Private equity investors are focused on building apps and platforms that are fueled by cryptocurrencies that are native to the virtual economies of the metaverse and Web 3.
In the first quarter of this year, VC investment in such projects was $10 billion, the largest quarterly sum of the year, and more than double the level seen in the same period a year ago, according to data from Pitchbook.
The full-year totals for 2019, 2020 and 2021 were $3.7 billion, $5.5 billion and $28 billion.
Steve Ehrlich, CEO of Voyager Digital, said that a lot of VC investment into a lot of protocols is because they believe that some of these protocols are the infrastructure of the future.
Protocols are used in reference to rules embedded in their code, which can range from crypto and NFT exchanges to decentralized finance applications and token issuers.
The recent action is different from the past when venture investment levels tended to track the price of a digital currency, but with a short delay, according to Alex Thorn, head of firmwide research at the bank Galaxy Digital in New York.
Investment levels in criptocurrency have continued to grow during the recent slump of the price of bitcoins, as well as during another decline last summer, Thorn notes.
He wrote last week that investors were disbelief that a long bear market in digital assets is coming, as well as the significant amount of dry powder held by funds seeking to allocate to the sector, is evidenced by this decoupling.
The tech-heavy Nasdaq benchmark fell 21% as a result of the VC craze in 2022.
As the buzz grows around the metaverse of virtual worlds and the Web 3 decentralized online utopia, the number of M&A deals involving criptotarget companies is ballooning worldwide.
There were 73 deals sealed in 2022 with a combined deal value of $8.8 billion, versus 51 deals worth $6.8 billion for the whole of last year, according to Dealogic.
Mildred Idada, founding partner at Open Web Collective, said that the funding rush means that cryptocurrencies firms can afford to be picky.
Founders are saying, There are five funds that want to invest in us, which one is going to bring the most value? She said something.
Idada said that in many cases, a firm is interested in the brand value of backing from established players and the integration with the financial system.
Some firms have been creative in how they raise money. In February, Polygon, a platform for developing and scaling applications on the Ethereum blockchain, raised $450 million through a private sale of its criptocurrency to investors, including SoftBank's Vision Fund 2.
Co-founder Sandeep Nailwal said the larger reason for the raise was to get the institutions on our side and to increase the visibility of Polygon.
The entrance of traditional venture investors accustomed to red-carpet treatment into online developer communities pushing for decentralisation isn't without cultural clashes.
Alexandra Bertomeu-Gilles, risk manager at Aave, said that many deep-pocketed venture capitalists are forced to woo the developer communities behind potential targets.
Some founders are creating agreements so that investors don't have an outsized say in the governance of the company, or they can't overrule something that the majority of the community wants, she said.