TL;DR

• As the cryptocurrency market rebounds, venture capitalists who have been on the sidelines are now investing in the Web3 industry.
• It is still low compared to past peaks, which can be attributed to 1) negative events such as Terra Luna and FTX bankruptcy, 2) the mega-trend shift from blockchain to artificial intelligence, and 3) macroeconomic deterioration.
• When analyzing recent venture capital investment flows, we found that both the originating and targeted geographies of venture capital are heavily concentrated in North America. However, we have seen a more diverse geographic distribution than in the past, most notably in Asia.

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Introduction

With the recent approval of a Bitcoin ETF, the market has fresh liquidity. Expectations for a market recovery are growing. At the same time, the price of Bitcoin has been rising day by day. Along with this price increase, the Web3 industry itself is naturally attracting attention.

Venture capital, which has been frozen until now, is also expanding its investment in the Web3 industry once again.

Investment remains low compared to past boom cycles

Source: CoinMarketCap, CryptoRank, TigerResearch

Yet, the quarterly investment volume of the global Web3 industry is lower than in the past boom period. The number of investments and funding sizes were high in the past, but they have been steadily declining since the first quarter of 2022. Only in the fourth quarter of 2023 do we see funding amounts starting to increase again.

However, this growth is still low compared to previous boom periods. While the prices of cryptocurrencies such as Bitcoin and Ethereum continue to move towards their all-time highs, investment activity in the industries shows stunted growth.

There are many reasons why this is the case.

1. A series of negative events such as Terra-Luna and FTX bankruptcy caused venture capitalists to take a cautious and conservative approach to Web3 businesses.
2. The shift in industry trends from blockchain to artificial intelligence may have also contributed to the decline in market interest.
3. The deterioration of the macroeconomy may have contributed to the decrease in funding across the venture capital market.

Web3 industry investment by region

Number of projects by jurisdictions of funds (Recent 3 months), Source: CryptoRank

In our previous report, ‘Crypto VC, the Initiative behind the Web3 Industry‘, we analyzed that VCs in the North American region continued to drive the development of the global Web3 industry throughout 2023, heavily skewing the market towards the region. A look at the last three months of investment in the Web3 industry shows no difference, with recent investment flows still centered in North America.

Outside of North America, Asian countries have shown impressive growth. In particular, Singapore, Hong Kong, and China were the most active investors after the U.S., indicating that the Web3 market opportunities are steadily expanding in Asia.

Heatmap of Investment Locations (Recent 3 months), Source: CryptoRank

The same pattern can be seen when looking at investment by region over the last three months. The U.S. is still the top investment recipient, accounting for 30% of total investments. Asian regions, including South Korea, Australia, and Hong Kong, have also attracted notable investment.

This indicates a notable shift in investment trends. The U.S. accounted for nearly 60% of global crypto VC investment in 2023. Now it is more evenly distributed, with 30% in the US, 7% in South Korea, and 5% in Australia. This shift indicates how the growth of Web3 projects is spreading regionally and the market’s expansion into Asia.

Areas of investment in Web3 projects by region

Analyzing investment trends by region over the past three months, we see that each region is focusing on specialized sectors. In particular, South Korea and the United Arab Emirates are actively investing in the GameFi space. Korean VC Hashed participated in a seed investment in game development studio Overworld, and Nexon is actively supporting Web3 games by funding its subsidiary Nexon Universe with about KRW 100 billion (approx. USD 74.9 million).

The United Arab Emirates is an overseas base for leading Web3 game companies such as WeMade and Neowiz, and there is active investment in Web3 game-related sectors. In particular, Morningstar Ventures, a crypto VC in the UAE, has recently invested in the GameFi sector, including BitBrawl and Ultiverse.

Another interesting pattern: investments were centered on services utilizing Web3 technologies rather than infrastructure, and many of these projects combined AI and blockchain technologies. As a global mega-trend, AI technology is also gradually expanding its influence in the Web3 industry, which is expected to create new opportunities and challenges in the future.

Venture capital in Asia

Source: Hashed

In South Korea, Hashed and Samsung Next are the most active venture capitalists in the Web3 space, investing in both domestic and international projects. Hashed and Samsung Next have made seven and three investments, respectively. Hashed’s initiatives in the Asian market are particularly impressive, with the establishment of Hashed Emergent in India and ShardLab in Thailand.

Source: Gumi Cryptos

In Japan, venture capital firms such as Gumi Cryptos, Saison Capital, and SoftBank are leading the initiative in the Web3 industry. In particular, Gumi Cryptos is running a Web3 fund, Gumi Cryptos Capital (gCC), which closed $110 million in 2022. Traditional venture capital SoftBank is also actively participating in this market.

In recent years, the Japanese government has introduced various policies to revitalize the Web3 market, and large companies such as SBI Holdings and NTT DoCoMo are expanding their investments in Web3. In addition, the legal framework for venture capitalists in Japan to hold and acquire crypto assets is expected to be established soon. Investment activities in this market are likely to become more active in the future.

Source: GBA Capital

China is one of the regions that maintains a conservative policy towards the cryptocurrency market. The number of venture capitalists in the region investing in the Web3 industry despite the country’s uncooperative stance is impressive. In the last three months, the most active VCs are Waterdrip Capital and Fenbushi Capital, which have made 14 and 4 investments, respectively. In December 2023, Chinese Web3 venture capital firm GBA Capital announced plans to raise a $10 billion Web3 fund.

Since 2023, China has begun to ease restrictions on the virtual asset market mainly in Hong Kong. Venture capitalists in these regions may become more active in the future in anticipation of the market opening.

Conclusion

Venture capital investment in the Web3 industry has been mainly focused on the North American market, but some signs indicate recent expansion into Asia. In particular, Japan, China, and Hong Kong have shown an open attitude towards crypto markets and investment in Web3 projects. The approval of the Bitcoin ETF and the growing institutionalization of crypto assets in the region is expected to mark a new turning point for venture capitalists in the Web3 industry.

Disclaimer：

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