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Retail Investors and VC Funding Make a Slow Comeback into Crypto After the Bear Market

Retail traders are regaining interest in the crypto market

As the crypto market exhibits signs of recovery, retail investors, once bitten by the 2022 market downturn, are cautiously stepping back, eyeing the bull market with a blend of hope and wariness. Bitcoin's remarkable ascent, nearly 70% in Q4 2023, has not gone unnoticed. Despite their eagerness, the scars of past losses have instilled a sense of caution, differentiating this re-entry from the frenzy of the 2021 bull market, as reported by Bloomberg.

Coinbase, a leading crypto exchange, has witnessed a tangible uptick in activity, with net revenue from customer transactions surging 60% in the last quarter of 2023 compared to the same period a year prior, an 80% increase from Q3 2023. This surge is attributed to a significant 164% increase in retail trading volume on Coinbase in Q4 2023, outpacing the growth of institutional trading volume, which saw a 92% increase. 

Retail trading now accounts for 19% of the total trading volume on Coinbase, up from 14% in Q3, signaling a robust return of retail investors to the platform, albeit still below the 28-40% range seen during the bull market's peak.

This renewed retail interest is further evidenced by Robinhood Markets, which reported a staggering 242% increase in crypto notional volumes in December year-over-year. Retail investors are drawn back as Bitcoin prices soar past the $50,000 mark for the first time in two years, ahead of the anticipated Bitcoin halving event known to historically trigger increased retail engagement and market growth. 

Alyssa Choo, a crypto equities specialist at BitInvest, encapsulates the prevailing sentiment in the investor community.

"As the crypto market cap and trading volumes go up, retail trading goes up as well. Everyone wants to be a part of the bull market," 

Caution remains despite market optimism

Despite the palpable optimism and the bullish trajectory of the crypto market, the shadow of 2022's tumultuous downturn looms large, instilling a cautious approach among retail investors. The memory of billions lost in a series of exchange bankruptcies has tempered the rush to re-enter the market, despite Bitcoin's significant gains and the overall market rebound observed in the fourth quarter of 2023. This cautious re-engagement is underscored by fluctuating Google search trends for 'Bitcoin,' a proxy for retail interest, which spiked in January with the launch of Bitcoin exchange-traded funds (ETFs) in the U.S., only to retreat back to levels indicative of a bear market.

Kyle Doane, a trader at Arca, an institutional asset management firm, remarked to Bloomberg, 

"There are signs that the retail audience is starting to get back into the market, but not nearly to the extent of the last bull market yet." 

This sentiment reflects a broader hesitance among retail investors, who, while keen to participate in the market's gains, are wary of repeating past mistakes. The cautious re-entry of these investors is a dance of optimism tempered by the hard lessons of recent history, indicating a more mature, albeit tentative, market participation.

The contrast between the current surge in interest and the previous bull market's fervor is stark. Retail investors, once the driving force behind unprecedented market rallies, are now navigating the crypto space with a newfound prudence.

Venture capital flows into crypto startups

The last quarter of 2023 witnessed the first uptick in venture capital (VC) funding for crypto and blockchain startups in 1.5 years, signaling a shift in investor sentiment towards the sector. According to a Pitchbook report, these startups secured $1.9 billion across 326 deals in Q4 2023, marking a modest yet pivotal 2.5% increase after six consecutive quarters of decline. This resurgence in funding, albeit slight, suggests a growing confidence among investors in the long-term potential of the crypto industry, despite the tumultuous events of the previous year.

The backdrop to this renewed interest is a landscape still reeling from the impacts of high-profile exchange bankruptcies and significant legal challenges faced by industry giants like Binance and FTX. Such events had led to a marked dry-up in venture capital for the crypto sector, as investors grew wary of the market's volatility and regulatory uncertainties. The Pitchbook report highlights that, despite these challenges, the fundamental appeal of crypto as an innovative and potentially disruptive technology continues to draw investment, particularly towards platforms offering low barriers to entry and enhanced user experiences.

The most notable deal of the quarter was the $225 million early-stage funding round for the crosschain bridging protocol Wormhole, backed by heavyweight investors including Coinbase Ventures, Jump Trading, and ParaFi Capital. This deal not only represents the largest single investment in the period but also underscores the specific areas within the crypto ecosystem that are attracting VC attention—namely, infrastructure and interoperability solutions that could play critical roles in the next phase of the industry's evolution.

While the overall deal volume saw a slight decrease of 2.4% from the previous quarter, the increase in total invested capital points to a cautious but tangible optimism for the sector's future.