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QUARTERLY UPDATE | Q3 2023

The crypto market witnessed an 8.6% decline in total market cap, coupled with falling developer activity.
Bitcoin remains strong with a 63% YTD price increase.
Web3 VC hits a new low in Q3, both in new deals and total capital invested.
Regulatory challenges intensify with ETF delays, legal battles, and institutional setbacks.
DeFi experienced a 13.1% TVL drop, with liquid staking emerging as a leader.


MARKET OVERVIEW

 

The Q3 2023 Web3 market portrayed a challenging landscape marked by downward trends in various key metrics. The market cap for the entire crypto space experienced an 8.6% decline from Q2 2023, and developer activity slightly decreased during this period. Funds raised for crypto projects hit a new 3-year low, witnessing a 21.4% decrease from Q2 2023, reflecting a bearish sentiment. The Crypto Fear & Greed Index fell by 9 points from Q2 2023, indicating an overall slightly fearful sentiment in the market.


BTC PRICE PERFORMANCE YTD 2023

BTC Price Performance YTD 2023

Bitcoin emerged as the standout performer for Year-To-Date (YTD) price performance, exhibiting a 63% increase since the start of 2023. However, Bitcoin Dominance fell by 1.5% from Q2 2023, suggesting a more diversified market. Notable events in Q3 included institutions like Franklin Templeton filing for Bitcoin ETFs, providing a potential bullish signal for Bitcoin. Ethereum's gas fees fell, indicating a drop in on-chain activity, however the amount of ETH staked increased, showcasing continued confidence in Ethereum.


In the DeFi sector, Total Value Locked (TVL) fell by 13.1%, with Ethereum maintaining its leadership. The NFT sector faced challenges, with metrics like NFT sales, transactions, unique buyers, and the NFT-500 Price Index all declining.



VENTURE CAPITAL LANDSCAPE

 

Despite the ongoing challenges in the bear market, Q3 showcased a Web3 VC landscape characterized by several notable trends and shifts. This quarter marked the lowest in terms of both deal count and total capital invested since Q4 2020.


Crypto VC Deal Count & Capital Invested

The United States continued to dominate the Web3 startup landscape, accounting for over 35% of all deals and raising more than 34% of the total capital invested by VC firms. Nevertheless, Q3 saw a notable shift as other jurisdictions, such as the United Arab Emirates, Singapore, and the U.K., with more progressive crypto regulatory frameworks.


The VC fundraising environment, while still challenging, showed signs of potential improvement in Q3. Venture funds raised more than $1 billion during this quarter, marking the first uptick since the declines began in Q3 2022. New fund launches also increased slightly to 15, up from 12 last quarter. However, median and average fund sizes witnessed a significant decrease from their bull run highs.


Deal count hit a new bottom at 376 deals, reflecting the persistent challenges in the fundraising environment. Notably, earlier stage deals (Pre-Seed, Seed, and Series A) accounted for the majority of investments (83.5%), continuing a trend from the previous quarter. Companies founded in 2021 and 2022 led the venture deals in Q3, with 2021 vintage firms raising the most capital.


The Trading, Exchange, Investing, and Lending sector raised the most venture capital money, accounting for 32.5% of all venture capital deployed. Web3, NFTs, Gaming, DAOs, and Metaverse startups followed closely, raising 14.2% of all venture capital deployed in the quarter.


While signs of improvement and resilience were evident, uncertainties remain, with ongoing shifts in investor preferences, geographic dominance, and sector-specific funding dynamics shaping the evolving landscape. The bear market, both in Web3 and broader venture capital, persists, presenting both challenges and opportunities for startups and investors alike.


Valuation & Deal Size (Crypto vs. All VC)


REGULATORY DEVELOPMENTS

 

Q3 unfolded as a period marked by dynamic regulatory developments, significantly shaping the legal landscape for the crypto industry. Notable court rulings, SEC actions, and global regulatory shifts influenced market dynamics and participant behaviors.


