Author: Alex Thorn, Gabe Parker, Galaxy

Compiled by: Luffy, Foresight News

Since March of this year, Bitcoin has been in a range-bound state, and other major liquid cryptocurrencies have also failed to return to historical highs. In this context, venture capital activity has been somewhat tepid this year. In the "barbell market," Bitcoin leads the way, while Memecoins drive activity on the other end of the barbell. Coupled with the lack of interest from large asset managers and ordinary venture funds, the crypto venture capital market has remained lukewarm throughout 2024. Nevertheless, opportunities abound, with crypto-native institutions taking the lead in investment activities. Expectations of declining interest rates and a relaxed regulatory environment may accelerate venture capital activities in the fourth quarter of this year and the first quarter of next year. Our quarterly report utilizes research from public documents, data providers like Pitchbook, and Galaxy Research's VisionTrack fund performance database to analyze two aspects of the crypto venture capital market: venture funds' investments in crypto startups and institutional investors' asset allocation to venture funds.

Key Points

• In the third quarter of 2024, crypto startups received a total of 478 venture capital investments (a 17% decrease quarter-over-quarter), amounting to $2.4 billion (a 20% decrease quarter-over-quarter).
• Over the past three quarters, venture capital institutions have invested a total of $8 billion in crypto startups, with expectations that investment levels in 2024 will be on par with or slightly exceed those of 2023.
• Early rounds accounted for the majority of capital investment (85%), while late rounds only accounted for 15%, marking the lowest level since the first quarter of 2020.
• In the second and third quarters, the median project valuation in the venture capital space increased, and the rate of increase outpaced that of the overall venture capital industry. 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, with most investments involving infrastructure, gaming, and DeFi projects and companies.
• The United States continues to dominate the cryptocurrency venture capital market, with the majority of capital investments (56%) and transactions (44%) involving companies headquartered in the U.S.
• In terms of fundraising, the interest from asset allocators remains lukewarm, with only 8 new funds raising $140 million in the third quarter of 2024.
• The median size of crypto venture capital funds continues to decline, with the median size of new funds in 2024 ($40 million) and the average size ($67 million) both reaching the lowest levels since 2017.

Venture Capital

Number of Transactions and Investment Capital

In the third quarter of 2024, venture capitalists invested $2.4 billion in crypto and blockchain-focused startups, with a total of 478 transactions (a 20% decrease quarter-over-quarter).

Venture capital transaction volumes in 2024 are expected to reach or slightly exceed those of 2023.

Investment Capital and Bitcoin Price

The long-standing correlation between Bitcoin prices and capital invested in crypto startups has been broken. Since January 2023, Bitcoin has surged significantly, while venture capital activity has not kept pace. The weak interest from asset managers in crypto venture capital, combined with a market narrative favoring Bitcoin while neglecting many popular narratives since 2021, partially explains the breakdown in the correlation between investment capital and Bitcoin prices.

Investment Rounds

In the third quarter of 2024, 85% of venture capital was allocated to early-stage companies, while 15% went to late-stage companies. Crypto-native funds may still be able to leverage capital from large-scale financing done a few years ago, as they seek new opportunities arising from the resurgence of cryptocurrencies.

In terms of transactions, the share of pre-seed transactions has slightly decreased but remains healthy compared to previous cycles.

Valuation and Transaction Size

In 2023, the valuations of venture-backed cryptocurrency companies saw a significant decline, reaching the lowest levels since the end of 2020 in the fourth quarter of 2023. However, as Bitcoin prices hit all-time highs, valuations and transaction sizes began to rebound in the second quarter of 2024. In the second and third quarters of 2024, valuations reached their highest levels since 2022. Despite a stronger rebound in cryptocurrencies, the growth in transaction sizes and valuations in the second and third quarters aligns with the overall growth in the venture capital space. The pre-investment median valuation for transactions in the third quarter was $23 million, with an average transaction size of $3.5 million.

Subcategories of Investment

In the third quarter of 2024, the "Trading/Exchange/Investment/Lending" category accounted for the largest share of crypto venture capital raised (18.43%), totaling $462.3 million. The two largest transactions in this category were Cryptospherex and Figure Markets, which raised $200 million and $73.3 million, respectively.

In the third quarter of 2024, funding for crypto startups building AI services increased fivefold quarter-over-quarter. Notably, Sentient, CeTi, and Sahara AI made significant contributions to funding in this area, raising $85 million, $60 million, and $43 million, respectively. Investment funds for Trading/Exchange/Investment/Lending and Layer 1 crypto projects also increased by 50% quarter-over-quarter. Conversely, investment funds for Web3/NFT/DAO/Metaverse/Gaming projects decreased by 39%, marking the largest quarter-over-quarter decline in venture capital funding among all categories.

If we further break down the larger categories shown above, Layer 1 projects raised the most crypto venture capital in the third quarter of 2024 (13.6%), totaling $341 million. The top two transactions in the Layer 1 category (Exochain and Story Protocol) raised a combined $183 million, accounting for 54% of the total Layer 1 venture capital funding in the third quarter of 2024. Following Layer 1, cryptocurrency exchanges and infrastructure companies ranked second and third in terms of funds raised from crypto venture capital, with $265.4 million and $258 million, respectively.

