By Alex Thorn, Gabe Parker, Galaxy

Compiled by: Luffy, Foresight News

Bitcoin has been range-bound since March, and other major liquid cryptocurrencies have failed to reclaim their all-time highs. Against this backdrop, venture capital activity has been somewhat muted this year. In a “barbell market,” with Bitcoin leading the way and Memecoin driving activity at the other end of the bar, coupled with muted interest from large asset managers and general venture funds, the crypto venture capital market has been lukewarm through 2024. Still, opportunities abound, with crypto-native institutions leading the way in investment activity. Falling interest rates and expectations of a loosening regulatory environment could see venture capital activity accelerate in the fourth quarter of this year and the first quarter of next year. Our quarterly report analyzes two aspects of the crypto venture capital market: venture fund investments in crypto startups and institutional investors’ asset allocations to venture funds, using research from public filings, data providers such as Pitchbook, and Galaxy Research’s VisionTrack fund performance database.

Key Takeaways

• In the third quarter of 2024, cryptocurrency startups received 478 venture capital deals (down 17% from the previous quarter) and an investment of US$2.4 billion (down 20% from the previous quarter).

• Venture capital firms have invested a total of $8 billion in cryptocurrency startups over the past three quarters, and investment in 2024 is expected to be the same or slightly higher than in 2023.

• Early-stage rounds accounted for the majority of capital invested (85%), with late-stage rounds accounting for just 15%, the lowest level since the first quarter of 2020.

• The median valuation of venture capital projects increased in both the second and third quarters, and increased faster than the venture capital industry as a whole. The median valuation in the third quarter of 2024 was $23.8 million, slightly lower than the $25 million in the second quarter.

• Layer 1 projects and companies raised the most funds, followed by cryptocurrency exchanges and infrastructure companies, while most investments involved infrastructure, gaming, and DeFi projects and companies.

• The United States continues to dominate the cryptocurrency venture capital market, with the majority of capital invested (56%) and deals (44%) involving U.S.-based companies.

• On the fundraising front, interest from asset allocators remained tepid, with just eight new funds raising $140 million in Q3 2024.

• The median size of crypto venture capital funds continues to decline, with both the median ($40 million) and average ($67 million) sizes of new funds in 2024 hitting their lowest levels since 2017.

Venture Capital

Number of transactions and investment capital

In Q3 2024, venture capitalists invested $2.4 billion (down 20% QoQ) in cryptocurrency and blockchain-focused startups across 478 deals (down 17% QoQ).

Venture capital deal value in 2024 is expected to match or slightly exceed 2023 levels.

Investment Capital and Bitcoin Price

The multi-year correlation between Bitcoin price and capital invested in crypto startups has broken. Since January 2023, Bitcoin has risen sharply, while venture capital activity has not kept pace. Weaker asset manager appetite for crypto venture capital, combined with a market narrative favoring Bitcoin while ignoring many of the hot narratives from 2021, can partially explain the broken correlation between investment capital and Bitcoin price.

Investment rounds

In the third quarter of 2024, 85% of venture capital went to early-stage companies, while 15% went to later-stage companies. Crypto-native funds may still have money from large rounds from a few years ago, and they can look for new opportunities that have emerged as a result of the resurgence of cryptocurrencies.

On the deal side, the share of pre-seed deals declined slightly but remains healthy compared to previous cycles.

Valuation and deal size

Venture-backed cryptocurrency company valuations fell sharply in 2023, reaching their lowest levels since late 2020 in Q4 2023. However, valuations and deal sizes began to rebound in Q2 2024 as the price of Bitcoin hit a new all-time high. Valuations reached their highest levels since 2022 in Q2 and Q3 2024. Despite a stronger rebound in crypto, the growth in cryptocurrency deal size and valuations in Q2 and Q3 was consistent with growth in the venture capital space as a whole. Q3 deals had a median pre-money valuation of $23 million and an average deal size of $3.5 million.

Investment categories

Companies and projects in the “Trading/Exchanges/Investing/Lending” category raised the largest share of crypto venture capital (18.43%), totaling $462.3 million in Q3 2024. The two largest deals in this category were Cryptospherex and Figure Markets, which raised $200 million and $73.3 million, respectively.

In the third quarter of 2024, the financing funds of crypto startups building AI services increased by 5 times month-on-month. Among them, Sentient, CeTi and Sahara AI made significant contributions to the allocation of funds in this field, raising $85 million, $60 million and $43 million respectively. The investment funds of trading/exchange/investing/lending and Layer 1 crypto projects also increased by 50% month-on-month. The investment funds of Web3/NFT/DAO/Metaverse/gaming projects decreased by 39%, which was the largest month-on-month decline in venture capital funds among all categories.

If we further break down the larger categories in the above chart, Layer 1 projects raised the most crypto VC funding (13.6%) in Q3 2024, totaling $341 million. Within the Layer 1 category, the top two deals (Exochain and Story Protocol) raised a combined $183 million, or 54% of total Layer 1 VC funding in Q3 2024. Following Layer 1, cryptocurrency exchanges and infrastructure companies ranked second and third in terms of funding raised from crypto VC funding, at $265.4 million and $258 million, respectively.

