Can Crypto Winter and New Tax Rules End VC Funding for Indian Crypto startups?

After the meltdown in June certain investors have delayed their cheques for funding and have asked startups to hold off until September

The cryptocurrency winter has diminished the appetite of investors for high-risk bets, according to Vineeet Budki the chief executive officer and managing partner of Cypher Capital

According Business Headers according to Business Headers the company, more than $773 million was invested across 39 deals in the H1 2022, which was more than the investment total of $513 million across the 2021 deals of 32 Web3 and crypto.

It never rains, but it pours. It’s never an eerie situation in which venture capitalists or retail investors invest their money into a crypto-related venture.

Over the past two years, market cap has dropped below $1 trillion and has wiped out $2 trillion of money from investors. Cryptocurrencies like bitcoin and ether couldn’t avoid the downward trend as well. Bitcoin dropped down to $17.6K at the end of June in 2022, but was able to climb to $22K, which was down from $70K by November 2021. Ether is a cryptocurrency that comes from the Ethereum network, reached its crucial support level of $1K on the morning of June 18, slipping from $1,076 to $986 within under two hours.

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It was an all-encompassing chain reaction throughout the ecosystem. Each block was in perfect sync, in the wake of the meltdown of TerraUSD/UST the algorithmic stablecoin as well as its twin currency LUNA. When prices dropped, some crypto-related startups and funds such as the Coinbase-backed Vauld, Three Arrows Capital and Voyager Digital have gone bankrupt.

Do you think this is an utterly brutal rebuke?

Don’t think about it. Things became more complicated days ago, when Binance, the world’s largest crypto exchange, refused to complete it’s acquisition of WazirX which was once the most popular of cryptocurrency exchanges that operate in India. The company reacted with a Twitter war and no agreement is yet reached in regards to who controls WazirX. It is interesting to note that the controversy came following an earlier ED investigation into WazirX.

If VC group had strenuously tightened its purses prior to the start of a winter of funding and they were a bit frightened at this point. There is a delay in delivering on funding promises following the economic meltdown.

Could the current state of affairs which is gravely threatening respecting the law could make things more difficult? Or has the freezing of funding already compelled VCs to reconsider their investment strategies?

Business Headers has spoken to a number of venture capitalists to get their views on cryptocurrency winters, market turmoil, and the recent tax imposed on crypto profits that could hinder cryptocurrency startups’ transactions and expansion.

It’s the Crypto Winter In India: Is it cyclical or is it driven by a crisis?

Despite a volatile market, VC funding in crypto startups hasn’t slowed across the globe. According to an J.P. Morgan report on venture capital, investment in the crypto space amounted to $17.9 Billion by the end of July this year. This is set to exceed the record figure of $29.4 Billion in 2021.

“While several of the traditional sectors’, such as biotech and software continue to be the mainstay of VC investment in 2022. One of the most fascinating developments we’ve observed in the last few quarters is the record-setting rate of VC investing in startups operating in the blockchain and crypto industry,” Steven Alexopoulos, an analyst at J.P. Morgan wrote in an article.

Vatsal Kanakiya Chief Technology Officer at 100X.VC explained the fundraising surge despite the uncertain economic climate.

“The character of markets is that it is cyclical and downturns are an integral part of the ride. There’s plenty of dry powder on the market and Andreessen Horowitz (a16z) announcement of the creation of a $4.5 Billion fund, in addition to an gaming fund worth $600 million. Additionally, there are allotments of Union Square Ventures ($625 Mn) and Dragonfly Capital ($650 Mn) and $2 billion in funding for Sequoia India and $275 Mn for Lightspeed India have been earmarked in addition. Each has a strong focus upon Web3,” he said.

“We have seen no slowdown from founders and we’re planning to keep up their rate of innovation” Kanakiya said. Kanakiya and added that the amount of pitching for funding has gone up compared to the previous year, as more founders have a connection with the purpose and methodology of the VC.

