Crypto fundraising has seen its lowest figures in three years, according to crypto intelligence firm Messari. The findings, released in a recent report, suggests that firms and individuals within the blockchain and digital asset sector are finding it increasingly difficult to raise capital and attract investors. The report also offers analysis and insight into the mounting challenges faced by stakeholders in the industry.
1. Crypto Fundraising at Three-Year Low Amid Capital Struggles
Crypto fundraising slowed to a three-year low in 2019 amid a capital crunch, with just $2.4 billion raised in the first nine months.
The lack of funds has been attributed to the bear market displacement of investors and the continuing economic slowdown. In addition, the protracted development of long-term projects, the Long Gestation Period (LGP) of investments, and the lack of a strong value proposition have all contributed to the declining capital inflows.
Lack of investor confidence has also hindered fundraising, as venture capitalists and other investors are hesitant to take the risk in the face of the unknown regulatory environment. The U.S Securities and Exchange Commission’s increased scrutiny on cryptocurrency initial coin offerings in 2018, as well as the dearth of favorable taxation incentives have further reinforced uncertainty.
Nonetheless, the impact of the low fundraising has been largely felt by decentralized finance projects, many of which were promising in 2018 with large amounts of capital, but have seen much of that capital dry up in the current bear market. Other projects, such as public blockchains, have also been affected but not to the same extent. Despite the capital struggles, startups remain resolute, methodically navigating the bear market and arguably positioning themselves in a much better place when the climate shifts to a bull-run.
2. Messari’s Data Shows Dip in Crypto Fundraising
Cryptocurrency Fundraising in Decline
Recent data from Messari shows a decline in cryptocurrency fundraising. During the third quarter of 2020, issuers around the world raised a combined $296 million. This is a 38% decrease from the second quarter total of $480 million.
The largest portion of this decrease was seen in the Security Token Offerings (STO) arena. This sector of the crypto fundraising sector saw a drop of almost 47%, from a second quarter total of $310 million to a third quarter total of $165 million. The decline in STOs was largely driven by fewer issuers, as the number of firms offering a token decreased by 37%.
Initial Exchange Offerings (IEO) fared better, but still experienced a decline. In the second quarter of 2020, IEOs raised $170 million. This figure dropped by a much smaller margin, to $131 million in the third quarter. However, the number of IEOs taking place also went down, at a rate of 19%.
3. What Factors Lead to the Crypto Capital Drought?
Market Volatility
One of the main factors that has contributed to the severe crypto capital drought of recent months has been the lack of stability in the markets. Volatility has been the norm, with crypto assets often experiencing large swings in prices. This market volatility has caused many investors to be hesitant to pour money into the crypto space, making it increasingly difficult for new projects to access the capital needed to move forward.
The unpredictability of crypto prices has caused even seasoned investors to shy away from making major moves in the space. Crypto assets are widely criticized for their lack of liquidity due to the global and decentralized nature of their markets, which is one of the main sources of their volatility.
Regulatory Uncertainty
Another key factor is the uncertain regulatory environment in which crypto projects operate. Government regulations play a major role in the acceptance and adoption of cryptocurrencies. Consequently, the lack of clear regulations from government regulators has adversely affected the crypto space, creating an atmosphere of uncertainty and reducing the chances for companies to receive quality investment.
The lack of clear regulatory guidelines has resulted in an abundance of speculation and rumors, which significantly affects the capital raising prospects for crypto projects. Some regulators have cracked down on ICOs and other activities related to crypto projects, dampening the enthusiasm of many potential investors.
Low Public Interest
Finally, the lack of public interest in cryptocurrencies has certainly had a negative effect on the ability for these projects to raise capital. Despite the large amounts of press coverage of the crypto space in recent years, the general public still appears to lack enthusiasm for cryptocurrencies. This lack of public engagement indicates a lack of faith in the potential of crypto projects, making it difficult for crypto companies to raise money from average investors.
Although crypto exchanges have attracted many traders and the industry is growing, the average person still appears to be largely uninvolved in the space, putting a damper on the ability of projects to raise capital.
The struggles of crypto fundraising suggest that this industry is still a long way away from achieving mainstream adoption. Despite the optimistic outlook of many in the crypto space, the reality is that difficulties remain. Businesses must continue to focus on innovation and building infrastructure to build credibility within the public eye. Until then, experts believe that fundraising will remain a challenge.