2023: The year Web2 became Web3
Goodbye Google (and 8,000 altcoins). Hello Web3 and power to the people time. The internet realizes it’s original distributed dream as we create another $100 trillion in global wealth along the way.
A multi-trillion dollar entrepreneurial opportunity
Our definition of Web3 refers to the transition of the web from a cloud computing-based, centralized platform to a decentralized internet driven by edge computing, blockchain dApps, cryptocurrencies, NFTs, artificial intelligence, and metaverse and virtual reality technologies. Decentralized applications empower users with what we all want most in life: autonomy, security, and privacy. Web3 aims to fulfill the original vision for the web — a decentralized, trustless, permissionless world where we control our data and interact peer-to-peer and peer-to-merchant, without the need for centralized powers who control our data and online activities.
“The decentralized future is not just about creating new applications; it’s about rethinking how we organize society. You shouldn’t have to trust any organization in order to participate in the system.”
— Vitalik Buterin, Computer Programmer & Founder of Ethereum
Our trust in all centralized agencies including Congress, the IRS, educational institutions, Wall Street, and the legacy media and entertainment industries — has plummeted. We are facing a global institutional trust crisis. Young people are leading us to take back our power, and deflect unnecessary intermediator fees. This rebellion has inspired a new generation of blockchain, dApp, artificial intelligence, and metaverse-focused technologies and companies. Web3 innovation will inevitably overwhelm and replace the cloud-computing paradigm with a smarter, more visual, decentralized, and distributed internet paradigm. The transition to Web3 means rewriting how we do almost everything, representing a societal change that put individuals back in control. It also represents trillions of dollars in new entrepreneurial opportunities and billions in micro-payments, largely distributed to third-world citizens in need everywhere for authenticating transactions and blockchain dApp support.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
— ‘Satoshi Nakamoto,’ Creator, Bitcoin & Blockchain
Our fundamental view is that 90+ percent of the epic Web3 companies and tradable currencies of the future have yet to be created. The 20-year innovation boom will start accelerating in 2023 and will ultimately create yet another $100 trillion of NASDAQ and cryptocurrency wealth over the next 20 years. Eighty percent of this economic wealth will come from the equity appreciation of thousands of Web3 companies developing decentralized apps powered by AI and 20 percent from rising cryptocurrencies fueling the new ecosystem.
To present our case, we highlight below the current Web3 private company VC funding stats and provide an update on the three major Web3 sectors: AI, Blockchain, and Metaverse/VR. Then we discuss higher-level trends and other facts and anecdotes fresh off the streets of the global Silicon Vallely that underscore the level of Web3 creative destruction underway.
Web3 VC funding down but steady after 6-quarter ‘21 to Q2 ’22 boom
In the last four years, venture capitalists and late-stage investors plowed $320 billion into over 10,000 private Web3 companies. The AI sector took in $250 billion (78 percent) of the cash, $57 billion (18 percent) went to blockchain/crypto companies, and $15 billion (4.5 percent) to the Metaverse/VR sector. Notably, both the Blockchain and Metaverse/VR sectors saw funding grow throughout the pandemic and recession, which supports their growing use case.
With NASDAQ taking a 30 percent hit and the economy teetering, private company valuations are in flux, and a more cautious, less active investing period will continue into 2023. As seen on all the Pitchbook data fed charts illustrated, VC funding in Web3 companies peaked along with NASDAQ in late Q4 ’21 and Q1 ’22. Since that peak, VC funding has dropped along with NASDAQ, as it does historically.
Geographically, the U.S., with some help from Canada, remains the dominant technology region with a 39 percent market share of Web3 startups; Europe and Asia (China + India) both have a 26 percent market share. The rest of the market distribution includes the Middle East with a 4 percent share, Central/South America with 2.5 percent, Oceania with 2 percent, and Africa with 1 percent.
Funding the AI boom: Taking a breath but gearing up for more
The AI/ML private company marketplace is more mature than the other two sectors and consumed 77 percent of the Web3 VC funding over the last four years. Since 2019, 6,512 AI companies have received $250 billion of risk capital equity investment.
