A recent report by Outlier Ventures reveals that venture capital investments in the cryptocurrency industry attained a year-over-year growth of 316% to $2.85 billion from $900 million through the three quarters of 2018.
This indicates that more startups in the blockchain and cryptocurrency are turning to more traditional forms of funding even as the number of initial coin offerings or ICOs continued to decrease and raise a lesser total amount of capital especially in the third quarter of this year. Of course, the report agrees with previous reports that many startups are now using a mixed model of raising capital including ICOs and venture funding.
Outlier Ventures, for instance, says that in the 119 venture capital deals completed in Q3 of this year, venture capital share was the highest in total compared to the total in other quarters this year. VCs within the United States continue to drive these venture capital investments in blockchain and cryptocurrencies. The report states that with capital investments shifting away from tech-savvy retail investors toward VCs, hedge funds and ultimately larger institutional investors, "a large growth" in (startups) new businesses and services that are enabling institutional investors to enter the industry. Those new businesses and services are coming in the form of institutional-grade trading platforms, custody providers, etc that want to solve the technical complexity and risks of dealing with blockchain and crypto such as the risk of users losing private keys.
A previous report last month from market research group Diar also indicated venture capital raised by blockchain and cryptocurrency startups had increased three-fold to $3.8 billion in 2018 compared to last year's total. This amount was raised from 2,000 investors (most from U.S. based dealmakers) across 384 deals. The report by Outlier Ventures says some startups in cryptocurrency and blockchain that do not require networks (online communities) to survive, have been avoiding token generation events called ICOs because of increasing legal expenses, marketing costs and community building efforts required. Of course, a lot of decrease in popularity of ICOs has come as a result of the bear cryptocurrency market as being witnessed currently. ICOs, according to the new report, raised $1 billion down from $3.8 billion in Q1 representing a 74% decline since the start of the year.
That does not mean the token is unpopular: the report says that startups still believe that the tokens are foundational to Web 3.0 infrastructure and represent the opportunity for new business models. The role of the token is also evolving beyond fundraising into a model for business innovation and could expand as a way to engage, retain and attract users. The latter is being witnessed with chat apps like Kik, Telegram, and Line implementing tokens.
Additionally, according to the report, FinTech innovation around crypto and blockchain is still alive and hot. For instance, there was an introduction of a blockchain phone in the third quarter from HTC. Evolution of blockchain-based mobile devices and smartphones is expected to help reduce the "leak of personal data from phones and combine secure enclave security with blockchain-based verification and authentication systems." It says that future iterations of retail mobile devices will integrate blockchains as a method to " authenticate third parties accessing private data of individuals." Currently, the new hotness is zero knowledge according to the new report, with enterprises becoming further interested in zero-knowledge proofs (ZKP) that for instance enable private transactions, authentication of entries on the ledger, and the verification of claims "without necessarily requiring access to the data itself."
Banking and financial institutions continue to lead in blockchain innovations as their fin-tech programs capitalize on blockchain-based open source projects according to the report.
The author is of the opinion that reduction in volatility could have resulted from "accumulation of tokens by larger more established players and retail investors (who are) no longer panic selling." The author notes that the current bear market, which has seen the market collapse from a high of $829bn in early January to currently around $200bn, is "very unattractive" for active cryptocurrency traders.
According to the report, a lack of volatility for tokens has resulted in a drop in daily volumes from over $20 billion to slightly over $10 billion this quarter.
It says that a rise in alternative investment instruments in the market such as DARs from Citi Bank could further reduce the volume of Bitcoin futures contracts, which has already fallen this year and whose launch (CBOE's) "has not necessarily done much to positively impact the price of the token." Bitcoin futures are struggling partly because of the "heavy expenses involved in taking and maintaining positions."
The new report by Outlier Ventures does reiterate the role of and development of regulation around blockchain and crypto topics: more countries continue to make decisive regulatory determinations relating to the issue, and "forward-looking" countries have started to engage with "regional banking entities" to create a regulatory environment that captures the "vast economic gains." France, Thailand, Singapore, Switzerland, and Thailand have pushed for the creation of ecosystems that enable token issuance this past quarter. Japan’s Financial Services Agency also enabled self-regulation of the industry through the ‘Virtual Currency Exchange Association. The UK, France, and Switzerland are also exploring possibilities of enabling the token economy.