Web3 Financing and Crypto Fund Year in Review: Infrastructure and services remain focused, and mainstream asset allocation has risen significantly

Original author: Sohrab Khawas

Compilation: Zen, PANews

In the third quarter of 2023, the primary market in the Crypto Assets and Blockchain space experienced a sharp decline, receiving only $1.975 billion in investment. This figure is not only the lowest since the fourth quarter of 2020, but also marks a new trough for the industry. After peaking at $12 billion in the first quarter of 2022, investment and financing in the crypto space have been declining for a year and a half.

As the flow and scale of funds change, we need to take a deeper look at the current funding situation in the Web3, Blockchain and Crypto Assets space. This analysis aims to uncover the complexities and nuances of the Web3 funding space and provide a clear idea of the current funding distribution.

Review of Web3 Primary Market Investment and Financing

At the beginning of 2021, the market performed strongly, but by the second half of 2022 and the beginning of 2023, this suggests that the market is going through a process of consolidation and consolidation, and may be more stable. Although there were fluctuations in the size of funds during this period, the number of projects completed for financing remained stable.

The Web3 industry showed strong growth in 2021, and this positive trend continued into the end of the year: $5.48 billion in Q2 with 549 financings, Q3 with $6.9 billion with 524 financings, and Q4 saw even more significant growth with $9.8 billion and 717 financings.

By the beginning of 2022, Q1 had seen a slight decline to $8.3 billion, but the increase in the number of rounds indicated that the market was still expanding. In Q2 2022, the amount of financing was reduced again to $7.5 billion, but the number of financing transactions remained relatively stable, which may indicate that the market is consolidating.

However, the decline seen in the second half of 2022 is indeed worrying, with investment falling to $3.4 billion in Q3 and $2.5 billion in Q4. This downward trend has continued into 2023, indicating a challenging phase for the industry.

On a half-year basis, the second half of 2021 showed strong growth, with $16.7 billion in financing and 1,241 transactions. This optimism continued into the first half of 2022, with $15.8 billion raised. However, the second half of 2022 took a sharp turn to $5.9 billion, suggesting that a market correction may have occurred. This trend intensified further in the first half of 2023, further indicating that the market is experiencing a significant contraction.

Crypto Hedging Fund

According to the 5th Annual Report of Global Crypto Hedging Funds, Hedging funds investing in crypto assets have declined, from 37% in 2022 to 29% in 2023. This shift is indicative of the need to reassess the risks and potential of crypto assets in portfolios.

Hedging Fund’s Crypto Asset Investment

The chart above shows the Hedging Fund’s allocation of crypto assets in its total assets under management (AUM). A significant portion of Hedging Funds (24%) take a conservative approach, investing less than 1% of their AUM in crypto, a cautious stance consistent with the overall Fluctuation and risk of the crypto market. Interestingly, about half of the hedging funds involved in crypto asset investments adopted a “testing the waters” strategy, investing less than 2% of their total assets under management. 63% of these funds have more than $1 billion in assets under management, suggesting that well-known funds are also cautiously testing the waters in the Crypto Assets space.

Conversely, 38% of Hedging Funds that are actively involved in crypto assets show a high-risk appetite, accounting for more than 5% of their crypto AUM. This is a significant increase from 20% last year, indicating that people’s confidence or willingness to take more positions in the crypto market is growing.

Top Reasons for Hedging Funds to Invest in Crypto

Web3 Financing & Crypto Fund Year in Review: Infrastructure and Services Remain Focused, Mainstream Asset Allocation Rises Significantly

The majority of Hedging Funds (39%) prioritize overall diversification, diversifying their portfolios with Crypto Assets. Another important factor is the pursuit of long-term alpha, with 38% of Hedging funds looking to achieve consistent growth from Crypto Assets investments. In addition, 23% are attracted to market-neutral Alpha investment opportunities, indicating their interest in capitalizing on potential returns when overall market trends are unclear. Together, these motivations highlight the multifaceted role of crypto assets in enhancing a Hedging Fund’s portfolio strategy.