OpenAI’s recent introduction of its consumer-facing chatbot, ChatGPT, received massive global news coverage and significantly broadened market awareness of the potential and value of AI technology. Microsoft recently invested another $10 billion in OpenAI as a follow-on to its 2019 and 2021 investments totaling $1 billion. It has also incorporated chatGBT technology into Word, Excel, and its Azure cloud service platform. In February, Google introduced ‘Bard’ its own ‘experimental conversational AI service’ to compete with ChatGPT and a slew of well-funded private companies
Elon Musk has also allegedly been approaching artificial intelligence researchers about forming a new AI research lab to develop an alternative to ChatGPT, a platform he cofounded when it was a non-profit open source foundation. He criticized OpenAI in a tweet post, ‘The danger of training AI to be woke — in other words, lie —it is deadly.’ OpenAI’s co-founder Greg Brockman responded humbly to Elon in an interview with The Information. ‘We were not fast enough to address that, so that’s a legitimate criticism.’ Mr. Brockman said.
OpenAI’s (chatGPT) top private company competitors
Stability AI: London-based open source generative AI developer of an artificial intelligence tool intended to create images based on text input given. The company’s tool implements given text commands into images and other forms of media using collective intelligence and augmented technology, enabling clients to develop cutting-edge open artificial intelligence models for image, language, audio, video, 3D, and biology. $110,000 in VC funding.
AI21 Labs: Tel Aviv-based AI technology developer of innovative tools, including Wordtune, which helps users improve their writing by suggesting more effective and expressive phrasing, and AI21 Studio, a platform that enables users to build and deploy custom NLP models for specific applications. AI21 Labs has also created GPT-3, an advanced language that has been used in a wide range of applications, from chatbots and virtual assistants to content generation and language translation. $98.5 million in VC funding.
Inflection AI: Palo Alto-based developer of an AI-powered chatbot technology that enables companies to easily create and deploy chatbots for customer service, sales, and marketing purposes. Their chatbots are designed to understand and handle complex natural language queries and transactions and process payments in a human-like manner, using machine learning algorithms to improve their accuracy over time. $265 million in VC funding.
Cohere: Canada-based developer of advanced NLP models that can understand and generate human-like language to make it easier for humans to interact with the computer. Cohere’s flagship product is a neural network platform that provides developers with tools and APIs to build custom NLP models that can be used for chatbots, virtual assistants, sentiment analysis, language translation, and content creation.$175 million in VC funding.
The next Google? The chatbot-driven search service competition is reminiscent of the search engine horserace in the 1990s. A good lesson to remember is that Google was the fourteenth search engine out of the gates in 1998. So the ‘first-mover advantage’ concept that pumped-up the bubble proved to be all hype. Google outpaced rivals like Ask Jeeves, Excite, and Inktomi by introducing the search rating algorithm (PageRank) that based search relevancy not only on whether pages contain the search terms (as was the standard at the time) but also on how many relevant pages linked to the page. In other words, chatGBT might look sleek today, but our gut says, given OpenAI’s growing controversy, the app may end up like the early search pioneers with too many arrows in its back as newer, more clever upstarts step over them.
On a recent earnings call, Apple CEO Tim Cook told investors and reporters, ‘We see enormous potential in AI technology, and virtually incorporate it in every product and service we have.’ Apple has already integrated AI into some iPhone, and Apple watch features, including a crash detector and electrocardiogram. Earlier this month, Apple released an AI-powered Apple Books digital narration app that instantly creates an audiobook from any written work. Apple is also readying for the ChatGPT fight with a supercharged Siri. ‘AI is incredible in how much it can enrich the lives of our customers,’ enthused Mr. Cook.
While VC investments into AI companies will eke up again by the end of 2023, we bet this sector will see a good uptick with a better economy and remain the center of investors’ attention for many years.
‘I believe that virtual intelligence will happen in my lifetime — one hundred percent,’
Elon Musk, Chief Twit, Twitter
Thousands of Blockchain dApps on the horizon
The younger, emerging blockchain/crypto private company marketplace saw VC funding rates grow faster than AI. Since 2019, almost 2,500 blockchain companies have received $50 billion of risk capital equity investment.
