VC funds bullish on crypto, massive investment in blockchain startups

Venture capital funding for crypto and blockchain startups appears to be record-breaking in 2021. Crypto and blockchain-based firms have received more funding in the first quarter of 2021 than the whole of 2020.

VC funds bullish on crypto, massive investment in blockchain startups

Three major companies have been funded as total $1.1 billion in Q1 2021, a third of the total funding for crypto and blockchain firms reported in the year 2018. With the current bullish enthusiasm in the crypto industry, funding demand for blockchain-based startups is expected to continue throughout this year.

In Q1 of 2021, 129 crypto and blockchain-based startups received roughly $2.6 billion in funding, according to a Bloomberg report culled from data by business analytics firm CB Insights. The figure is already $300 million more than the total funding for such companies in the whole of 2020.

Wallet provider, lending outfit BlockFi and blockchain game studio Dapper Labs accounted for almost half of the $2.6 billion funding received by startups in the industry in Q1 2021. At the end of March, Dapper Labs made an announcement of $305 million investment from sports stars and other celebrities amid the popularity of NBA Top Shot NFTs.

The potential for outsized returns continues to be a driving force behind increased equity investments in crypto startups both for blockchain and mainstream VC funds.

Blockchain private equity performance has proven itself to be largely uncorrelated with the mainstream asset class. This trend offers some form of assurance for VC funds looking for diversity in their early-stage investment portfolios.

Following the remarkable increase in funding for crypto startups in 2021, the proportion of blockchain-focused VC funding to the overall market might be set for a trend reversal. After almost peaking at 2% during the 2017 bull run, blockchain private equity fell to less than 1% of the global VC market as of the end of 2020.

This decrease could be caused in part to the trends that emerged post-2018 bear market and the ongoing coronavirus pandemic. 

Since the emergence, the crypto space has been likely compared to the early days of the internet market in the late 1990s and early 2000s where the internet boom led to the rise of sectors such as e-commerce and social media, the blockchain space has been acclaimed to bring innovations such as decentralized finance and the decentralized web.

Legacy brands that were dismissive of the promise of the then young internet space saw the rise of e-commerce and online merchants challenge the primacy of these brick-and-mortar firms in the retail arena. Social media also grew to arguably eclipse the reach of print and broadcast media as web-based services disrupted several industries.

The token economy associated with blockchain startups also offers early backers the opportunity to buy cryptocurrencies that could surge in value within a short period of time. 

The Defi boom to prominence has offered remarkable popularity in the crypto market through activities such as staking and protocol governance. According to Baek Kim, director of investments at VC fund Hashed: “The most important part of the crypto VC investments is that this is also an entry ticket to participate in crypto networks as a shareholder.” He added further, “Crypto portfolios allow for investors to participate and contribute to the ecosystem in a much more engaging way than the traditional equity investments through staking, node operations, governance proposals, liquidity bootstrapping, and many more. VC participation in crypto and blockchain projects means you can be part of this paradigm shift not just as an investor but as a participant.”

The growing desire for blockchain startups is not restricted to established players in the still-nascent crypto space. Such new projects, especially in the Defi industry, are also enjoying significant interest from private equity firms looking to be early backers of the next Defi bluechip.

Early-stage funding by retail investors is also another growing trend as of now, especially amid the gains enjoyed by projects bootstrapped on IDO launchpads. Launchpad platforms often utilize a tiered subscription package that allows holders of their native coins to gain access to project token allocations before the public listing.

According to data from cryptocurrency aggregator CryptoDiffer, the top 10 launchpad platforms in the market have recorded average returns on investment ranging between 11.3% and 68.2% thus far in 2021.

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