By Alex Thorn and Gabe Parker, Galaxy Digital
Compiled by Research Analyst: Yangz, Techub News
Compared to the strong performance of Bitcoin and liquid cryptocurrencies in the first quarter, the market cooled slightly in the second quarter, but it was still a significant increase compared to the same period last year. The crypto VC rally seen in the first quarter appears to be continuing. The performance of industry founders and investors in the second quarter means that the financing environment is more active than in previous quarters.
However, as of July 1, the data performed slightly worse than the general market sentiment. The number of industry venture capital transactions in the second quarter decreased slightly from 603 in the first quarter to 577 in the second quarter, while investment capital increased from US$2.5 billion in the first quarter to US$3.2 billion in the second quarter. The median transaction size increased slightly from US$3 million to US$3.2 million, but the median pre-investment valuation increased from US$19 million to US$37 million, close to the historical high. These data show that despite the lack of available investment capital compared to previous peaks, the recovery of the cryptocurrency market in the past few quarters has brought fierce competition to investors and triggered their FOMO.
Number of transactions and investment capital
In Q2 2024, VCs invested $3.194 billion in cryptocurrency and blockchain companies (up 28% QoQ) across 577 deals (down 4% QoQ).
Investment Capital and Bitcoin Price
The multi-year correlation between Bitcoin price and capital invested in crypto startups has broken. Bitcoin has risen sharply since January 2023, while VC activity has not kept pace. While Bitcoin has risen sharply this year and invested capital has also risen, it is still far below the levels when Bitcoin broke through $60k in 2021-2022. Crypto native catalysts such as Bitcoin ETFs and emerging areas (such as re-staking, modular, Bitcoin L2), as well as pressure from crypto startup bankruptcies and regulatory challenges, combined with macroeconomic headwinds (interest rates), have led to this stark divergence. Now, as liquid crypto recovers, VCs are preparing to return and VC activity will increase in the second half of this year.
Stages of venture capital investment
In the second quarter of 2024, 78% of funds were allocated to early-stage companies and 20% to later-stage companies. While early-stage cryptocurrency-focused venture capital funds are active and have reserves left over from 2021 and 2022, large, integrated venture capital firms appear to have exited the industry or significantly scaled back their activities, making it more difficult for late-stage startups to raise funds.In terms of transaction quantity, the share of Pre-Seed round transactions has slightly decreased, but is still higher than the previous market cycle.
Valuation and deal size
Venture capital-backed cryptocurrency company valuations fell sharply in 2023, falling to the lowest median pre-money valuation since the fourth quarter of 2020 in the fourth quarter. However, by the first quarter of 2024, valuations of venture capital-backed cryptocurrency companies began to rebound, surging to $37 million in the second quarter (a 94% quarter-over-quarter increase), reaching their highest level since the fourth quarter of 2021. It's important to note that reporting delays and a lack of public valuation data can cause these numbers to fluctuate significantly as more data becomes available. We strive to provide this information in a timely manner after the quarter ends, so the data is subject to revision, but this spike is still a signal. Additionally, the median deal size increased slightly sequentially (+7%) to $3.2 million, which was essentially the same as the past five quarters. The increase in valuations stems from improving market sentiment; although there has been no significant increase in investment capital, founders have captured interest and competition from the existing investor base.
Investment Types
In the second quarter of 2024, cryptocurrency companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised a total of $758 million in crypto VC funding, accounting for the largest proportion of all categories (24%). The two largest deals in this category were Farcaster and Zentry, which raised $150 million and $140 million, respectively.It was followed by companies/projects related to infrastructure, exchanges, and L1, accounting for 15%, 12%, and 12% of investment, respectively. Notably, the L1 category saw its market share of investment capital grow more than 6x, as Monad and Berachain raised $225M and $100M, respectively. Additionally, Bitcoin L2 raised $94.6M in Q2 2024, up 174% QoQ ($34.7M in Q1).