Despite a slowdown in blockchain/crypto VC funding since May 2022, the total blockchain funding for 2022 exceeded the figure for 2021 because of a peak first quarter. Like the AI sector, VC funding in this sector will see more demand than a ready supply of cash, and private company valuations will be down. Long-term, blockchain dApps will be the highest growth sector, especially as AI gets more incorporated into the smart contracts that drive these applications.
AI meets the Blockchain
Ocean Protocol (OCEAN) is a successful example of a decentralized data exchange protocol that uses AI algorithms to analyze and process data shared on its network. The protocol enables data providers to monetize their data by creating customized smart contracts that specify the terms and conditions for data usage. The AI algorithms embedded in these smart contracts help ensure that the data is used appropriately and that the contract terms are met.
Fetch.ai (FET) is a decentralized platform that uses AI algorithms to facilitate machine-to-machine communication and coordination. The platform uses smart contracts to enable autonomous agents to interact with each other and other network components.
Large banks have also continued to show increasing interest in the sector. Fidelity launched a crypto service for investors, BlackRock partnered with Coinbase to bring its institutional clients crypto access, and Goldman Sachs is creating a new crypto data service and claims blockchain helped the Wall Street titan dramatically speed bond underwriting. In addition to providing custody services for crypto assets, the nation’s oldest bank BNY Mellon is working with Goldman, Mastercard, Citigroup, Wells Fargo, and the New York Fed on a digital dollar pilot project.
$500 billion-strong private equity manager Apollo hired JPMorgan’s cryptocurrency guru, Christine Moy, a pioneer in using blockchain to improve visibility into alternative investments. In March, Apollo bought its first mortgage tracked on a blockchain, reducing the weeks-long settlement time to seconds. ‘We’re focused on the technologies that make our business faster, more efficient, and more accessible, including capital raising, securitization, and even trading; applications rooted in real-world use cases,’ says Apollo’s new head of digital assets strategy.
JPMorgan meets the blockchain
Last Halloween, Onyx, JPMorgan’s business unit focusing on cutting-edge technologies, ran its first decentralized finance transaction on a public blockchain, using Ethereum to exchange Japanese yen for Singaporean dollars. As a result, settlement time dropped from two days to mere seconds, allowing participants to prove their identities without revealing them on the public blockchain. Additionally, JPMorgan has used blockchain to execute repurchase agreements and has transferred $25 billion using the JPM Coin network.
All the top mega IT consulting firms have also made significant commitments to blockchain and digital asset creation and management. Each offers a plethora of CEO surveys, research, and analytics to educate and assist Big Business’s conversion to Web3 as can be viewed on their websites: Deloitte, PwC, IBM, KPMG, Accenture, EY, Capgemini, Wipro, Infosys, McKinsey & Company, Boston Consulting, and Bain & Company.
Blockchain is driven by data privacy and security and the desire to eliminate the hassle and cost of dealing with intermediaries. The AI boom is driven by gaining greater efficiencies. The combination of blockchain technology and AI has the potential to revolutionize many industries by enabling secure, transparent, and automated data sharing and decision-making. In a struggling economy with the growing mistrust of the Central Bank and banks in general, the companies leveraging Web3 technologies to power transactions in a trustless and efficient way will rise and prosper.
The Metaverse — Getting the VC money to make it happen
Despite Facebook (a.k.a. Meta Platforms) having lost billions of dollars with no apparent results over the last several quarters in its Reality Labs division, VC investing in the metaverse rose from $2.4 billion in 2019 to $8.8 billion in 2022. During this period, 1,000 metaverse/VR companies have received $19 billion of risk capital equity investment. The fact this funding came in during COVID and a slowing economy should bode well for metaverse startups looking to raise cash.
In March 2021, Roblox, a massively multiplayer game platform that allows users to create their games and experiences, went public with a $38 billion market cap, a big boost for investor interest. Another boost also came in December of 2021 when NIKE bought RTFKT Studios for a sum rumored to be more than $1 billion. Founded in January 2020, RTFKT started out creating virtual footwear and clothing. Today they leverage the latest in game engines, NFTs, blockchain authentication, and augmented reality to create one-of-a-kind virtual products and experiences.