In terms of transaction volume, Web3/NFT/DAO/Metaverse/Gaming led with 25% of the total transactions (120 deals), reflecting a 30% quarter-over-quarter increase. The largest transaction in the gaming sector in the third quarter of 2024 was Firefly Blockchain, which raised $50 million in Series B funding.

Crypto infrastructure projects and companies ranked second in transaction volume, accounting for 16.5% of total transactions (79 deals), with a 12% quarter-over-quarter increase. Following closely, Trading/Exchange/Investment/Lending projects and companies ranked third in transaction volume, accounting for 11.5% of total transactions (55 deals). Notably, the media/education and data categories saw the largest quarter-over-quarter declines in transaction volume among crypto companies, decreasing by 73% and 57%, respectively.

The larger categories shown above can be further subdivided into more refined submarkets, with crypto infrastructure projects and companies leading in transaction volume across all categories (64 transactions). Following closely are gaming and DeFi-related crypto companies, which completed 48 and 38 transactions, respectively, in the third quarter of 2024.

Investment by Company Stage and Category

By categorizing investment capital and transaction numbers by category and stage, we can gain a clearer understanding of which types of companies are raising funds within each category. In the third quarter of 2024, the vast majority of capital for Layer 1, enterprise blockchain, and DeFi flowed to early-stage companies and projects. In contrast, a significant portion of venture capital funding for mining went to late-stage companies.

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

Similar to the crypto venture capital capital in the second quarter of 2024, a large portion of the transactions completed in the third quarter involved early-stage companies. The total amount of late-stage crypto venture capital transactions across all categories was comparable to that of the second quarter of 2024.

Analyzing the share of transactions completed by company stage within each category provides deeper insights into the various stages of each investable category.

Investment by Geographic Location

In the third quarter of 2024, 43.5% of transactions involved companies headquartered in the United States, followed by Singapore (8.7%), the United Kingdom (6.8%), the UAE (3.8%), and Switzerland (3%).

Companies based in the United States attracted 56% of all venture capital funding, a slight quarter-over-quarter increase of 5%. The UK accounted for 11%, Singapore for 7%, and Hong Kong for 4%.

Investment and Company Age

Companies and projects established in 2021 received the most funding, while those founded in 2022 had the highest number of transactions.

Venture Capital Fundraising

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

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

The decline in interest from asset managers has led to fewer new crypto venture funds and smaller fund sizes, with the median and average fund sizes in 2024 (as of the third quarter) reaching their lowest levels since 2017.

Conclusion

The current sentiment and activity level in the crypto venture capital market are far below bull market levels. While the crypto market has emerged from the lows of late 2022 and early 2023, venture capital activity has not rebounded. The bull markets of 2017 and 2021 were characterized by a high correlation between venture capital activity and the prices of liquid crypto assets, but over the past two years, venture capital activity has remained sluggish while cryptocurrencies have risen. The stagnation in venture capital is due to various factors, including Bitcoin (and its new ETFs) becoming the center of the "barbell market," along with marginal new activity from Memecoins, which find it difficult to secure venture capital funding.

Early-stage transactions continue to dominate the market. Despite the challenges facing venture capital, interest in early-stage deals still bodes well for the long-term health of the broader cryptocurrency ecosystem. While late-stage companies struggle to raise funds, entrepreneurs are still seeking investors willing to back new innovative ideas. In this tough fundraising environment, projects and companies building Layer 1, scaling solutions, gaming, and infrastructure have secured good funding.

Bitcoin ETFs may put pressure on funds and startups. The high-profile investments by U.S. asset managers in spot Bitcoin ETFs suggest that some large investors (pension funds, endowments, hedge funds, etc.) may be looking to invest in the crypto industry through large, liquid instruments rather than seeking early-stage venture capital. While interest in new spot Ethereum ETFs is very limited, if demand for investments in broader crypto categories like DeFi and Web3 increases, Ethereum ETFs may also attract more attention.

Although newly established small funds have begun to secure some funding, fund managers still face a tough situation. The number of newly established funds and the capital allocated to these funds in the third quarter are at their lowest levels in four years (since the third quarter of 2020). With the decrease in the number of newly established small funds, traditional venture capital firms and asset managers remain relatively inactive in the market, and late-stage companies may continue to face challenges in fundraising. If the regulatory approach to digital assets in the U.S. is significantly relaxed after the presidential election on November 5, late-stage companies may look to the public markets as an alternative.

The U.S. continues to dominate the cryptocurrency startup ecosystem. Despite a hostile regulatory environment, companies and projects based in the U.S. still attract the most capital. If the U.S. is to maintain its position as a long-term center for technological innovation, policymakers should recognize how their actions or inactions will impact the cryptocurrency and blockchain ecosystem. There may be good news on the horizon, as former President Donald Trump and current Vice President Kamala Harris have both expressed support for the industry.

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