Cryptoverse: Venture Capitalists Get Crypto Fever

Venture capital will make a big leap in crypto in 2022.

Afraid of being left in the digital dust, private equity investors are rushing into crypto projects – blockchain-based applications and platforms powered by native cryptocurrencies from virtual metaverse and web3 economies.

Venture capital investments in such projects totaled $10 billion worldwide in the first quarter of this year, the highest quarterly amount ever and more than double the level seen in the same period a year ago. , according to data from Pitchbook.

A trickle turned into a torrent: The 2019, 2020, and 2021 annual totals were $3.7 billion, $5.5 billion, and $28 billion.

“You see a lot of VC investment in a lot of protocols because they all believe, just like us, that some of these protocols are the infrastructure of the future,” said Steve Ehrlich, CEO of crypto brokerage Voyager. digital.

Such projects, which can range from crypto exchanges and NFTs to decentralized financial applications and token issuers, are often referred to as protocols, referring to the rules embedded in their computer code.

The recent move differs from the past as venture capital investment levels tracked the price of bitcoin, albeit with a short lag, according to Alex Thorn, chief of research at the IAEA firm at blockchain-focused bank Galaxy Digital in New York.

Investment levels in cryptos have continued to rise this year during bitcoin’s price crash — it’s down about 16% — and also during another dip last summer, Thorn notes.

“This decoupling demonstrates investors’ disbelief that a prolonged bear market for digital assets is coming, as well as the significant amount of dry powder being held by funds trying to allocate to the sector,” he wrote last week.

The 2022 VC crypto craze also coincided with a crash in the tech-heavy Nasdaq benchmark, which fell 21%.

Average Crypto Fund Size (2016-YTD) https://graphics.reuters.com/CRYPTO-INVESTMENTS/byprjnezxpe/chart.png

VC DATING WEB3

The number of mergers and acquisitions involving target crypto firms is also exploding globally as buzz builds around the virtual worlds metaverse and Web3’s decentralized online utopia.

According to Dealogic, 73 deals worth $8.8 billion have been closed so far in 2022, compared to 51 deals worth $6.8 billion last year.

The rush for funding means crypto firms can afford to be picky, said Mildred Idada, founder of the blockchain venture fund and accelerator Open Web Collective.

“The founders say, ‘There are five funds that want to invest in us, which one will deliver the most value? ‘” she said.

In many cases, blockchain technology companies are interested in the brand value of backing established players and growing integration with the financial system, Idada added.

Some companies have gotten creative with raising funds. For example, Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised $450 million in February through a private sale of its cryptocurrency to investors, including SoftBank’s Vision Fund 2.

“The main reason for this increase was to get institutions on our side and increase Polygon’s visibility,” said co-founder Sandeep Nailwal.

Still, the entry of traditional venture capitalists accustomed to red-carpet handling into online developer communities pushing for decentralization is not without cultural clashes.

According to Alexandra Bertomeu-Gilles, risk manager at Aave, a decentralized financial (DeFi) company, many venture capitalists are forced to lure these developer communities behind potential targets.

“Some founders now… when they get money from investors, make agreements so that the investors don’t have a say in the governance of the company, or they can’t undo something that the majority of the rest of the community wants,” she said. said.

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