On the Big Tech front, Microsoft empowers its Team app users to navigate 3D virtual spaces with avatars and engage in collaborative digital whiteboarding. We expect all major collaboration app providers, including Google, Slack, Webex, and Zoom, to add 3D metaverse-style features in 2023.
The metaverse is now orbiting the cryptocosm, with gaming and virtual worlds natural fits for offering token rewards and payments, as well as community governance.
Metaverse Companies with Cryptocurrencies
Decentraland (MANA): Decentraland is a decentralized virtual world where users can buy, sell, and build on virtual land as NFTs and create their own experiences on that land. The MANA token is used to purchase virtual assets and pay for services within the platform.
The Sandbox (SAND): The Sandbox is a virtual gaming world where players can create, build and monetize their games using NFTs. The SAND token is used as the main currency within the platform.
Axie Infinity (AXS): Axie Infinity is a blockchain-based game where players can collect, breed, and battle creatures called Axies and trade them using NFTs. The AXS token governs the game’s economy and rewards players for participating.
The authors of a recent McKinsey report on Value creation in the metaverse observe: ‘With the potential to generate up to $5 trillion in value by 2030, the metaverse is too big of an opportunity for companies to ignore.’ Thus far, the metaverse has touched most consumers through brand marketing, engagement campaigns, and gaming. Still, many new emerging social, fitness, commerce, and virtual learning applications are also coming onstream to boost user familiarity. Here are a few stats from the report.
- Corporations, VCs, and private equity investors invested $120b+ into the metaverse in 2022, more than double the $57 billion invested in all of 2021
- Seventy-nine percent of consumers active on the metaverse have made a purchase.
- Over 15 percent of corporate revenue is expected to come from the metaverse in the next five years, according to 25 percent of senior executives.
- By 2030, McKinsey estimates the metaverse will generate $2.6 trillion in e-commerce revenue, up to $270 billion in virtual learning fees, $206 billion in advertising dollars, and $125 billion in gaming revenues.
The introduction of the World Wide Web in 1989 provided online users with a 2D view of the internet and became the foundation of the Web1 and Web2 experience. Undoubtedly, the metaverse will be the 3D experience layer of the Web3 era, and more applications will leverage this value. But, economically, the metaverse is still in its early stages of experimentation and development and will take much more entrepreneurial energy over the next decade to fully realize the vision.
What’s up for startups
The Silicon Valley consensus says VCs are pushing for private company valuations back down to 2015 levels when the NASDAQ index was 5,000. This ask is a stretch, of course, but if you are a Web3 entrepreneur who put off raising money in 2022 due to the down market, you are now competing with twice the number of startups looking for cash this year. Companies typically dilute themselves 5 percent to 10 percent each round in a bull market, but dilution can be up to 30 percent in a bear market. In 2015, seed rounds averaged around $10 million, A rounds were between $15 million to $25 million, B rounds were $25 million to $50 million, and growth rounds were valued at 10x revenues.
The new normal [of company valuations] will lead to flat rounds, down rounds, inside rounds, and rounds with a lot of structure on them. I believe founders and CEOs and Boards should take the pain of a new valuation (flat, down, whatever) over structure.
— Fred Wilson, Union Square Partners
Before planning their public altcoin launches, new projects typically require raising two to three equity rounds. The first round is raised with passionate and tech-savvy founders, a superior product plan/whitepaper, and a big market opportunity; the second round will come with a product launch and some traction. Finally, a third round to help fund the preparation and marketing of their token launch. The project founding date to the actual token launch date has been extended over the last two years. The more projects achieve community involvement in their product development, viral marketing, and token raising, the better chances for its success.
The Sequoia Startup Memo for 2022 — Recognize the moment!
