What's Driving Investor Interest In Crypto Startups Despite Regulatory Swings Despite volatility, many factors have led to the structural shift towards digital assets

The Indian government is expected to table a comprehensive bill on cryptocurrency in the upcoming winter session of Parliament. According to news reports, in a meeting conducted by a Parliamentary Standing Committee on Finance with cryptocurrency experts and industry associations, there was a consensus that digital currency can't be stopped but should be regulated. Even though there is still a dilemma of who should be the regulator, this is seen as a favorable step for crypto startups.

These startups have been grabbing investors' interest despite the regulatory flux. In fact, some such as CoinDCX and CoinSwitch Kuber have already entered the unicorn club. The number of users is also growing as we speak. For instance, WazirX has more than 8.5 million users and CoinSwitch Kuber over 11 million. India is being seen as the fastest-growing crypto market in the world. India ranks second among 154 nations in crypto adoption, says a report by Chainalysis.

So, what are the factors that have fueled such a tremendous increase in a number of users and investor interests in crypto startups?

What Grabbed Investors' Eyeballs

The Crypto ecosystem transcends all geographies and sectors, including banking and social media, believes Ashish Singhal, co-chair of The Blockchain and Crypto Assets Council (BACC) and founder, and CEO, CoinSwitch Kuber. The crypto exchanges have been running on BACC's guidelines till now.

"We believe VCs are typically looking at industries that bring in paradigm shifts in the way the world works. The potential of the technology behind crypto to shape the future of the Internet is one of the key reasons behind investor interest," added Singhal.

Cryptocurrencies have been looked at with suspicion and interest by the regulators, consumers, alike up until 2020. Today, things have changed dramatically. "With the quashing of the financial regulator's dicta on transactions related to cryptos by banking and financial companies, there has been a prevalence of trading, exchanges in the sector," said Abhishek Malhotra, managing partner, TMT Law Practice.

Experts believe that two crypto startups achieving a billion-dollar valuation in a short span of time is a result of people recognizing the potential of blockchain as a technology, and the returns cryptocurrency can generate compared to other established asset classes. "With crypto savvy investors leading the charge, big marketing spends coupled with crypto startups engaging in extensive influencer marketing has at least brought the cryptocurrency discussion to the mainstream, which is good for the future of the technology, but special care should be given to communicating to the new investors about the volatility of this new asset class," said Vedant Kaushik (Vedant Rusty), a crypto influencer.

Unlike countries such as El Salvador, the US, and Brazil, with overall positive sentiment towards the adoption of cryptos, the Indian government India doesn't want to risk adopting cryptos but at the same time, they don't want to lag behind in the trends either, feels Vikram R Singh, founder, Antier Solutions. This has further paved the way for growth in the space.

"India's RBI is one of the front runners in launching a CBDC. It is not exactly a cryptocurrency but is greatly inspired by a digital asset over the blockchain. India also has the highest number of crypto users in the world. Clearly, for investors, this is a goldmine of opportunity. India has proven expertise in fintech including blockchain. On-demand availability of tech talent ensures sooner time-to-market and thus optimization of costs," he added.

Another factor that has led to increased investor interest in the space is the rising interest in finance, asset classes, and investments in general among the masses after the pandemic. "Crypto startups have approximately 97 crore people to tap into and that opportunity is huge. Additionally, a lot of investors are interested in crypto startups because of one fundamental reason, India only has 3 crore Demat accounts and that's not even 3 per cent of India's population. Now everybody wants to grow their money by investing money into digital assets. That's where in India, crypto sees a huge space," said Raj Shamani, founder, Shamani Industries, investor, podcaster and digital content creator.

Will The Shift Towards Digital Assets Continue?

Experts expect to see the current trends magnify even more. "More marketing spends, more regular and retail investors coming into the space to test the potential of the new asset class, more education and awareness being developed around blockchain and cryptocurrency," said Kaushik.

Despite volatility and regulatory swings, the structural shift towards digital assets is expected to continue. "DAOs are now the most interesting new theme underlying new experiments in Web3, DeFi and NFTs.Thousands of Web2 developers are now reinventing their careers via Web3, and this should lead to a Cambrian explosion of new crypto startups in India," said Nitin Sharma, partner and global blockchain lead, Antler Global.

"As someone engaged in the policy process, I do believe the pendulum is swinging too far on the other side, potentially misleading and exposing the small investor to frauds and manipulation. Some crackdown on the dangerous advertising fueling the current hype will be welcome," he added.

Some also predict a rise in bogus crypto coins if there continues to be a lack of regulations, as has been the trend in the western countries where crypto has been the talk of the town for a while. "But I hope the education and awareness, the responsibility of which lies on the names of the current big players as well, and the partners they're working with, is of a good enough quality that it protects the first-time investors coming into the space," said Kaushik.

The market in India may remain retail-focused until institutional capital rushes in after regulatory clarity. "This means that beyond exchanges, other platforms around on-ramps, crypto asset management or social investing could be next to rise in value. I am an investor in 3 such ventures. Secondly, if we take token network value (not just equity value) into account, there could be dozens of vibrant token economies around Web3 and NFTs being built out of India, following the success of Layer 2 projects like Polygon," said Sharma.

Further, people are just getting started to know about Ethereum, Bitcoin, Solana, Polygon, and multiple other coins. Once people realize their potential and the space gets more regulated, they may be joined by the bigger trading community, the art and tech community and many others. "Once this space gets more regulated, it is going to see many inventions and new disruptions in terms of the way people save and invest money. Plus, how consumers are using their regular apps, how they are using their internet, and how they are going to transit into web 3.0 everything will evolve once we have consumer behavior and regulation in place," said Shamani.