Motivation insights based on AUM

Depending on the Hedging Fund’s assets under management (AUM), Hedging funds show different preferences when it comes to investing in crypto assets. Hedging funds with more than $1 billion in assets under management prefer general diversification (50%) and long-term alpha (38%). In contrast, funds with less than $1 billion emphasize market-neutral Alpha opportunities (40%) and long-term alpha (40%).

Hedging Funds’ Preference for Crypto Assets

The data shows that from 2021 to 2023, there have been interesting changes in Hedging funds’ investments in various crypto assets. Notably, Ethereum (ETH) and Bitcoin (BTC) allocations have rise significantly, from 67% in 2021 rise to 91% in 2023, likely driven by their market dominance and recognition as a store of value asset. In contrast, the allocation of Non-fungible Tokens has dropped significantly, while investment in other CEX-listed Tokens has surged significantly, from 29% in 2022 to 55% in 2023.

Blockchain Funding Trends 2023

In 2023, the Blockchain fundraising trend shows a dynamic trajectory, with fluctuations in both the “total amount raised” and the “number of funds raised”, which are manifested as:

• Good start: The year got off to a bumper start and peaked slightly in March, when 104 rounds of funding raised a total of $1.31 billion.
• Mid-year decline: The industry saw a mid-year low in funding at $414.61 million in June.
• Year-end surge: There was a sharp spike in November, when $1.67 billion was raised in 111 rounds of funding.

The total amount of crypto financing in 2023 reached $9.615 billion, with 1,174 financings. **This compares to a higher total of $41.86 billion in 2022, with 2,072 financings. While the total amount raised in 2023 has declined, the number of rounds raised has remained relatively stable. This suggests that the market is diversifying, with more frequent fundraising activities and a shift towards relatively smaller-scale projects.

Analysis of different **** tracks

Blockchain infrastructure and services have always been in the spotlight. At the beginning of January, they raised 6 and 39 rounds, respectively, and in February, they saw significant increases of 8 and 48 rounds. This trend shows the growing interest in underlying technologies and related services, and underscores the industry’s focus on enhancing Blockchain capabilities.

DeFi (Decentralized Finance) emerged as a prominent area, with 22 financings in January and 40 in October, maintaining a sustained competitive edge. The Decentralized Finance space has experienced substantial growth, reflecting the industry’s commitment to DeFi solutions.

GameFi projects peaked at 22 funding rounds in February, but also experienced cyclical fluctuations, with only 8 in July and 10 in October.

Non-fungible tokens gained traction throughout the year, peaking in January and March with 10 and 8 funding rounds, respectively. This shows that the unique appeal of digital assets persists in a variety of applications.

The Web3 social category showed resilience, notably in April, August, and November, with 14 funding rounds each. This shows the continued interest in platforms that integrate Blockchain with social interaction.

Notably, Stable Coin and Traditional Currencies did not see significant fundraising activity during the year. This could mean a shift in focus from traditional fiat-backed digital assets to other areas, either due to regulatory considerations or due to increased demand for more innovative crypto solutions.

2023 VS 2022

Comparing trends in 2023 and 2022 can provide valuable insights into the changing landscape of the market.

In 2023, Blockchain infrastructure financing increased significantly, rising from 62 to 72, indicating the industry’s growing interest in and investment in the foundational elements of Blockchain technology. It means that industry practitioners will continue to focus on building a robust infrastructure to support various Blockchain projects. On the other hand, the number of Blockchain services decreased from 621 to 381, indicating that the focus may shift from services to infrastructure development.

DeFi (Decentralized Finance) remained significant, falling from 326 to 242, indicating that the DeFi sector is consolidating or maturing. However, the number of GameFi funding rounds dropped from 351 to 130, indicating that the industry is reevaluating interest in gaming-related Crypto Assets projects.