Sequoia Capital, an early backer of Apple, Cisco, Google, and Airbnb, to name a few of their dozens of startup investment success stories, has long been seen as the gold standard in the venture industry. During the Internet bubble bust in the roaring 1990s, the housing bubble in 2008, and more recently, the down market in 2022, Sequoia issued legendary ‘startup memos’ aimed at their portfolio company founders but also devoured by entrepreneurs and risk investors worldwide. Their recent 52-slide deck in May 2022 titled ‘Adapting to Endure’ emphasizes the same basic theme of their previous memos: ‘Recognize the moment, expand runway by cutting costs, and aim to become a sustainable, cash-flow-positive business because the recovering may be a ways off.’
Big Tech Is Dead
To create the next innovation wave, the global Silicon Valley invariably must eat its own. Our view is the Web2 cloud-computing era topped out when NASDAQ hit 16,057 on November 19, 2021. As the economy stabilizes in 2023, the fundamental innovation shift to Web3 will become more popularly understood, and its impact will accelerate dramatically.
As the prize-winning economist and the top innovation futurist of our time, George Gilder, so aptly forecasted in his 2018 book, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy, the centralized, algorithmic model of the Internet, as exemplified by Google, is no longer sustainable. The cloud computing era, based on centralized servers and massive data centers, is inefficient, insecure, and vulnerable to attacks and hacking. Instead, the Web3 internet is built on decentralized, blockchain-based models, where data is stored and distributed across a network of nodes, with no single point of failure or attack.
“The empire might think that Satoshi and his bitcoin followers are on shaky ground. Still, the emperors’ and courtiers’ $280 trillion tower of debt is beginning to teeter. Their fortunes may go down with it. The creativity in crypto is preparing a new financial system for the moment when the fiat currency pinata bursts at last.”
— George Gilder, author, Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy
Mr. Gilder argued that this new model promotes innovation and competition and allows smaller players to compete with large technology companies. The centralization of the internet led to the concentration of power and wealth in the hands of a few large technology companies, such as Google, Facebook, and Amazon. Web3 is driven by the desire for users to distribute the power of the internet across the network.
As Mr.Gilder’s forecast becomes a reality, the inevitable downsizing and wreckage of the Big Tech Goliaths have ensued. Job cut announcements are now daily: Facebook (11,000 jobs), Amazon (18,000 jobs), Dell (6,650 jobs), Google (12,000 jobs), IBM (3,900 jobs), Microsoft (10,000 jobs), PayPal (2,000 jobs), Salesforce (8,000 jobs), SAP (2,000 jobs), Spotify (600 jobs), Wayfair (1,750 jobs), and Zoom (1,300 jobs).
With its stock trading at a 2015 valuation, Facebook suffers the triple punishment of being stuck in its Web2 strategy of selling customers’ data, an advertising slump, and dwindling trust due to a history of member and content censorship directed by the ideological whims of a small cadre of executives. Another round of firings is currently widely anticipated as the company strives to ‘flatten’ operations to meet Zuck’s stated ‘year of efficiency’ goal for 2023. Zuck’s ultimatum: Give up managing other employees and find something productive to do — or leave.
We expect the triage currently underway across Big Tech within the white color ranks due to productivity gains offered by AI/ML technologies, dApps, and robots will continue.
Amazon is adding a thousand robots to its workforce a day, according to Cathie Wood, founder and CEO of ARK Investment Management, a $14 billion fund. ‘If you compare the number of robots Amazon has to the number of employees, it’s about a third, and we believe that Amazon will have more robots than employees by 2030,’ Ms. Wood says. Amazon began its journey into robotics in 2012 with its $775 million acquisition of Kiva Robotics, an early pioneer of the now-ubiquitous autonomous mobile robots seen in warehouses worldwide. A few years later, Amazon established a robotics business unit and began experimenting with many different types of robots for material handling in its warehouses, including robotic arms such as the Sparrow (pictured above).
The Web2 giants are now mature businesses whose growth prospects depend on how well they adapt to Web3 technologies. We are hedging on Google because AI/ML apps, such as OpenAI and the dozen companies chasing them, will disrupt their search franchise which still represents nearly 60 percent of Google’s revenue. Likewise, all social media companies, particularly Facebook, that sell their customers’ data for a living will struggle to recover against the headwinds of Web3 and its maniacal focus on creator content ownership and privacy.
