Original author: Vladimir Sergeevih
Original translation: TechFlow
2020 is a critical year not only for the gaming industry, but also for the cryptocurrency market. The price of Bitcoin soared from about $7,200 at the beginning of the year to $29,000 at the end of the year, sparking widespread interest in blockchain projects. With the intersection of the gaming and crypto industries, the Web3 gaming market has emerged, with many projects thriving under the "earn while playing" model.
While we have been focusing on the gaming side of Web3 gaming since then, we have not yet explored in depth the tight connection between cryptocurrency dynamics and investment activity in the space. In this research, we explore several key questions:
How does Bitcoin’s price volatility affect investment activity in the crypto gaming space?
How do investors differ in their interest in content-oriented and platform-oriented crypto gaming startups?
Which startups have received the most significant investments, and what is their exit potential?
The impact of Bitcoin price on crypto game investments
Our data goes back to 2020. Investment activity in the crypto gaming space was relatively sluggish at the start of the year, largely due to a general lack of interest in cryptocurrencies, coupled with market volatility caused by the COVID-19 pandemic, and a lack of projects that effectively combined gaming and crypto. However, as the bull cycle kicked off in late 2020 and peaked in early 2021, the landscape changed significantly.
The surge in Bitcoin prices has not only rekindled widespread interest in the crypto market, but has also attracted new creators and investors, driving new trends in the crypto gaming space. In the first quarter of 2022, a total of 85 deals raised up to $1.6 billion. Our analysis covers only private investments and excludes crypto public listings and token sales.
2022 is the beginning of the crypto winter. In March, Ronin, the blockchain service owned by Axie Infinity, was hacked and about $625 million in assets were stolen. In May, the collapse of LUNA further exacerbated the market's difficulties. At the end of the year, another shocking news came out that the large cryptocurrency exchange FTX collapsed. Despite these events, the reduction in investment activities did not appear immediately, and the downward trend gradually became apparent after several quarters, which was related to the time lag in transaction announcements and the delay in market response.
By 2023, transaction activity remained weak and fell to its lowest point in the third quarter, coinciding with the time when Bitcoin showed signs of recovery. It is worth noting that the growth of investment activity is not completely synchronized with the fluctuations in Bitcoin prices. Although a new bull run has begun and Bitcoin surpassed its previous highs in the first half of 2024, investment activity in the crypto gaming sector has not yet returned to previous levels. This is partly due to the closure of many projects and the fact that the development of Web3 games is still in its infancy and is still exploring its customer base and business model.
Investment activity in the crypto gaming space
Before we dive into the deal analysis, we need to understand some basic background. Crypto gaming startups can be roughly divided into two main categories:
— Content: Includes companies developing games and interactive experiences that leverage blockchain technology.
— Platforms and technologies: Includes companies that provide the infrastructure, tools, and technologies required for crypto games, such as blockchain infrastructure, development tools, and community platforms for games.
In 2020, the NFT concept — the core of most Web3 games — remained relatively niche. A total of 9 deals were announced that year, raising $46 million (4 in the content space and 5 in the platform and technology space). This low level of activity reflected the early stages of the industry and the limited mainstream awareness at the time. However, this situation has changed dramatically in 2021.
As NFTs and Metaverse concepts gradually enter the mainstream and receive increasing media attention, investment activity has increased significantly. In 2021, we saw 79 deals in the content space and 46 deals in the platforms and technology space, bringing the total deal value to $2.9 billion, a significant increase from the previous year. This growth can be attributed in part to the popularity of “play and earn” games, as well as the success of early pioneers like Axie Infinity, which quickly became the focus of crypto enthusiasts and investors.
Note: For a clearer presentation, items with mixed content and platforms have been excluded.
Investments in content creators initially accounted for 40% of total funding rounds in 2020 and have significantly outpaced platform and tech startups in recent years, accounting for more than 60% of total funding and transactions in the Web3 space, both in terms of number of rounds and total capital invested. This may be due to the greater potential for scale and/or faster returns for game development studios compared to other participants in the gaming ecosystem. In the first half of 2022, the investment boom reached its peak, with content startups completing 96 funding rounds, while platform and tech companies completed 62 rounds.
Some of the most notable VC-led investments during this period included Forte, Sorare, Yugalabs, and Mysten Labs. Together, these four startups attracted nearly $2.4 billion, accounting for nearly 30% of the total investment in crypto games so far in 2020-2024.
Among the most active investors, Hong Kong-based Animoca Brands (ASX: AB 1) stands out, participating in almost all major deals. Animoca Brands has participated in 109 funding rounds with a total amount of US$2.3 billion, making it a leader in the field. Another important investor is Andreessen Horowitz (a16z), a fund that often appears in our VC rankings, which invested US$2.7 billion through 28 deals. Griffin Gaming Partners and BITKRAFT are involved in both Web3 and gaming, while Polygon, Merit Circle and Spartan Group focus mainly on the crypto sector. Today, the market is no longer dominated by crypto companies alone; mainstream VCs are also increasingly keen to discover and invest in emerging technologies in search of excess returns.
Exits of Web3 Gaming Startups
However, the situation in the M&A market is different. This market is still in its early stages, and many startups have not yet grown to the point where they can become acquisition targets. Although the P2E and Metaverse trends have attracted the attention of investors, the implementation of these concepts has not been ideal in most cases.
While there are some acquirers in the market, such deals are still relatively rare. For example, Wemade’s $115 million acquisition of SundayToz was the largest acquisition in the sector. Meanwhile, Animoca Brands has been involved in at least six M&A deals, but financial details of most of the deals were not disclosed.
Compared to the more common M&A activities in the traditional gaming industry, there are fewer exit cases in the crypto gaming market. For example, NFT Tech’s acquisition of Run It Wild for $6 million or Pioneer’s acquisition of Bark Ventures for $4 million are common small-scale M&A in this field. We recorded 33 M&A transactions from 2020 to 2024 to date, with a total disclosed amount of $146 million.
The stark contrast between high investments and limited exits highlights that the crypto gaming industry is still in its early stages. While it is expected that M&A activity may increase, the industry first needs to demonstrate its maturity.
Key Takeaways
Bitcoin-related investments surge: The Bitcoin bull run in 2021 and 2022 significantly boosted investment activity. However, the current bull market has failed to inspire the same level of investor interest and confidence as in the past.
Crypto winter effect: Although the decline in Bitcoin prices did not directly affect investment activities, a series of negative news exacerbated the trend and eroded the trust of crypto enthusiasts and investors.
Advantages of content-based investments: Content creators continue to attract more funding than platforms and technology companies and achieve the largest exits in the Web3 space.
High investment and limited M&A: Despite high investment, M&A activity remains low, indicating that the market is still in its early stages. As the crypto gaming market matures, we expect the frequency and scale of M&A activity to increase, gradually approaching that of the traditional gaming industry.
There is no one-size-fits-all path to success. Investors and developers recognize that new opportunities are emerging as emerging technologies integrate into everyday life. However, there is currently no widely accepted business strategy in the market to create unique gaming experiences, and current practices are mostly speculation by investors. Major studios are trying different business models: some focus on "play to earn" mechanisms, while others rely primarily on one-time NFT resales or token listings to generate revenue.
In the first half of 2024, funding activities related to Web3 games began to gradually pick up. Will this trend continue, or will it become a thing of the past? Will we see top games using blockchain technology to enhance active player participation? These questions remain unanswered and will affect the future direction of the market and the price of Bitcoin.