A court ruling in favor of Grayscale against the SEC captured attention, granting a petition for review and setting a deadline for the SEC's response by October 14th. Meanwhile, the SEC delayed approval for high-profile Bitcoin ETFs from BlackRock, Bitwise, VanEck, Wisdomtree, Invesco, Fidelity, and Valkyrie until October.


The regulatory landscape faced challenges from multiple fronts, including the US Federal Reserve's initiation of the "Novel Activities Supervision Program," granting special oversight powers for crypto. Simultaneously, Binance encountered setbacks, shutting down its crypto payments business and facing legal scrutiny with the SEC filing 37 submissions "under seal."


Individuals within the crypto space faced legal actions, with Sam Bankman-Fried's bail being revoked, leading to imprisonment until October trial. The regulatory heat extended to entities like Prime Trust, filing for Chapter 11 bankruptcy, and Two Tornado Cash developers charged by the DOJ for money laundering and sanctions violations. Coinbase, a major player in the industry, also found itself entangled in regulatory complexities. The platform faced a lawsuit from the SEC, alleging the offering of unregistered securities. This lawsuit marked a significant development, highlighting the regulatory scrutiny surrounding major crypto exchanges and their compliance with existing securities laws.


Regulatory uncertainty affected major players, with Mastercard ending its card partnership with Binance and Revolut shutting down its US crypto business due to regulatory uncertainty. These developments showcased the intricate interplay between legal frameworks and the crypto industry, influencing market participants, shaping future regulations, and contributing to the ongoing dialogue on the regulatory front. The involvement of key industry players like Coinbase underscored the need for clear regulatory guidelines and compliance measures within the crypto ecosystem.



EMERGING TRENDS

 

Q3 saw the emergence of several notable trends that shaped the dynamics of the Web3 space. These trends underscored the industry's resilience and adaptive nature, responding to evolving market conditions and user demands.


REAL WORLD ASSETS ON-CHAIN (RWA)


In Q3, Real World Asset (RWA) projects have emerged as a standout trend, experiencing substantial growth within the crypto landscape. The RWA category has gained renewed interest due to concerns surrounding diminishing returns and increased risks in traditional crypto instruments. The cumulative Total Value Locked (TVL) of RWA projects has notably surpassed $2.5 billion, underlining the sector's growing significance.


RWAs Broke Above $2.5B

Leading the way in this space is Protocol Maker, allocating a significant portion of its revenues to stable cash flow assets like Treasuries and securities. Other notable contributors to the RWA trend include projects like Frax, Canto, and others. Asset tokenization, while not a novel concept, has garnered increased attention, positioning RWA projects as a compelling investment avenue.


DECENTRALIZED FINANCE (DEFI) EVOLUTION


DeFi continued to evolve, with a notable shift towards liquid staking. Despite a decrease in total value locked (TVL), innovations and development persisted, indicating a maturing DeFi ecosystem.


INTERPLAY OF AI AND CRYPTO


The intersection of artificial intelligence (AI) and crypto gained prominence, leading to the creation of a new sector in the Web3 VC realm. Projects exploring the overlap between AI and blockchain technology attracted increased interest, showcasing the potential for synergies between these two transformative fields.


GEOGRAPHIC REDISTRIBUTION OF CRYPTO INVESTMENTS


While the United States historically dominated the crypto startup landscape, Q3 witnessed a shift. Countries with more progressive regulatory frameworks are gaining traction. this trend suggests a redistribution of crypto investments globally, with a broader array of jurisdictions participating in the Web3 innovation landscape.


MATURATION OF LAYER 2 SOLUTIONS


Layer 2 solutions, crucial for addressing scalability issues on prominent blockchains, witnessed varying performances. While projects like Arbitrum maintained dominance, new entrants like Base showed promising results. The maturation of Layer 2 solutions remained a focal point, contributing to enhanced blockchain scalability and efficiency.



Sources: CoinMarketCap, Cryptorank, Galaxy Research, PitchBook Data

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