‘We could make a ton of money trading our customers’ personal data, but all people have a fundamental right to privacy. The American people demand it, the Constitution demands it, and morality demands it.’
— Tim Cook, CEO, Apple
Of the bunch, only Twitter is steering towards Web3 under its progressive new Chief Twit, who has already downsized the staff by 70 percent to prepare the company for the new, lean, mean, and less hierarchical distributed computing era. Our suggestion to Elon has been to acquire 30 percent of dogecoin’s circulation, make it Twitter’s new reward and payment coin, and watch his net worth double.
Crypto wallets @ 4 percent penetration — Let’s party like 1999!
A key indicator for Web1 and Web2 was internet user penetration, which rose from under 3 million people in 1989 when the world wide web was first introduced to over 5 billion today. It’s not quite apples to apples, but two key Web3 indicators will be crypto wallet penetration and the total value of real-world tokenized assets (covered in the next section).
There is no consensus about how much of the world’s population holds digital assets. However, Singapore-based blockchain firm Triple A estimated that as of 2022, the global crypto ownership rate is around 4.2 percent, with over 320 million crypto users worldwide. It reported that the United States had 46 million crypto holders, followed by India, Pakistan, and Nigeria. Coinbase claims to have over 108 million wallet accounts, Blockchain.com has 84 million, and MetaMask has 10 million. In addition, dozens of other smaller crypto wallets have unreported users.
Tokenization of assets — including your automobile ‘pink slip’
While the number of people with crypto wallets is an important indicator, what drives the desire to have a wallet is what matters. In our view, the real number to watch is the rise in the dollar value of tokenized real-world assets (RWAs), including ownership in real estate, cars, boats, fine art, debt, most equities, precious metals, and even stocks and bonds. The tokenization of assets also provides both big and small investors a taste of instant settlement, 24/7 global markets, more investment liquidity and portability, and a massive reduction in ongoing compliance costs.
In 2022 when the crypto markets were battered, on-chain communities demonstrated demand for RWAs, including MakerDAO, which invested $500M worth of its DAI token into U.S. Treasurys and corporate bonds in mid-2022. Goldfinch, a company that provides loans that are collateralized off-chain, currently has an active loan value of ~$100M.
A use case we have cited for several years is a blockchain app that takes the misery of dealing with the DMV we all loathe. We are pleased to report that thanks to crypto infrastructure company Oxhead Alpha, California DMV registration will soon be on the blockchain. According to Oxhead CEO Andrew Smith, paper car titles (a.k.a. pink slips) will be reflected as digital assets on the Tezos (TVL) blockchain so owners can initiate their transfers, and car registration can be easily verified. Mr. Smith says Oxhead chose Tezos for the project because it has a ‘responsible consensus algorithm, on-chain governance that reduces forking issues and an overall robust security model.’
This event is significant because California has the highest number of car registrations in the U.S. This single act could convert millions to the crypto age. The crypto wallet penetration rate will zoom when you multiply this DMV approach to reinvent thousands of other government and free market transactions and practical exercises. The emergence of the RWA crypto category will unlock trillions in asset liquidity over time. Despite a lagging economy in 2023, this trend will accelerate exponentially and bring billions of assets on-chain this year.
Trading Tokens in 2023
Regarding playing at the non-RWA-backed altcoin trading table, 2023 is a year of massive token wreckage and investor prudence. There is a much larger overhang in cryptos right today, by far than the broader VC-backed company space. It’s like Internet Bubble 1999 déjà vu all over again. It’s time to zoom up 30,000 feet, look down at the crypto crap table, put emotions aside, and accept that over 90 percent of the 9,000 altcoins trading on CoinMarketCap.com are going away. But it also means remembering that, from a financial history standpoint, it’s not time for despair because 90 percent of the opportunity is still ahead.
