The perfect storm for Web3 markets has seen nearly $3 trillion of assets shrink by over 70%. And, according to Crunchbase, Web3 venture funding was down 74% in Q4 2022 vs the same quarter in 2021.
A series of cataclysmic events — most notably the implosions of FTX, Silvergate and Silicon Valley Bank (SVB) — are creating an existential crisis for crypto. Following the SVB shut down, it was reported that Circle had $3.3 billion in deposits with the bank, and as a result the Stablecoin USD Coin (USDC) lost its dollar peg.
To make matters worse, Silicon Valley was already shifting its focus toward AI, with prominent venture capitalists postulating that generative AI represents the most significant platform innovation since mobile. In other words, from the perspective of many VC's, the real Web 3.0 may be generative AI and not crypto.
On the other hand, Web3 advocates draw parallels to the 2000 dot-com meltdown, which followed a lack of investment discipline, irrational exuberance and, in some cases, outright fraud. Given the nascent state of this technology, Web3 proponents believe that volatility is to be expected and that foundational building blocks of decentralization and transparency will continue to drive innovation and adoption. Bitcoin's recent resiliency offers a reasonably strong validation of this thesis.
We would agree this to be the case, particularly within private equity and wealth management. More specifically, we continue to see great potential in use cases for blockchain tech from the perspectives of both broadening access to retail investors and lowering fund administration costs.
As private markets become increasingly dependent on individual investor participation, successful capital raising will need to adapt to allow for much lower investment minimums, greater access to liquidity and lower administration costs. According to Bain, individual investors hold roughly 50% of the estimated $275 trillion to $295 trillion in global assets under management (AUM), while those same investors represent only 16% of AUM held by alternative investment funds.
Early initiatives include KKR's efforts to tokenize a small portion of its $4 billion Health Care Strategic Growth Fund II on the Avalanche blockchain. Tokens will be tradable on a secondary market managed by Securitize after a one-year holding period.
In the near term, we're more likely to see greater adoption with regards to back-office automation via blockchain. Smart contracts, for example, could automate routine tasks such as capital calls, distributions, cap table updates and tax reporting. With transactions recorded on the blockchain, funds should be able to speed up compliance processes, providing greater visibility to regulators.
The recent SVB collapse and the depegging of USDC by Circle due to cash reserve dependency may seem like a major setbacks for Web3, but we believe it is only a temporary hiccup. This event exposes the vulnerability of traditional financial infrastructure in the face of rising interest rates. As entrepreneurs who have relied on banks like SVB in the past, we are saddened to see it fail so abruptly, but we also see it as a wake-up call for all businesses and investors to manage their risks by diversifying their funds and investments. This week will be an interesting and consequential one for many private companies, regulators and investors.
