introduction
Bitcoin’s price has been trading in a fixed range since March, while other major cryptocurrencies have failed to regain previous all-time highs, causing venture capital activity to remain subdued in 2024.
The "dumbbell market" refers to the fact that on the one hand, Bitcoin is in a leading position, on the other hand, meme coins are highly active, coupled with the low interest of large investors and ordinary venture capital funds, making the overall crypto venture capital market in 2024 Relatively bland.
However, opportunities remain, especially with experienced managers in the crypto space dominating trading activity. Venture capital activity is likely to accelerate in the fourth quarter and into the first quarter of 2025 as interest rates fall and the regulatory environment potentially eases.
Our (Editor’s note: Alex Thorn & Gabe Parker’s) quarterly report analyzes two aspects of venture capital – venture fund investment in crypto startups, and institutional investors’ capital allocation to venture funds. The analysis is based on research from public filings, data providers such as Pitchbook, and Galaxy Research's own VisionTrack fund performance database.
Key takeaways
In the third quarter of 2024, venture capital investment in new crypto startups totaled $2.4 billion, a 20% decrease from the previous quarter, and a total of 478 transactions were completed, a decrease of 17% from the previous quarter.
In the first three quarters, venture capitalists have invested $8 billion in crypto startups, and total investment in 2024 is expected to be flat or slightly higher than in 2023.
Early-stage deals attracted the most funding (85%), while later-stage deals accounted for just 15%, the lowest level since Q1 2020.
Median venture capital valuations rose in the second and third quarters, with deal valuations in the crypto space growing faster than the venture capital industry as a whole. The median transaction 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, with most deals involving infrastructure, gaming, and DeFi projects and companies.
The United States continues to dominate the crypto venture capital space, with 56% of capital investments and 44% of deals involving U.S.-based companies.
When it comes to fundraising, investor interest remains subdued, with only eight new funds raising $140 million in the third quarter of 2024.
The median size of crypto VC funds continues to decline, with the median ($40 million) and average ($67 million) new funds in 2024 being the lowest since we started tracking in 2017.
venture capital
Transaction volume and investment capital
In the third quarter of 2024, venture capitalists invested $2.4 billion in new startups focusing on encryption and blockchain, a 20% decrease from the previous quarter, and a total of 478 transactions were completed, a decrease of 17% from the previous quarter.
2024 is expected to match or slightly exceed 2023 levels.
Investment Capital and Bitcoin Price
The long-term correlation between Bitcoin price and investment capital in crypto startups has been broken, with Bitcoin rising significantly since January 2023 while venture capital activity has struggled to keep pace.
Weak interest from allocators in the crypto space and overall venture capital, combined with the market favoring Bitcoin and ignoring many of the hot topics of 2021, could partially explain this disparity.
Invest by stage
In the third quarter of 2024, 85% of venture capital was invested in early-stage companies, while later-stage companies received only 15%.
Crypto-focused funds may still be able to draw on leftover capital from large capital raises a few years ago, and thanks to their strong ties to entrepreneurs, they will be able to tap into new trading opportunities from the renewed enthusiasm for crypto markets.
On the deal side, the share of deals in the pre-seed phase has declined slightly but remains at a healthy level compared to previous cycles.
Valuation and deal size
Venture capital-backed crypto company valuations fell significantly in 2023, reaching their lowest point since Q4 2020 in the fourth quarter.
However, valuations and deal sizes began to recover in the second quarter of 2024 as Bitcoin hit all-time highs. In the second and third quarters of 2024, valuations reached their highest levels since 2022.
The rise in crypto deal sizes and valuations in the second and third quarters is consistent with trends across the venture capital space, but the rebound in crypto has been more significant. The median pre-deal valuation in the third quarter was $23 million, and the average deal size was $3.5 million.
Invest by category
In the third quarter of 2024, companies and projects in the "Trading/Exchange/Investment/Lending" category received the most crypto venture capital funding, accounting for 18.43% of the total, raising a total of $462.3 million.
Among them, Cryptospherex and Figure Markets were the two largest deals in this category, raising $200 million and $73.3 million respectively.
In the third quarter of 2024, crypto startups focused on building AI services achieved a 5x sequential increase in crypto venture capital funding.
Sentient, CeTi and Sahara AI have contributed significantly to venture capital investment in AI crypto projects, raising US$85 million, US$60 million and US$43 million respectively. Venture capital funding for trading/exchanges/investing/lending and Layer 1 crypto projects also grew significantly by 50%.
Venture capital funds for Web3/NFT/DAO/Metaverse/game projects decreased by 39%, the largest decrease among all categories.
If the larger categories are further broken down, crypto projects building Layer 1 blockchains accounted for the most crypto venture capital in the third quarter of 2024, reaching 13.6%, totaling $341 million.
In the Layer 1 category, Exochain and Story Protocol were the top two deals, raising a combined $183 million, accounting for 54% of total Layer 1 venture capital funding during the quarter. They were followed by crypto exchanges and infrastructure companies, which raised $265.4 million and $258 million respectively.
In terms of the number of transactions, the Web3/NFT/DAO/Metaverse/Game sector ranked first with 25% of the transaction volume (120 transactions in total), a month-on-month increase of 30%, of which 48 were game transactions.
The largest gaming deal of Q3 2024 was Firefly Blockchain raising $50 million in its Series B funding round.