By the end of the year, most of the sustainable altcoins will have floated to the top, and the remaining hoards will find themselves in the Land of the Living Dead. The fact that BTC has rebounded 42 percent and ETH 31 percent since they both hit two-year low last November indicates the crypto investors’ flight to proven coins and a long-term commitment to the crypto markets. We are more bullish on ETH because it has the best underlying economic model of any crypto asset business case. ETH has only gotten stronger since the Ethereum Merge last September. During the Merge, the Ethereum blockchain transitioned from a proof-of-work to a proof-of-stake model, which impressively reduced electricity costs by ~99.9 percent.
The Coinbase crypto exchange is second only to Binance in coins traded and dollar volume. Different than other exchanges, the Coinbase Wallet self-custody mobile app only allows customers to buy, sell, send, or receive a dynamically selected group of digital assets. Today the number of altcoins on the Coinbase list is 237. To be listed by Coinbase, assets must meet the exchange’s legal, compliance, supportable use-case, degree of centralization, and technical security requirements. As an example, as of last January 23, Coinbase stopped supporting Ethereum Classic (ETC), Ripple (XRP), and Stellar (XLM) ‘due to low usage’ of the assets on the platform. The assets listed on Coinbase’s tradable token list are not sure winners, nor are altcoins not listed on Coinbase necessarily bad bets. Still, it represents an excellent example of how to filter the best coins out of the thousands listed on CoinMarketCap.com.
We are not coin pickers by trade, but ETH at $1,200 and BTC at $16,000, and dozens of other quality coins were oversold in the downturn, and the recent bumps in price appear to confirm that analysis. After the FTX debacle, regulated, transparent, onshore, and audited crypto exchanges, such as Coinbase, Kraken, Upbit, and Bitstamp, are seeing a dramatic increase in market share. Large-cap, viable cryptos continue to attract more interest from investors and should do well in 2023.
‘We need to be held to a higher standard because digital currency is so new and interesting and powerful that it is attractive to a lot of people out there to try to steal it.’
— Brian Armstrong, Founder & CEO, Coinbase
Valuations are still very much in flux due to the broader macroeconomic uncertainty. However, putting 3 percent of tradable assets in cryptos, with 60 percent in BTC and ETH, until signs of a broader market upturn, then an increasing percentage into well-vetted, ‘here-to-stay” mid-cap altcoins by the end of 2023, should outperform NASDAQ. Less capital will go into new token rounds than VC rounds in 2023 because there is a massive overhang of existing altcoins that must be sorted through and re-valued.
NFTs secure their role in gaming and identity
NFT art, gaming, and collectibles sales saw a downfall of 83 percent year-over-year in 2022, as some exchanges were forced to freeze cryptocurrency assets, including digital collectibles. We are bullish on the potential of NFTs and their future proliferation but do not believe the value proposition driving the investor hype will ever match the original promises of the early NFT investor enthusiasts. Instead, the long-term utility value of NFTs to enhance the experience of gaming, entertainment, and consumer marketing is the greater promise.
Gaming transactions represented over half of all blockchain activity in 2022, and this trend should continue into 2023. Gaming NFTs that validate identity and permit community privileges will grow in 2023, and this utility value can and will disrupt many other incumbent sectors.
Gaming Companies with NFTs
Gods Unchained (GODS) — A collectible card game where players can buy, sell, and trade rare cards as NFTs.
CryptoKitties — A game where players can collect, breed, and trade digital cats as NFTs.
F1 Delta Time — A racing game where players can buy and trade unique cars and other in-game assets as NFTs.
Aavegotchi (GHST) — A game that combines NFTs and DeFi, where players can collect, train, and battle ghost-like creatures called Aavegotchis.
Splinterlands — A collectible card game where players can buy, sell, and trade cards as NFTs and battle other players for rewards.
Gala Games — A platform that hosts various games that use NFTs for in-game items and assets, including Townstar, Mirandus, and Fortified.
Unlike other crypto niches, NFTs are relatable to everyday life, such as art, music, and games. Avichal Garg, the CEO and co-founder of the $1.6 billion VC fund Electric Capital, who defines himself as ‘an NFT maximalist,’ told Cointelegraph that NFTs would play an essential role in converting the masses to crypto. ‘In 18–24 months from now, I think we’re just going to see this onslaught of (NFT-based) games,’ says Mr. Garg, ‘And that’s something that everybody can participate in, and everybody can understand.’