In terms of transaction count, Web3/NFT/DAO/Metaverse/Gaming led with 25% of transactions (120), up 30% QoQ. The largest gaming transaction in Q3 2024 was Firefly Blockchain, which raised $50 million in Series B funding.

Crypto infrastructure projects and companies ranked second in terms of deal count, accounting for 16.5% (79) of the total deal count, up 12% month-over-month. Following closely behind, trading/exchange/investing/lending projects and companies ranked third in terms of deal count, accounting for 11.5% (55) of the total deal count. Notably, crypto companies in the media/education and data categories saw the largest month-over-month declines in deal count, down 73% and 57%, respectively.

Breaking down the broad categories in the above chart into more granular segments, crypto infrastructure projects and companies had the highest number of deals (64) across all categories. This was followed closely by gaming and DeFi-related crypto companies, which completed 48 and 38 deals, respectively, in Q3 2024.

Investment by company round and category

Breaking down investment capital and deal count by category and stage provides a clearer picture of what types of companies are raising capital in each category. The vast majority of capital in Layer 1, Enterprise Blockchain, and DeFi went to early-stage companies and projects in Q3 2024. In contrast, a large portion of crypto venture capital funding invested in mining went to later-stage companies.

Analyzing the distribution of investment capital at different stages within each category can reveal the relative maturity of various investment opportunities.

Similar to crypto VC capital in Q2 2024, a large portion of deals completed in Q3 involved early-stage companies. Total late-stage crypto VC deal volume across all categories was similar to Q2 2024.

Analyzing the share of deals completed by company stage within each category provides insight into the various stages within each investable category.

Investments by company geography

In Q3 2024, 43.5% of deals involved companies headquartered in the United States, followed by Singapore (8.7%), the United Kingdom (6.8%), the United Arab Emirates (3.8%), and Switzerland (3%).

Companies headquartered in the United States attracted 56% of all venture capital funding, up 5% from the previous month. The United Kingdom accounted for 11%, Singapore 7%, and Hong Kong 4%.

Investment and company age

Companies and projects founded in 2021 received the most funding, while those founded in 2022 saw the most deals.

Venture Capital Fund Financing

Fundraising for crypto venture funds remains challenging. The macro environment and crypto market volatility in 2022 and 2023 have made some asset managers reluctant to make the same level of commitments to crypto venture funds as they did in 2021 and early 2022. At the beginning of 2024, investors generally believed that interest rates would fall significantly in 2024, although the rate cuts did not begin to materialize until the second half of the year. Since the third quarter of 2023, total capital allocated to venture funds has continued to decline, and the amount of funds raised by new funds in the third quarter of 2024 reached the lowest level since the third quarter of 2020.

2024 is on track to be the weakest year for crypto venture capital fundraising since 2020, with just 39 new funds raising $1.95 billion, well below the levels seen during the frenzy of 2021-2022.

The decline in asset manager interest has resulted in fewer new crypto VC funds and smaller fund sizes being raised, with the median and average fund sizes in 2024 (as of the third quarter) reaching their lowest levels since 2017.

Summarize

Current crypto VC market sentiment and activity are well below bull market levels. While crypto markets have recovered from the lows of late 2022 and early 2023, VC activity has not picked up. The bull runs of 2017 and 2021 were characterized by a high correlation between VC activity and liquid crypto asset prices, but over the past two years, VC activity has been sluggish while cryptocurrencies have risen. The stagnation in VC investment is due to a variety of factors, including the "barbell market" in which Bitcoin (and its new ETF) has become the center, and marginal net new activity from Memecoin, which has difficulty in obtaining VC funding.

Early-stage deals continue to dominate the market. Despite headwinds for venture capital, interest in early-stage deals bodes well for the long-term health of the broader cryptocurrency ecosystem. While late-stage companies struggle to raise capital, entrepreneurs continue to find willing investors for new innovative ideas. In a tough fundraising environment, projects and companies building Layer 1s, scaling solutions, games, and infrastructure are all receiving good funding.

Bitcoin ETFs could put pressure on funds and startups. Several high-profile investments in spot Bitcoin ETFs by U.S. asset managers suggest that some large investors (pensions, endowments, hedge funds, etc.) may be investing in the crypto industry through large, liquid vehicles rather than seeking early-stage venture capital. While interest in new spot Ethereum ETFs has been very limited, Ethereum ETFs could also attract more attention if demand for investment in broader crypto categories such as DeFi and Web3 increases.

Although new small funds have started to secure some funding, fund managers are still facing a tough situation. The number of new funds formed and the capital allocated to these funds in the third quarter were at their lowest level in 4 years (since the third quarter of 2020). With fewer new small funds formed, general venture capital firms and asset managers remain less active in the market, and late-stage companies may continue to face difficulties when raising funds. If the regulatory approach to digital assets in the United States is significantly relaxed after the November 5 presidential election, late-stage companies may use the public markets as an alternative.

The United States continues to dominate the cryptocurrency startup ecosystem. Despite a hostile regulatory regime, U.S.-based companies and projects continue to receive the most capital. If the United States is to remain a hub for technological innovation in the long term, policymakers should be aware of how their actions or inactions will impact the cryptocurrency and blockchain ecosystem. Good news may be on the horizon, as both former President Donald Trump and current Vice President Kamala Harris have expressed support for the industry.