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Venture capital is making a big move on crypto in 2022.
Scared of being left in the digital dust, private equity investors are stampeding towards crypto projects – blockchain-based apps and platforms fuelled by cryptocurrencies that are native to the virtual economies of the metaverse and Web3.
VC investment in such projects totalled $10 billion (Sh 1.15 trillion) globally in the first quarter of this year, the largest quarterly sum ever and more than double the level seen in the same period a year ago, according to data from Pitchbook.
A trickle has become a torrent: the full-year totals for 2019, 2020 and 2021 were $3.7 billion (Sh425.3 billion), $5.5 billion (Sh633 billion) and $28 billion (Sh3.2 trillion).
“You’re seeing a lot of VC investment into a lot of protocols because they all believe, as we do, that some of these protocols are the infrastructure of the future,” said Steve Ehrlich, CEO of crypto brokerage firm Voyager Digital.
Such projects, which can range from crypto and NFT exchanges to decentralized finance applications and token issuers, are often known as protocols about the rules embedded in their computer code.
The recent action is different from the past when venture investment levels tended to track the price of bitcoin, albeit with a short delay, according to Alex Thorn, head of firm-wide research at blockchain-focused bank Galaxy Digital in New York.
Investment levels in crypto have continued to grow during a bitcoin price slump this year – it’s down about 16 per cent – as well as during another decline last summer, Thorn notes.
“This decoupling is demonstrative of investors’ disbelief that a prolonged bear market in digital assets is forthcoming, as well as the significant amount of dry powder held by funds seeking to allocate to the sector,” he wrote last week.
The VC crypto craze in 2022 has also coincided with a slump in the tech-heavy Nasdaq benchmark, which is down 21 per cent.
VC MEETS WEB3
The number of mergers and acquisitions (M&A) deals involving crypto target companies is also ballooning globally as the buzz grows around the metaverse of virtual worlds and the Web3 decentralised online utopia. There have been 73 deals sealed so far in 2022 with a combined deal value of $8.8 billion, according to Dealogic, versus 51 deals worth $6.8 billion for the whole of last year.
The funding rush means crypto firms can afford to be picky, said Mildred Idada, founding partner at blockchain venture fund and accelerator Open Web Collective.
“Founders are saying, ‘There are five funds that want to invest in us, which one is going to bring the most value?’,” she said.