like chain infrastructure, gaming, and DeFi, continue to attract substantial investment. This suggests that while the broader market may be bearish, there are specific areas where investors see long-term potential.