The coronavirus had a negative impact on investment in early stage crypto startups, early in the year. The economic uncertainty caused by the pandemic made venture capital companies hesitant to invest in the first half of 2020. Yet, there is reason for optimism, as things are starting to turn around. In the third quarter of this year. Crypto startups have raised $900 million in venture capital, more than 3x of what was raised in Q2 2020.
Ilias Louis Hatzis is the founder and CEO at Kryptonio, a “keyless” non-custodial bitcoin and cryptocurrency wallet, that lets users manage bitcoin and crypto, without private keys or passwords.
Research from Block showed that in Q3 2020, there were 212 VC deals, with half of those being early stage (59) and seed stage (60). Outlier Ventures reported that crypto projects raised $227 million in September through 97 deals, $278 million in August in 24 deals, and $254 million in July with 29 deals.
The average deal size for early-stage startups was $7 million. These early-stage deals were about $272 million, or about 30% of the investment total for the quarter. Seed deals averaged $2.1 million and accounted for about 12% of investments for the quarter.
Since late June this year, Defi has been on the tear and it’s not surprising to see DeFi investments crushing it. In September, DeFi deals made up for two-thirds of the total funding, or $157 million. In August, they made up 62% of deals and in July 72.4%. Overall in Q3, VCs invested in DeFi aggregators and derivatives platforms, including a new sub-category called “Staking Derivatives”, with projects like Stafi, Bifrost, Reflexer Labs, and Kira Core.
Among the 23 DeFi projects, most are based on Ethereum and five of which are Polkadot-based with EVM compatibility, that raised $18.7M over the last three months.
$18.7M has been raised across 5 Polkadot DeFi projects over the last two months
A comparatively small figure, but a sign of Polkadot's burgeoning DeFi community pic.twitter.com/33iRkXeeyb
— Messari (@MessariCrypto) October 22, 2020
When we look back at 2019, blockchain and crypto companies raised a total of $4.5, in all types of financing, including Bitfinex’s $1 billion token issuance. Equity funding accounted for 678 funding rounds, raising a total of $2.7Bn, with participation from 997 accredited investors, according to CrunchBase.
What we’re seeing in 2020, is that investments in centralized services are dropping. The competitive landscape for centralized exchanges, custodians, OTC and market makers has reached a level of maturity, investments in these categories are declining.
Between 2015 and 2019, annual VC-backed deals and financing into enterprise blockchain–defined as software for enterprise processes excluding holding or trading cryptocurrencies, was dwarfed by funding to cryptocurrency companies. In 2019, cryptocurrency companies received $2.3 billion in VC-backed funding while enterprise blockchain received $434 million. Furthermore, almost half of the funding for enterprise blockchain, around $200 million came from Ripple.
While I doubt the future of digital money could come out of a central bank and not a startup, government involvement in cryptocurrencies is set to grow. Central banks in the China, US, Europe and Asia are exploring central bank digital currencies (CBDC).
As IEOs have taken a back seat, the recent announcement by the SEC is an interesting development. The SEC raised the limit of the funds a crypto startup can raise through regulated crowdfunding campaigns from $1 to $5 million. Regulated crowdfunding allows startups to make securities offerings without having to register with the SEC. According to the SEC regulations, anyone can participate in this type of campaign. The restrictions will no longer apply to accredited investors, and the amount available to non-accredited investors will be calculated based on their annual income. This lets startups access capital, while ensuring investors still have access to various protections through regulations.
The cryptocurrency and blockchain industry are still at an early stage. Sentiment has always been a strong driver for investments and market. valuations. As bitcoin’s price goes up even more, we will see new interest, new ideas and use cases from new fresh startups, which will only lead to more funding. In the traditional venture capital, investments made in equity are illiquid for 3-10 years, but only those who will risk going too far can possibly find out how far it is possible to go.
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