The cryptocurrency ecosystem faced significant challenges in the third quarter of this year, with fundraising in the space dropping to a three-year low. According to a research report by blockchain intelligence firm Messari, crypto-focused firms raised just under $2.1 billion across 297 deals in Q3, marking a 36% decline in both categories compared to Q2. This is the lowest fundraising amount since Q4 2020.
The decline in fundraising can be attributed to the industry-wide downturn that occurred following the collapse of the Terra ecosystem. In Q1 2022, fundraising reached a peak of almost $17.5 billion across more than 900 deals. However, the demise of stablecoin TerraUSD and sister token Luna wiped out tens of billions of dollars in market capitalization and led to the collapse of several other key players, including Sam Bankman-Fried’s multibillion-dollar empire.
The overall funding amounts and deal counts saw a sharp decline in the Q2-Q3 period last year due to these events. Despite posting significant gains for the year, major digital tokens experienced losses in Q3 2023. Bitcoin and ethereum, the two largest cryptocurrencies by market value, retreated 8.6% and 10.6%, respectively, during the quarter. In comparison, the S&P 500 logged a 3.8% loss.
Messari’s report also highlighted that the majority of deals in Q3 were concentrated in early-stage rounds. Seed funding accounted for the largest total at $488 million raised over 98 rounds. The report noted a significant shift away from later stage projects and towards early stage projects over the past three years.
When it comes to sectors, chain infrastructure received the largest share of funding at 18%. Decentralized finance (DeFi) dominated in terms of the number of funded deals, with 67 deals in this sector. Gaming also experienced a robust quarter, attracting nearly $250 million in funding.
Interestingly, Binance Labs, the venture capital division of crypto exchange Binance, emerged as the most active investor during the quarter. With 23 deals focused on DeFi and gaming projects, Binance Labs outperformed other investors, including Robot Ventures. This comes at a time when Binance is facing regulatory scrutiny from the U.S. Commodity Futures Trading Commission and the Securities and Exchange Commission for allegedly failing to register with U.S. regulators and selling illegal securities.
Overall, the cryptocurrency ecosystem faced challenges in Q3, but the industry remains resilient. Despite the decline in fundraising, there are still opportunities for growth and innovation in the space. As the regulatory landscape continues to evolve, it will be interesting to see how the cryptocurrency market adapts and evolves in the coming months.