Galaxy Digital, a global crypto-focused financial services firm, released a research in July 2024 that shows venture capital market in crypto rebounded and is up nearly 30% quarter-on-quarter in 2024.
PitchBook also released similar reports stating that investors are warming up to Bitcoin again after the recent bitcoin rally and the SEC’s approval of bitcoin exchange-traded funds.
As the market struggled over the past few years, crypto start-up projects grappled to raise money. With investors playing safe with their remaining capital, demand for new projects has been low since 2022. As the market begins to pick up, a change could be on the horizon.
GALAXY DIGITAL RAISES $113M FOR CRYPTO VC FUND
Galaxy Digital has raised $113 million in the first close of its new venture capital fund, aiming for a total of $150 million.
The capital will be invested in early-stage crypto startups, supporting innovation in the blockchain… pic.twitter.com/7wsnTGDdei
— Crypto Town Hall (@Crypto_TownHall) July 25, 2024
Venture capitalists (VCs) have been investing into crypto-related projects at an increased rate this year which has seen $3.2 billion worth of investments in the second quarter of this year alone. It is the largest amount for per quarter since 2022. This is an increase on Q1, which saw VCs pump $2.5 billion into various digital asset projects.
This data comes via a “Crypto & Blockchain VC quarterly report” by Galaxy Research, the research arm of New York-based venture capitalist group. As per its website, Galaxy has an AUM (assets under management) totalling $4.6 billion. The firm also has more than 1100 institutional trading counterparties, making Galaxy one of the world’s leading liquidity providers in the digital asset space.
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Despite A Low Sentiment Low On NFTs And Metaverse, Crypto Is Still The Go-To Investment For VCs
One extremely interesting find within the report is that the sector with the highest investment in Q2 2024 was the Web3/NFT/DAO/Metaverse/Gaming category. At the same time that meme coins and Artificial Intelligence (AI) tokens have been in the spotlight recently, many NFTs have seen a sharp drop-off in value. Also, the Metaverse/Gaming sector is deathly quiet, in stark contrast to its hype during 2021. Therefore, it is a surprise to see that this category raised the largest share of crypto VC capital in Q2 2024 (24%), amounting to $758m in VC fundraising.
(From Galaxy Research Crypto & Blockchain VC Q2 2024 Report)
Within Galaxy Research’s latest Crypto VC report, these are some of the notable key findings listed;
- The crypto venture capital sentiment continues to improve, though levels remain significantly lower than the 2021-2022 bull market. With BTC & ETH rising ~50% YTD, capital invested is up 28% QoQ while deal count is mostly flat. If this pace holds through the end of the year, 2024 will see the third-highest investment capital and deal count behind 2021 and 2022.
- Web3 and Layer 1s saw notable investment. The Web3 category led the way with about $750m raised, driven by Farcaster ($150m) and Zentry ($140m). Layer1s notably came in fourth with $371m, led by the Monad ($225m) and Berachain ($100m) deals.
- Bitcoin L2s continue to see significant investment. Bitcoin Layer 2 companies and projects raised $94.6m, up 174% QoQ. Investor excitement remains high that more composable blockspace will emerge in the Bitcoin ecosystem, attracting models like DeFi and NFTs back to the Bitcoin ecosystem. Our internal research suggests there are at least 65 projects identifying themselves as “Bitcoin Layer 2s.”
- The US continues to dominate the crypto startup ecosystem. While the US maintains clear leads in deals and capital, regulatory headwinds could force more companies to move abroad. Policymakers should be conscious of how their actions or inactions could impact the cryptocurrency and blockchain ecosystem if the US is to remain the center of technological and financial innovation over the long-term.
Alternative View On Rise Of Crypto VCs – Is It Bad For Business?
We are facing a systemic issue that’s stifling true innovation and retail participation.
The current VC model is not just unfair; it’s undermining the long-term viability of the crypto ecosystem.
An example is @Starknet
Why launching tokens is broken and how crypto VCs are… pic.twitter.com/7ZgaHbT0rI
— arndxt (@arndxt_xo) July 20, 2024
With VC investments in crypto on the rise, a wider discussion has opened up. Many believe that the investments are bad for crypto projects, with an ever increasing amount of projects launching at staggering market caps (sometimes in the billions).
An interesting thread on this topic was posted to X by the user, arndxt_xo. The thread succinctly breaks down the overarching issue with VC raises right now. An excerpt from the full thread reads;
“We are facing a systemic issue that’s stifling true innovation and retail participation. The current VC model is not just unfair; it’s undermining the long-term viability of the crypto ecosystem. An example is Starknet. Why launching tokens is broken and how crypto VCs are manipulating the market.”
It is being pointed out that all upside is taken by insiders and VCs before retail investors can even participate. This creates a cycle where the average investor becomes exit liquidity for well-connected players.
The process typically unfolds like this:
a) VCs pump billions into unproven projects
b) Projects list on exchanges at inflated valuations
c) Market makers maintain artificially high market caps
d) Retail investors buy in, providing exit liquidity
e) Price collapses
Let’s look at a case study: Starknet, an Ethereum L2 solution. Despite minimal adoption (15,000 active accounts, hundreds of weekly users), it achieved an $8B valuation in 2022. $STRK market cap at launch: $2.8B. Current market cap: $800M. This dramatic decline exemplifies the larger issue plaguing the crypto industry.
This pattern repeats across numerous projects, creating a market where:
- VCs and insiders capture most gains
- Retail investors face significant downside risk
- True price discovery is inhibited
The full thread can be found here and is well worth a read for an alternative view on VC raises in crypto.
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Disclaimer: Crypto is a high-risk asset class. This article is provided for informational purposes and does not constitute investment advice. You could lose all of your capital.