Bitcoin Surges to New Heights, But Crypto VC Investments Slow Down

The cryptocurrency market experienced a positive start to 2023, with Bitcoin closing seven consecutive months with gains, the longest such streak in 13 years. Despite this bullish trend, venture capital investments in crypto remained subdued, registering a 25% increase in Q1 but falling short of the record highs seen in 2021 and 2022.

Cryptocurrency Market Analysis: Bitcoin's Steady Rise, Crypto VC Investments Lag Behind

London, United Kingdom (February 4, 2022) - A neon sign illuminates the availability of a bitcoin automated teller machine (ATM) at a Texaco petrol station in London, signaling the growing presence of cryptocurrency in daily life. Amidst this surge of popularity, the United Kingdom's tax authorities are preparing to complicate matters for taxpayers grappling with the complexities of cryptocurrencies in their financial reporting.

Bitcoin's Extended Bullish Run

On Sunday evening, Bitcoin closed the seventh consecutive month with a green candle, marking the longest such streak in thirteen years. The first quarter of 2023 witnessed a flurry of activity in the crypto world, with the emergence of exchange-traded funds (ETFs) and increasing institutional involvement. Notable among these developments was BlackRock's tokenized fund, which has raised over $250 million. Venture capital (VC) investments in cryptocurrency also experienced a resurgence.

Crypto VC Investments Trail Historic Highs

Despite Bitcoin's sustained bull run, crypto VC investments have remained relatively low compared to their 2021 peaks. While investors allocated over $2.5 billion in Q1, representing a 25% increase from Q4 2023, the total of $10.2 billion raised in 2023 falls short of the benchmark set in previous years. According to Pitchbook's data, 2023 saw a significant decline compared to 2021 and 2022, which witnessed $33 billion and $30 billion in crypto VC investments, respectively.

Lingering Effects of Crypto Market Turmoil

Several factors may have contributed to the muted funding landscape despite increasing optimism. The lasting damage caused by the collapse of Terra and FTX, two prominent crypto firms, has instilled caution among investors. FTX, Alameda Research, and Three Arrows Capital, all active VCs in the past, no longer exist, leaving a void in early-stage financing. The involvement of reputable investors in both FTX and Terra has further raised concerns among limited partners, who may be hesitant to allocate funds to crypto VC funds.

Crypto VC Funds Face Challenges

Data from Saison Capital reveals that the majority of crypto VC funds established in 2021 have yet to repay any capital to investors. Liquid token funds, which invest in tokens already trading on exchanges, may have absorbed some of the allocations that would otherwise have gone to crypto VC funds. Limited partners, seeking to avoid being locked in during the next bear market, are opting for funds that can return their capital faster and provide more liquid exposure to the asset class.

Merkle Manufactory Aims for Crypto Unicorn Status

Merkle Manufactory, the developer behind the blockchain-based social media app Farcaster, is seeking additional funding in its pursuit of becoming crypto's next $1 billion unicorn. The X alternative has witnessed a 25-fold increase in daily active users since the start of 2024, reaching nearly 50,000. The app has fostered a crypto-native community through the use of the token Degen. Power users receive a daily allowance of Degen and can reward other users for engaging content.

Degen Launches Layer 3 Chain, Fueling Price Surge

Last week, Degen launched its own chain, utilizing a combination of Arbitrum and Base layer-2 solutions. This has created one of the first active layer 3s, and the Degen token is used to pay for near-zero gas fees. Consequently, Degen's price surged by over 400% last week. However, it remains to be seen whether the free Degen and decentralized approach will be sufficient to retain Farcaster users in the long run. The market will closely monitor this development in the coming quarter.