Transaction volume breakdown by category
In terms of transaction volume, the “Web3/NFT/DAO/Metaverse/Gaming” category leads the pack with 19%, driven by an increase in decentralized social media and gaming-related transactions. While the number of funding rounds for restaking-related crypto startups declined in Q2 2024, the Infrastructure category ranked second in the quarter with 15% of transactions.Closely following are cryptocurrency companies/projects related to trading and DeFi, accounting for 11% and 9% of the total number of completed transactions in Q2 2024, respectively.
Stages and categories of venture capital
Breaking down investment capital and deal count by stage and category provides a clearer picture of what types of companies in each category are raising funding. In Q2 2024, the vast majority of funding in the Web3, L1, and Infrastructure categories went to early-stage companies and projects, while venture capital in the Deals category went more to companies in later stages of funding.By studying the share of capital invested in each category at each stage, we can gain insight into the maturity of each type of investable capital.
Furthermore, the number of deals tells a similar story. A significant portion of completed deals in almost all categories involved early-stage companies and projects.
By examining the share of deals completed at each stage within each category, insight can be gained into the various stages of each investable category.
Investment by Geography
In terms of investment volume, more than 40% of venture capital went to companies headquartered in the United States in the second quarter of 2024. The United Kingdom accounted for 10%, Singapore accounted for 8.7%, the UAE accounted for 3.13%, and Hong Kong accounted for 2.78%.In terms of investment amount, companies headquartered in the United States attracted 53% of venture capital, an increase of 23.5% month-on-month. The United Kingdom accounted for 12.78%, Singapore accounted for 4.6%, and the United Arab Emirates accounted for 4.39%.
Investing by Group
The vast majority of venture capital in the second quarter of 2024 went to companies founded between 2021 and 2023.
Summarize
Crypto VC sentiment continues to improve, but levels remain significantly below the 2021-2022 bull run. With Bitcoin and Ethereum up about 50% this year, invested capital increased 28% month-over-month, while deal count remained essentially flat. If this growth rate continues through the end of the year, 2024 would rank third in both invested capital and deal count, behind only 2021 and 2022.
Investments in the Web3 and L1 categories were notable. The Web3 category led the way with approximately $750 million in total funding, driven by Farcaster ($150 million) and Zentry ($140 million). L1 ranked fourth with $371 million, driven by deals to Monad ($225 million) and Berachain ($100 million).
The median valuation of venture-backed cryptocurrency companies has soared to the highest level since the fourth quarter of 2021 (the peak of the previous bull market). Affected by the 2022 bear market and adverse macroeconomic factors, most general venture capital firms are still on the sidelines, while venture capital firms focused on cryptocurrencies are in an increasingly competitive environment, providing project founders with more bargaining chips. It should be noted that the median is based on available data as of July 1, and as more transaction information in the second quarter increases, the median may be updated and may be adjusted downward.
Bitcoin L2 continues to receive a lot of investment, with related companies and projects raising a total of $94.6 million, a month-on-month increase of 174%. Investors are still enthusiastic about the emergence of more composable block spaces in the Bitcoin ecosystem and the return of models such as DeFi and NFT. Our internal research shows that there are at least 65 projects claiming to be "Bitcoin L2".
Early-stage deals dominated the second quarter, receiving nearly 80% of invested capital, with Pre-Seed rounds accounting for 13% of all deals. The continued focus on early-stage deals bodes well for the long-term health of the broader cryptocurrency ecosystem. While some later-stage companies struggle to raise funding, entrepreneurs are finding willing investors for new and innovative ideas.
The United States continues to dominate the cryptocurrency startup ecosystem. While the United States maintains a clear lead in transactions and capital, regulatory headwinds may force more companies to move to other countries and regions. If the United States wants to remain a center of technological and financial innovation in the long term, policymakers need to be aware of how their actions or inactions will affect the cryptocurrency and blockchain ecosystem.
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