Crypto infrastructure projects and companies ranked second in the number of transactions, accounting for 16.5% of the total transactions (79 transactions in total), an increase of 12% month-on-month.
Followed closely by projects and companies in trading/exchange/investment/lending products, ranking third with 11.5% of transaction volume (55 transactions in total). It is worth noting that crypto companies focused on media/education and data businesses experienced the largest month-on-month declines in the number of transactions, with a decrease of 73% and 57% respectively.
If you break down the larger categories further, projects and companies building crypto infrastructure had the highest number of deals (64 total) across all sectors.
Gaming and DeFi-related crypto companies followed suit, completing 48 and 38 transactions respectively in Q3 2024.
Investments by stage and category
By breaking down invested capital and deal volume by category and stage, you can get a clearer picture of which types of companies in each category are raising capital.
In the third quarter of 2024, most of the funds invested in Layer 1, enterprise blockchain and DeFi flowed to early-stage companies and projects. In the mining space, a larger proportion of crypto venture capital funds flow to later-stage companies.
Analyzing the distribution of investment capital in each category at different stages can reveal the relative maturity of various investment opportunities.
Similar to Q2 2024, a large portion of deals completed in Q3 2024 involved early-stage companies. The total value of late-stage crypto venture capital deals across all categories remained unchanged from Q2 2024.
Studying the proportion of deals completed by stage within each category provides insight into the different stages of development of each investable category.
Investment situation by geographical location
In the third quarter of 2024, 43.5% of transactions involved companies headquartered in the United States. Singapore ranked second with 8.7%, followed by the United Kingdom at 6.8%, the United Arab Emirates at 3.8%, and Switzerland at 3%.
Venture capital investment in U.S. companies accounted for 56% of total investment, an increase of 5% from the previous quarter. The United Kingdom accounts for 11%, Singapore accounts for 7%, and Hong Kong accounts for 4%.
Investment status by year of establishment
Companies and projects founded in 2021 received the most investment capital, while companies founded in 2022 closed the most deals.
Venture capital financing situation
Raising capital for crypto venture funds remains challenging.
The macro environment in 2022 and 2023 and the turmoil in the crypto market have caused some investors to no longer actively invest in crypto ventures as they were in 2021 and early 2022.
At the beginning of 2024, investors generally expected interest rates to fall significantly during the year, but the rate cuts did not begin to materialize gradually until the second half of the year.
Total capital allocated to venture funds has continued to decline since Q3 2023, with the number of new funds raised in Q3 2024 being the lowest since Q3 2020.
On an annualized basis, 2024 could be the weakest year for crypto venture capital fundraising since 2020, with just 39 new funds raising $1.95 billion, well below the boom of 2021-2022.
Declining allocator interest has led to fewer new cryptocurrency VC funds raising smaller funds, with median and average fund sizes in 2024 (as of Q3) reaching their lowest levels since 2017.
Summarize
Market sentiment and activity remain well below bull market levels.
Although liquid crypto asset markets have recovered significantly since late 2022 and early 2023, venture capital activity remains below previous bull market levels.
During the bull markets of 2017 and 2021, venture capital activity was highly correlated with liquid crypto asset prices, but over the past two years, venture capital activity has remained subdued even as the cryptocurrency market has rebounded.
There are many reasons for this stagnation, including a "barbell market" in which Bitcoin (and its new ETFs) takes center stage, while new activity on the fringes comes largely from memecoins that are difficult to fund and have questionable longevity.
Early-stage deals continue to lead the way.
Despite the challenges faced by venture capital, interest in early-stage deals remains strong, boding well for the long-term health of the cryptocurrency ecosystem.
While late-stage companies have trouble raising capital, entrepreneurs are still able to find backers willing to invest in new innovative ideas.
In a tough funding environment, projects and companies focused on building Layer 1, scaling solutions, games, and infrastructure are doing well.
Bitcoin ETFs could weigh on funds and startups.
Several high-profile investments in spot Bitcoin ETFs by some U.S. investors (such as pension funds, endowments, hedge funds, etc.) indicate that they may be more inclined to enter the field through these large liquidity vehicles rather than choosing early-stage venture capital.
While interest in the newly launched spot Ethereum ETF has been muted, an Ethereum ETF could also attract some of the money that would otherwise go to venture capital if demand increases for other crypto areas like DeFi and Web3.
Fund managers continue to face a difficult environment, although some new smaller funds are starting to have some success raising capital.
The number of new funds and capital allocated to these funds reached their lowest levels in four years (since Q3 2020) in the third quarter.
Late-stage companies are likely to continue to face difficulties as fewer and smaller new funds are launched, and as regular venture investors and capital allocators remain inactive in the market.
If U.S. regulations on digital assets loosen significantly after the November 5 presidential election, late-stage companies may consider public markets as an alternative.
The United States continues to dominate the crypto startup ecosystem.
Despite facing a complex and often unfriendly regulatory environment, U.S.-based companies and projects account for the majority of deals and investments.
If the United States hopes to remain at the center of technological innovation over the long term, policymakers should be aware of the impact their actions or inactions may have on the cryptocurrency and blockchain ecosystem.
There may be good news ahead, as former President Donald Trump and current Vice President Kamala Harris have each expressed sentiments ranging from extremely supportive to mildly supportive of the industry.
This article is reproduced in cooperation with: Shenchao
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