Crypto VC Market ‘Tepid’ as Q3 Investments Declined 20%, Says Galaxy Digital

As a seasoned analyst with over two decades of experience in the financial markets, I’ve witnessed numerous bull and bear cycles, and the current state of crypto VC funding is reminiscent of the dot-com bubble burst in 1999. The drop in investments by 20% this quarter, combined with the projected annual funding barely surpassing that of 2023, is a stark reminder of the market’s volatility and the need for caution.

Crypto venture capital activity has remained quiet in 2024, in particular during the third quarter.

This quarter, venture capital companies poured approximately $2.4 billion into cryptocurrency startups, as per a recent report by crypto investment firm Galaxy Digital. This represents a 20% reduction compared to the second quarter of the year regarding funding, and a decline of 17% in the number of deals made.

Based on the $8 billion invested during the first three quarters of this year, the industry is projected to receive only slightly higher funding in 2024 compared to what it got in 2023. This amount pales in comparison to the deal values that the crypto sector enjoyed in 2021 and 2022, where the industry saw annual investments exceeding $30 billion across around 3,000 different deals each year.

According to Alex Thorn, the head of research at Galaxy Digital, the enthusiasm among institutional investors for cryptocurrency VC and venture capital as a whole has decreased compared to previous years. This refers to the larger investment firms that these venture capitalists rely on for funding.

Thorn explained that the lack of interest could be due to high interest rates reducing appeal for venture funds, and also because exchange-traded funds (ETFs) based on bitcoin (BTC) and ether (ETH) have emerged as alternative methods to invest in cryptocurrencies. Furthermore, the recent collapses within the industry in 2022 are still vivid memories.

Thorn stated that there’s a challenge for venture investors in locating substantial funds for starting new investment vehicles, which results in a shrinking supply in the cryptocurrency venture investment sector.

However, as a result of the growth in the ETF market, there is an escalating rivalry among cryptocurrency venture capitalists for investment opportunities (deal flow), giving entrepreneurs more control over the appraisal process. This was stated by Thorn.

“It’s a great time to be a founder if you can source investment capital,” he said.

Allocating capital

A significant portion of the funding was directed towards fledgling businesses, specifically those in the initial stages of producing their product and establishing their business model. These startups accounted for approximately 85% of the total investment, while more established companies with recognized products and brands took in only about 15%.

Despite crypto company valuations plummeting in 2023, they rebounded during the second quarter of 2024 and have maintained their strength in the third quarter. The median pre-money valuation currently stands at $23 million, while the average deal size is around $3.5 million.

In the realm of cryptocurrencies, certain areas experienced a higher surge of attention compared to others. Crypto trading platforms, exchanges, lending, and investment services managed to secure 18% of venture capital investments, amounting to over $460 million. Following closely were Layer 1 projects with approximately $440 million, then Web3/Metaverse projects at around $360 million, and infrastructure projects garnered $340 million. Meanwhile, ventures merging crypto and artificial intelligence (AI) saw a substantial increase in funding, with about $270 million – fivefold the amount from the previous quarter, as reported by Galaxy.

It’s not surprising that the U.S. took the lead in investment, contributing about 56% of all capital and being involved in around 44% of all crypto deals. The United Kingdom followed at a significant distance, providing approximately 11% of the capital and accounting for 6.8% of the transactions. Singaporean VCs were next in terms of capital contribution (7%) but managed to participate in nearly 8.7% of all deals.

2024 is looking like a slow year for cryptocurrency venture capital funding, according to the report, as just $140 million was raised among eight new funds – making it the weakest annual performance since 2020. The report further predicts that by the end of 2024, a total of only 39 new crypto VC funds will have been established, raising a combined $1.95 billion. This is significantly less than the investment boom experienced in 2021 and 2022.