“At 100X, we’re looking at and actively investing in Web3 startups. We have not seen any changes for the better. The cycles will pass and come back however, we’re looking to invest in businesses that will endure for a long time. We’ve previously invested in companies such as Deefy (the first non-collateral payment infrastructure protocol that lets individuals to borrow, rent as well as BNPL using NFTs) along with Strive.Social (a market that allows NFT fractionalisation). We also have other investments that are stealth.”

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Despite Capital Inflows, Startups, Investors Feel The chill

A lot of industry experts describe the 2022 downturn as “different” from the prior crashes. “It is not just a bubble that bursts when the stability of a stablecoin decreases and becomes a major issue,” said a California-based cryptocurrency investor of Indian origin who managed the index fund.

Crypto-related companies in India (like the ones mentioned earlier) are also feeling the cold because raising capital is becoming more challenging, and funding deals are often delayed. One possible reason may be diversification of investments and the rapid expansion of Web3 and the metaverse within the global digital realm has opened up a variety of opportunities beyond the realm of digital tokens and their applications.

A stringent tax system (more on the subject in the future) and uncertainty over crypto-related regulations in India have added to the difficulties of crypto-related players. Many believe this is a aspect of the teething issue since the cryptocurrency industry is still in its infancy across India and volatility in the short term is to be expected.

However many industry experts predict grim days ahead and a probable value loss for companies funded by VCs. But the effect will be evident earlier in the beginning of Series A than during the seed or angel rounds, according to experts.

The winter of crypto has definitely been a blow to the likes Cypher Capital. The Dubai-based VC company, which has made over 100 investments in their Fund 1 called Phoenix VC and more than 16 investments through its Cypher Capital fund, has drastically reduced its activities.

Cypher’s ticket size ranges from $250K to $1 million and the company typically invests in partnership with other companies instead of taking the lead in investments. In the company’s India investments The most notable ones include Matterless, Finblox, Rainfall, MetaOne and Astra Protocol as well as others. Other notable crypto startup financing previously arranged comprised Casper Labs, Torus, Splinterlands, Fractal, Poolz, Paid Network, SingularityDao and many more.

Deal Pace Slows: Crypto Startups

But, experts are of the opinion that things could get worse. David Nage, a VC portfolio manager at Arca which is a firm that manages digital assets Recently, he said to the transactions take longer to complete and valuations of companies are declining during the (crypto) recession.

“Some VCs are deploying capital under conditions that are favorable to investors. There’s been this online discussion that, around the end of September, valuations will going to drop substantially and there’s going to create a frenzy” he said.

Does Value Creation offset tax impact?

In March 2022 The Indian administration announced a variety of tax-related regulations that caused a wave of dismay and shock particularly among investors who are retail.

Things to Stabilize But the Performance of Your Website Will Be Most Important.

Although industry insiders and VCs expect to see more deals and funding in the H2 2022 period A massive construction or high yield might not be feasible right now. In essence, funders aren’t going to chase every cryptocurrency startup on the market because of the fear of missing out. The growth of this sector will be largely dependent on the fiscal health of startups in the event that the crypto winter persists.

The effects of the tax law aren’t fully understood, Ken Li, executive director of Binance Labs, said, “Our general view is that, in the moment that we invest, the most crucial quality is the long-term outlook of the founders as well as their grit and perseverance. They can be successful regardless of external factors.”

“The path for crypto investment in India is slow and uncertain in the near-term,” said Khaleelulla Baig who is co-founder and CEO at Koinbasket, a Singapore-based cryptocurrency investment platform. Koinbasket.

“But in the longer term the wave of crypto driven by public sentiment could force the government to adopt an uncompromising position. I see the total market value of the cryptocurrency market reaching $10 trillion in 5 years. This could attracted Indian investors. The market will stabilize in the coming quarters, and the best crypto projects will hit new heights within about two years.” Baig added.

The cryptocurrency market is entering the phase of consolidation and will continue to be a wide range-bound market through the second half of 2022. The market will also witness greater clarity on regulations coming from G7 countries and more acceptance from countries that are economically developing the analyst concluded.

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