Celsius has halted withdrawals citing extreme market conditions. For similar reasons, hedge fund Three Arrows Capital has reportedly had difficulties covering redemptions.
The latest meltdown in cryptocurrency prices has put a damper on Web3 VC dealmaking and valuations.
Proponents of Web3 hope that this new iteration of the internet, characterized by decentralized platforms based on blockchain technology, will eventually overturn the “evil” of big tech and traditional banks, allowing all users—not just founders, investors and employees—to benefit financially from their participation.
The market capitalization of all cryptocurrencies may have fallen by nearly two-thirds to below $1 trillion, but crypto enthusiasts are not the type to give up easily.
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“The people that have been working on crypto since 2010 have seen these price cycles four or five times before. They’ve got thick skin,” said Yash Patel, a general partner with Telstra Ventures, a backer of FTX, a cryptocurrency derivatives exchange last valued at $32 billion.
Web3 believers are ready to play the long game even if it takes five to 10 years to persuade the world of the true value of their beloved technology. They are convinced that price volatility and rampant speculation will subside once blockchain tokens’ utility is widely apparent.
But not all investors are feeling so patient.
“I think the flaws of Web3 are coming out,” said one venture capitalist who has backed a handful of crypto startups. “The entire space is moving so fast that everything is broken.”
While he still finds the concept of programmable money powerful, he said that a lot would have to change—from regulations to user experience—for him to feel comfortable investing in these companies again. “It is a scary and unsafe place right now,” he said, referring to the convoluted decentralized finance protocols on which Celsius Network relies.
Other venture capitalists are taking a more measured approach to Web3. These investors believe that the blockchain could have useful applications, but they don’t subscribe to the vision that it’s practical to rebuild the entire internet on top of it.
Sandhya Hegde, a general partner with Unusual Ventures, said she views blockchain as one new interesting technology among many.
“We’re not subscribing to some philosophy here. Like, ‘Oh, this is a better way to live,'” she said, referring to crypto fans who view Web3 as an ideology. “That’s not how we operate.”
Unusual Ventures, like many other generalists VCs, focuses on investing in Web3 infrastructure, or the plumbing of the crypto system. These VCs are saying that by betting on so-called picks-and-shovels startups, they are helping to make the crypto ecosystem more reliable and secure, and less fraudulent.
But Phil Libin, former managing director with General Catalyst and co-founder of Evernote and Mmhmm, who has compared the way believers approach Web3 to communist propaganda, thinks investing in infrastructure tools is a little disingenuous.
“By saying that you’re building picks and shovels is basically like saying, ‘We are building things that take advantage of people who believe in [Web3],'” Libin said, pointing out that very few people made money during the California gold rush.
He remains a vehement critic of Web3, calling these technologies not only impractical but also mostly harmful.
For Libin, one of the big ironies is that Celsius, whose founder and CEO has sported T-shirts that said “Banks are not your friends,” may now be asking Citigroup, a bank, to bail it out.
Crypto fans and skeptics will likely continue to disagree on the industry’s usefulness for years to come.
In the meantime, one thing is clear, the first signs of a VC pullback from this sector are here.
Investors are saying they are seeing a major slowdown in deal activity and a drop in valuations.
Last year, seed-stage crypto startups would fetch valuations between $50 million and $100 million, but more recently, deal prices fell to as low as $20 million, said Unusual Ventures’ Hegde.
“I’m seeing fewer and fewer people start crypto companies right now,” Hegde said. “It is almost a standstill.”
Featured image of Celsius CEO Alex Mashinsky by Piaras Ó Mídheach/Getty Images
