Funding will slow down, at least in the first half of the year. Deep-pocketed investors will be more reluctant to back crypto startups in early 2023, VCs said. Martin Schutt/Picture Alliance/Getty Images
Crypto investment has been dropping in recent months, and that's likely to continue in early 2023, several VCs told Insider.
"There is no doubt that 2022 was an incredibly difficult year of self-harm in the crypto ecosystem, which is already manifesting as a slow down by institutional investors into crypto," said David Pakman, the head of venture investments at CoinFund.
But others believe VCs may begin warming up to crypto and Web3 again in the latter half of 2023. For instance, Edith Yeung, a partner at Race Capital, told Insider she anticipates a pick-up in funding starting in August.
"As in most bear markets, investing now will produce outsized returns for those who can navigate effectively," said Jules Miller, a partner at Mindset Ventures and the cofounder of VC3 DAO.
Yet more big companies will begin embracing Web3. Reddit is among companies that have explored the use of Web3 this year. VCs told Insider more are likely to follow in 2023. Reddit
Financial companies such as J.P. Morgan and KKR have already shown signs of embracing crypto and Web3. That trend is likely to accelerate in 2023, Nisa Amoils, the managing partner of the VC firm A100x, said. With increased regulation, more financial companies will feel comfortable dipping their toes into crypto, added John Wu, the president of the blockchain company Ava Labs, who leads its investment arm, Blizzard.
"Every Wall Street and retail bank will start experimenting with blockchains," he said.
Consumer internet brands are also making a push into Web3, and Dan Abelon, a partner at Two Sigma Ventures, told Insider that he sees that continuing. "I'm excited to see more experiments like those by Reddit and Instagram in recent weeks that will help bring Web3 into the mainstream," he said.
SC Moatti, the founder and managing partner of Mighty Capital, said she also anticipates more Web3 companies branching out into business-to-business software.
"Apps that can improve enterprise productivity and reduce costs are likely going to rise in popularity," she said.
The hype around new tokens is officially dead. Esoteric cryptocurrencies will fade away in 2023, Ava Labs' Wu said. Lauren DeCicca/Getty Images
Even investors who are bullish on crypto and Web3 have acknowledged the market excesses that led up to the current crypto winter. Among them: a rush among immature startups to launch tokens, whose values have largely plummeted this year. Many of those tokens will go bust altogether, investors told Insider, and there will likely be much fewer launches in 2023.
"About 80% of all coins in circulation will go out of business," Wu said. "However, this will be good for the industry as far too many projects have been speculative at best."
Likewise, as investors place more emphasis on due diligence and corporate governance within the crypto industry, they will cast a more skeptical eye upon tokens when considering deals, Miller said.
But NFTs will have a renaissance — although maybe by a different name. The hype over NFTs has faded, but they're still useful tools for artists, Mighty Capital's Moatti said. Katie Canales/Insider
Like altcoins, non-fungible tokens have had their own boom-and-bust cycle over the past year. Several VCs said that even though the novelty of ape-themed profile pics may have worn off, NFTs can thrive in other ways.
Companies — including Reddit, Ticketmaster, and Starbucks — are continuing to experiment with NFTs, even if they don't necessarily refer to them as such, said Latif Peracha, a partner at M13. Reddit, for instance, calls them "collectible avatars."
"I do believe that NFTs will re-emerge in a different way," Peracha said. "They might not be called NFTs anymore."
For one, the potential for artists to capture more income from sales of their digital work remains compelling, Moatti told Insider. "There is underlying merit to NFTs as a way for creators to monetize their work in a new way," she said.
Real estate could become "the next big use case for NFTs," Adam Struck, the founder and managing partner of Struck Capital, said. Companies such as Roofstock onChain have begun creating tokens for real-estate properties to facilitate purchases and lending.
Say goodbye to centralized crypto exchanges and lenders... Several VCs told Insider they believe centralized crypto exchanges will lose ground in 2023 after high-profile collapses such as the bankruptcy of Sam Bankman-Fried's FTX. Tom Williams/Getty Images
After this year's series of high-profile crypto bankruptcies, VCs told Insider they're bracing for a regulatory crackdown in 2023, which will change how crypto financial institutions are built.
"In 2023, I believe the broader market will begin to see centralized crypto institutions for what they are: traditional, poorly regulated fintech businesses," Andy Kangpan, a principal at Two Sigma Ventures, said.
Tyler Griffin, the managing partner and cofounder of Restive Ventures, concurred: "Unregulated centralized exchanges are dead."
Kangpan said he foresees greater momentum for decentralized finance, or DeFi, which aims to offer customers access to products such as loans without having to go through traditional banks.
Not everyone is convinced, however. "My view is that DeFi is exciting and will drive a lot of innovation over the next few years, but will ultimately fail to become a reality," Moatti said.
Climate-tech and gaming Web3 apps will thrive, too. Web3 will play a big role in climate tech, said Samantha Lewis, a principal at Mercury Fund. Getty
Climate tech has grabbed investors' attention in the past year, with firms such as Union Square Ventures raising funds dedicated to investments in the space. Several companies have sought to apply blockchain technology to climate issues, such as enabling crypto holders to offset their carbon footprint. That trend will ramp up next year, said Samantha Lewis, a principal at Mercury Fund.
"Everyone's talking about climate," she said. "Web3 can unlock a lot of the things we need."
Lewis and other VCs pointed to Web3 gaming as another segment poised to pick up steam in 2023. Gamers are already used to buying virtual goods, which makes it a good fit for NFTs and other Web3 applications, Pakman said. "A vast number of exciting web3 games are in production," he told Insider.