Both the centralized finance (CeFi) and public chain categories saw a decline in 2023, with CeFi falling from 244 to 97 and public chains falling from 71 to 65. This could mean that interest in centralized financial services is declining. It is worth noting that the momentum of memes is not obvious. Non-fungible tokens dropped sharply from 224 to 62.

The social category dropped from 148 to 119, which could indicate that social-oriented Crypto Assets projects are decreasing, or that the category is more selective in its approach to investing.

Overall, investors seem to be diversifying their interests, emphasizing Blockchain infrastructure, and adjusting their focus in specific categories such as Decentralized Finance and GameFi.

Financing by Phase

Seed funding became the main driver, accounting for 30.62% of the share, indicating support for early-stage start-ups. Strategic financing followed with 9.53%, pre-seed and Series A financing accounted for 8.68% and 6.43%, respectively. Grant funding (3.49%), Mergers & Acquisitions (M&A) (1.94%), and “Others” had the highest share at 39.3%. This shows that the crypto industry has a funding ecosystem that values early-stage innovation, strategic partnerships, and flexible funding methods, a large portion of which is used for diverse and evolving funding models.

Geographical Trends in Blockchain Project Financing

In 2023, the main centers for Crypto Assets fundraising include the United States, the United Kingdom, Germany, Canada, Singapore, France, Switzerland, Italy, South Korea, Hong Kong.

Through comprehensive Blockchain project financing data analysis, geographical trends between different jurisdictions can be revealed. The following chart analyzes and highlights the global nature of Blockchain innovation and the unique strengths and preferences of different regions when it comes to project financing.

The United States has become a strong leader in the Blockchain space with a wide variety of projects covering Blockchain services, GameFi, social, Blockchain infrastructure, CeFi, public chains, Non-fungible Tokens, Stable Coins, Meme, and Decentralized Finance. It is worth noting that Blockchain services and Decentralized Finance projects have the highest concentration, indicating that the region mainly emphasizes basic Blockchain products and DeFi solutions.

Singapore followed closely behind, showing a well-balanced portfolio of projects. Blockchain services and Decentralized Finance are also dominant in Singapore, which coincides with the global trend. The data shows that there is a clear interest in Blockchain technology in finance and Decentralization applications.

While Hong Kong keeps up with global trends and has a growing interest in Blockchain services and Decentralized Finance, it is particularly prominent in the GameFi, Blockchain Infrastructure, Chain, and Non-fungible Token categories. This indicates the region’s preference for gaming, Blockchain infrastructure, and Non-fungible Tokens, while the diversity of project priorities demonstrates Hong Kong’s goal of embracing different verticals of Blockchain technology.

The UK excels in Blockchain services, CeFi, and Decentralized Finance, showing a strong interest in traditional Blockchain services and the DeFi industry. At the same time, China, as an important player in the global technology sector, maintains a solid position in several categories, among which it dominates Blockchain services, Decentralized Finance, GameFi, and Blockchain infrastructure.

Japan has adopted a balanced approach, with its prominent Blockchain services, GameFi, Decentralized Finance, CeFi, and chain projects; Switzerland and Canada are known for their robust financial sectors, focusing on Blockchain services, Blockchain infrastructure, and Decentralized Finance, in line with their strategy of financial innovation.

South Korea’s focus on Blockchain services, GameFi, and public chains has shown a preference for real-world applications. Finally, the Netherlands has a well-balanced project portfolio, evenly distributed across Blockchain services, GameFi, Blockchain infrastructure, Non-fungible Token, and Decentralized Finance projects.

Summary

2023 has been a rollercoaster ride for the Web3 and Crypto Assets space. Despite the sharp decline in funding amounts throughout the year, the data shows potential resilience and a changing landscape. Blockchain infrastructure and services remain a top priority, while Decentralized Finance and GameFi continue to attract a lot of attention. The rise of early-stage financing and strategic partnerships underscores the importance placed on nurturing innovation and ensuring long-term success.

Looking ahead, it is worth watching how these trends will shape the future of Web3 and Crypto Assets, whether established companies can regain their dominance, and whether new pioneers can rise and redefine the landscape.