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

• Crypto VCs invested $2.4 billion in the third quarter of 2024, a 20% drop compared to the third quarter.

• The industry is on track to barely get more funding than in 2023.

• High interest rates, spot crypto ETFs, and the hangover from 2022 are keeping allocators away from the industry.

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

Venture capital firms invested $2.4 billion in cryptocurrency startups this quarter across 478 deals, according to a new report from crypto investment firm Galaxy Digital. That’s a 20% drop from the second quarter of the year in terms of funding, and a 17% decrease in the number of deals.

With $8 billion invested over the course of the year’s first three quarters, the industry is on course to barely get more funding in 2024 than it received in 2023. Those numbers are a far cry from the deals that crypto reaped in 2021 and 2022, when the industry saw more than $30 billion across 3,000 deals each year.

“Allocator interest in crypto VC and venture capital more broadly is down from prior years,” Alex Thorn, head of firmwide research at Galaxy Digital, told CoinDesk, referring to the institutional allocators that venture investors themselves raise funds from.

The reasons for that lack of interest? High interest rates have made venture funds less attractive, Thorn said, and spot bitcoin (BTC) and ether (ETH) exchange-traded funds (ETFs) offer new avenues to gain exposure to crypto. Not to mention that the industry’s various collapses in 2022 are still fresh in everyone’s minds.

“This leaves venture investors struggling to find large sources of capital to launch new fund vehicles, leading to a tightening of the crypto venture investing market,” Thorn said.

But the ETF-driven market surge is “leading to increased competition among surviving crypto VCs for deal flow and putting entrepreneurs in the driver’s seat when it comes to valuation,” Thorn added.

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

Allocating capital

The majority of capital went to early stage firms – meaning to startups that are still developing their product and business model. They received 85% of capital investment, whereas later-stage companies, which generally already have a well-known product and brand, only received 15% of capital.

Whereas crypto company valuations cratered in 2023, they bounced back in the second quarter of 2024, and have held firm in the third quarter, with a median pre-money valuation of $23 million and an average deal size of $3.5 million.

Some sectors of the crypto ecosystem saw more interest than others. Crypto exchanges, lending, investing and trading platforms raised 18% of VC capital, over $460 million. Layer 1 projects came in next, at roughly $440 million, then Web3/Metaverse projects, at about $360 million, then infrastructure projects at $340 million. Meanwhile, projects combining crypto and artificial intelligence (AI) took in about $270 million – five times more than in the previous quarter, Galaxy said.

Unsurprisingly, the U.S. led the way in terms of investment – providing 56% of all capital – and accounted for 44% of all crypto deals. The United Kingdom was a distant second in terms of capital, 11%, and placed third in terms of deals, accounting for 6.8% of them. Singapore-based VCs provided 7% of all capital, but struck 8.7% of all deals.

Fundraising for crypto venture funds proved challenging, the report said, with only $140 million raised across eight new funds. “On an annualized basis, 2024 is shaping up to be the weakest year for crypto VC fundraising since 2020, with only 39 new funds raising $1.95 billion, well below the frenzy of 2021-2022,” the report said.