Further, NFTs are mashing with entertainers and influencers to monetize unique content and connection. For example, soccer sensation Cristiano Ronaldo dropped an NFT collection to drive fan engagement and access other future perks. Instagram creators will soon sell their digital collectible NFTs to fans on and off Instagram. Reddit now offers members limited-edition NFT profile avatars created by independent artists. Youtube also allows creators to sell content as NFTs so fans can ‘own’ videos.
“Our challenge is to survive Web3. We are moving into a trustless, permissionless, creator economy where content is disintermediated, tokenized, and instantly distributed. All barriers to entry are obliterated. Blockchain, crypto, and the metaverse must be at the top of our agenda.”
— Lachlan Murdoch, Vice Chairman, News Corporation
Traditional consumer brands have been aggressively experimenting with NFTs as marketing plays. Click each brand name to see their NFT marketing tactics in action: Adidas, Lamborghini, Tiffany & Co, Disney, Louis Vuitton, Nike, Porsche, NBA, Burberry, Netflix, Tag Heuer, Visa, Timex, Prada, BMW, NFL, Gucci, Ray-Ban, Cartier, Red Bull, Lacoste, Australian Open, Heineken, Marc Jacobs, Audi, Hugo Boss, Mastercard, Hermes, McLaren, and Ralph Lauren.
The more big brand marketers, content producers, and entertainers use NFTs for audience promotion and incentives; the more consumers will need a crypto wallet, which is a big boost for broader blockchain and crypto application and adoption, as Mr. Garg refers to above. NFT trading will invariably heat up again by the end of the year but with more traditional (and hopefully rational) collectibles investor-valuation sensibility.
Epilogue
We look at blockchain and digital assets as the new decentralized internet paradigm, with AI and ML as its ‘smart engine’ and the metaverse as an emerging and powerful new way to visualize and engage with data, content, and each other. The real magic is when these three innovations combine to create new dApps where content creators can share in remarkable new ways yet control and monetize their work and expertise. Thousands of clever VC-fueled entrepreneurs throughout the global Silicon Valley and ‘intrapreneurs’ funded by large corporate budgets are pioneering new public and private dApps that are beginning to change the way we work and play.
Just as in the Internet Bubble era, the average investor in Crypto 1.0 will lose money, and the lucky winners will have sold out somewhere near the irrational top which, by our guess, was on November 11, 2021, when the total cryptocurrency market cap topped $2.8 trillion. However, when the crypto dust clears, like during the Internet Bubble, all the wild betting, experimentation, infrastructure and ecosystem building, and refinement during Crypto 1.0 will pay huge Web3 cash and crypto dividends in the 20s and 30s and save the world from the centralized powers we loathe.
Mark Cuban became the King of ‘sell at the top’ when he unloaded his fledgling Internet radio company Broadcast.com to Yahoo for $5.7 billion when the dot-com bubble peaked in 1999. The service became a part of Yahoo! Broadcast Services. But the Broadcast.com app was ahead of its time and shut down by 2002 due to a lack of user engagement. Yahoo! ‘s high-profile purchase of Broadcast.com has since been called the worst internet acquisition in history. Lucky Mark hauled in an estimated $1.1 billion payout after taxes for his share of the deal, and he quickly spent his first $280 million buying a majority stake in the NBA’s Dallas Mavericks. According to Forbes, today the basketball team owner and media proprietor has an estimated net worth of $4.8 billion.
The Web3 opportunity already has the backing to be at least 5x the size and impact of Web2. On top of the crypto speculative investing, you can add $320 billion in equity investment into over 10,000 private Web3 companies by VCs since 2019, with billions more coming in from big company Blockchain, AI, and the metaverse funding.
In the end, customers always get what they want. Today, people no longer trust centralized institutions and are demanding their privacy and autonomy back. Once again, the global Silicon Valley entrepreneurs have stepped up to the challenge and are rewriting how we operate in society all over again and continuing its legacy of bringing power back to the individual.
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