Why Blockchain and Crypto VC Funding Is Down in Q4, According to This Report

The year 2022 was a disastrous period for crypto due to the bear market and other chaotic events. The crypto industry has yet to recover from the collapse of Terra in Q2 of 2022 to the implosion of FTX in Q4. The ripple effects of FTX’s bankruptcy across the industry affected many sectors, including top firms.

Among the areas affected is crypto venture capital funding. Block data analytics company reported the state of blockchain and crypto venture capital funding in the fourth quarter (Q4) of 2022. According to the report, venture capital funding in the crypto and blockchain sectors declined.

Terra and FTX implosions among the main reasons for the decline in VC funding

Blockdata’s report noted a successive quarterly decline in funding through 2022 after a boom in venture capital funding in the Web3 space in 2021. Blockdata analyzed data from CB Insights, a market intelligence platform that analyzes data points about venture capital, startups and various sectors.

In its analysis, Blockdata noted that Q4 recorded a 34% drop in venture capital funding from the third (Q3) of 2022. The final quarter saw a drastic drop in funding compared to Q1 and Q2.

According to Blockdata’s report, venture capital investments in crypto fell quarterly in 2022. Q1 recorded a 53% decrease from the 2021 value, Q2 a 67% reduction, and Q4 experienced a 61% decrease in funding. The drop in venture capital investment maintained a consistent pattern, falling from a high of $11 billion in funding and 692 deals in the first four months of 2022.

In its report, Blockdata outlined several factors responsible for the decline in crypto and blockchain funding over the past year. First, it cited the $60 billion collapse of the Terra ecosystem in May 2022 as a trigger for the decline. The Terra collapse sent a cascading effect across the industry, bankrupting many crypto firms, including Celsius and Three Arrows Capital.

The November 2022 FTX implosion was also among the factors Blockdata cited as driving reduced blockchain and crypto VC funding. In addition, the FTX liquidity crisis increased the volatility of the crypto market, causing many assets to lose value while some firms went bankrupt.

The global macroeconomic conditions in traditional financial and capital markets also contributed to the decline in VC funding. For example, the rise in interest rates and the US Federal Reserve’s inflation control strategy were among the factors that dissuaded venture capitalists from funding crypto and blockchain startups.

Due to these factors, Q4 2022 saw only $3.7 billion in funding, down 61% from $9.6 billion in Q4 2021. Total blockchain and crypto startup funding saw an annual decline of 11 %, falling from $32 billion in 2021 to $29. billion in 2022.

A ray of hope for the crypto sector

However, Blockdata noted that the volume of investment deals in 2022 increased by 35% against the 2021 outcome. It is a positive result amid the massive decline in funding recorded. In addition, the firm noted that despite the decline in venture capital investments, investors still want to invest in blockchain-based technology.

The report noted that venture capitalists are shifting their focus towards non-volatile innovations, including cross-chain bridges, payments, DAOs, lending, remittance services and more.

Despite a funding slowdown in Q4, Amber Group raised $300 million in a Series C round of funding in December 2022. The fourth quarter saw nine blockchain mega-rounds, where firms raised over $100 million in funding. However, Uniswap and Celestia were the only firms to achieve unicorn status in the fourth quarter of 2022.

Featured image from Pixabay stevepb, chart from TradingView.com.