VCs like Galaxy Digital almost doubled their bets on crypto games this month

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A visitor takes a photo in front of the digital artwork “Untitled (Self-Portrait)” by Andy Warhol and digital artist Mike Winkelmann, known as Beeple, at the Digital Art Fair, Hong Kong, China, September 30, 2021. REUTERS / Tyrone Siu

Since NBA Top Shots and artist Beeple’s digital collage which sold by Christie’s for $ 69 million this year, the craze for NFT investing has only intensified.

Artists from Snoop Dog to singer-songwriter Grimes and rock band Kings of Leon have made huge profits creating these unique digital collectibles. Even big brands like Budweiser, Coca-Cola, Dolce & Gabbana, Taco Bell and Nike are now tinkering with the technology. Soon, Twitter will even grant special authentication badges to users who want to display NFTs as profile photos.

A telltale sign that NFTs are more than just a fad is the accelerated pace that venture capitalists are supporting crypto game companies, betting that NFTs and other digital assets can redefine how and why we play video games.

On Wednesday, crypto game investor and publisher Animoca Brands raised $ 65 million at a valuation of $ 2.2 billion from backers like Ubisoft. On October 19, Galaxy Digital Holdings, whose CEO is Michael Novogratz, announced a further raise of $ 325 million with a significant portion of funds – like Animoca – going to crypto game companies.

Galaxy partner Sam Englebardt told Yahoo Finance the switch to crypto games has been choppy for years, but the NFT boom in 2021 – along with successes from games like Axie Infinity – are accelerating the pace of investment.

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Venture capital investment in crypto games in October increases

Crypto or blockchain gambling is a niche segment that implements NFTs and other digital assets at a certain level of gambling. It could be creating digital collectibles or creating more robust gambling economies, features that improve the progression of players and the games themselves.

The global video game industry is valued at around $ 175 billion, receiving a big boost from time spent at home during the pandemic. It is also the largest and fastest growing form of media in the world, according to Newzoo. A similar story is playing out in the crypto industry. In the past quarter, user growth and engagement in crypto-related gaming projects overtook other NFT and DeFi applications, according to analytics platform DappRadar.

Investments in Blockchain games have been valued at $ 476 million for the first half of 2021; investments in October alone are double that number.

Currently, the most common business strategy explored by the largest video game publishers is to sell collectible NFTs using legacy brand value. For example, Animoca Brands now offers die-hard fans the ability to trade and collect Atari games in digital box form.

Brands Animoca, Crazy Defense Heroes

Digital boxes may not seem revolutionary, but Piers Kicks, a senior partner at games and esports company VC BitKraft, predicts that many game publishers will follow the trend.

This month, BitKraft, with $ 540 million in assets under management, opened its own fund to invest $ 75 million in NFTs and other tokens for gaming projects. Like Animoca Brands and Galaxy Digital, BitKraft’s investments show how much further venture capitalists are looking at crypto games further, while major game studios and publishers are still deciding to dip their toes in. space.

These funds reflect on how the futuristic “metaverse” will play out and whether it is content or intellectual property, they are betting that video games play a prominent role.

“What really turns me on is a lot more native to crypto, things that are built from the ground up rather than relying on NFT strategies to [existing] matches, ”Kicks said.

A leading indicator

As Galaxy’s Kicks and Englebardt pointed out, the barometer of built-in crypto games appeared earlier this year in the form of Sky Mavis game, Axie Infinity. Axie Infinity is a “play-to-earn” (P2E) mobile game similar to the Pokemon franchise. There, players can fight, breed, and trade digital monsters also known as Axie. Thanks to the success of Axie Infinity, Sky Mavis raised an additional $ 152 million in a Series B funding round led by Andreessen Horowitz (a16z), the same week that Kicks’ BitKraft launched its fund.

Visitors are seen at the Digital Art Fair Asia in Hong Kong, China, October 8, 2021. The fair features NFT Crypto Art, non-fungible tokens, as part of the new trend in modern art. (Photo by Miguel Candela / Anadolu Agency via Getty Images)

The growth in Axie users over the past year is staggering. Since its inception, the game has generated over $ 2.4 billion in total transaction volume, making it the most valuable NFT collection to date. For a week in July, the game generated more protocol-level revenue than Bitcoin, Ethereum, and most of the top DeFi projects. As of August, it averaged 1.8 million daily active users, at one point reaching $ 33 million in daily transactions.

“It would be impossible – unless you were living under a rock – not to look [Axie Infinity], take it very seriously and try to figure out what’s going on, ”said Englebardt, explaining how Axie has become a barometer that investors in crypto games use to gauge the space.

It should be noted that the core of Axie Infinity’s gameplay depends on players owning and trading in-game assets. This is a near-revolutionary break from how traditional mobile games work. Everything in Axie Infinity, from money and land to objects and creatures, has real value that can be exchanged for cryptocurrencies like Ethereum (ETH-USD) and local currencies like the Philippine Peso. Players can earn a return on these assets. While their value sometimes fluctuates as dramatically as bitcoin (BTC-USD), a July study by Coingecko showed that Axie players can sometimes earn more than the US federal minimum hourly wage through gameplay.

“At the very least, what blockchain enables is the largest, most viral, and profitable form of user acquisition, and we see it over and over again,” Englebardt explained, citing bitcoin as the most successful example.

On the fence

Not all video game publishers sell crypto games. In response to the Steam gaming platform’s decision last week to ban all games with crypto or NFT, Fortnite creator Epic Games is opening its Game Store at the niche intersection as long as they play by the rules.

Epic CEO Tim Sweeney also expressed mixed opinions, saying the space is “currently entangled with intractable scams”, in addition to having “interesting decentralized technology foundations.”

For more background on how major publishers might think of crypto games, Yahoo Finance reached out to Amy Wu of Lightspeed Partners, a venture capital firm that backs Epic Games, 1047 Games, and others in crypto, gaming. or both.

Wu said large game publishers are at much more risk in diving into blockchain compared to smaller independent studios, especially those who are already crypto enthusiasts. “All the major game publishers are curious about NFT to say the least and some will be announcing major partnerships soon,” Wu said.

She categorized a large games company’s willingness to jump on a blockchain into three main categories: the drop in cosmetic NFT in-game, potentially with brands (Atari); items in the form of NFTs, traded on an open or closed exchange; full game to win + tokenized game coins (Axie Infinity).

“Rising revenue and deeper player engagement are appealing. However, poorly implemented, and a publisher could frustrate massive existing player bases,” Wu said.

As game developers dig deeper into crypto games could deepen revenue streams and player engagement, “there could be irreversible consequences” if something goes wrong, Wu said. Essentially, errors, hacks and the inherent volatility of crypto could have a more direct impact on video games.

“The real challenge is compliance,” Wu said. “Not all publishers think about it yet. Allowing a player to withdraw money from a game collides with gambling laws. in many markets. In addition, there are only a few blockchain partners, FTX being one of them, that can enable the launch of NFT, compliant in over 100 jurisdictions that a game publisher will need . “

The current approach to how countries want to regulate the crypto industry may be enough to prevent many game publishers from announcing, at least publicly, the development of a game like Axie Infinity this year. Still, this makes the present moment the perfect time for VCs to place their bets.

David Hollerith is a senior journalist covering cryptocurrency and the stock markets. You can follow him @DsHollers.

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