Venture Capital investment in cryptocurrencies decreased by 20% in Q3 2024, down to $2.4 billion, due to market polarization, with Bitcoin and memecoins attracting most of the capital while mid-tier projects were "overlooked".
Venture Capital (VC) investment in the cryptocurrency sector decreased by 20% in Q3 2024, down to $2.4 billion compared to the previous quarter, according to the latest report from Galaxy Digital. This decline is attributed to the clear polarization trend in the market, with Bitcoin and high-risk memecoins attracting the majority of capital, while mid-tier projects struggled to secure funding.
The report, released on October 15 by Alex Thorn, Head of Research, and Gabe Parker, Analyst at Galaxy Digital, shows that the number of VC deals also decreased by 17%, with only 478 transactions completed in the quarter.
However, the $2.4 billion figure is still 21.5% higher than the same period last year, indicating that the long-term growth potential of the cryptocurrency sector is still recognized by investors.
The "barbell" market negatively impacts mid-tier projects
The authors of the report attribute the stagnation in the cryptocurrency VC market to several factors, with the "barbell" trend being the most prominent. This trend shows that capital is primarily concentrated on Bitcoin (and related ETFs) at one end and speculative memecoins at the other, neglecting mid-tier projects and tokens - the usual targets for VC funding.
The strong demand for Bitcoin ETFs from large institutional investors such as pension funds and hedge funds has made them less interested in investing in early-stage cryptocurrency startups.
The report also notes that the correlation between Bitcoin's price and cryptocurrency VC investment has "broken down" after years of being closely linked. "The weak allocation of capital to venture capital in general and cryptocurrencies in particular, combined with the market's Bitcoin-centric narratives, has caused many of the hot trends from 2021 to be forgotten," Thorn and Parker observed.
While the demand for Ether ETFs remains weak, Galaxy predicts that the increasing adoption of Ether could further reduce interest in decentralized finance (DeFi) and Web3.
In Q3, early-stage deals accounted for 85% of the total capital raised, with the majority of the funds going to cryptocurrency exchanges, trading firms, and Layer 1 blockchain projects. Notably, cryptocurrency companies integrating artificial intelligence (AI) services achieved exceptional growth, with funding increasing fivefold compared to the previous quarter. Some notable deals include Sentient ($85 million), CeTi ($60 million), and Sahara AI ($43 million).
Geographically, cryptocurrency companies in the US accounted for 56% of the total VC investment, up from 43.5% in the 478 deals completed in Q3. Singapore and the UK followed with 8.7% and 6.8%, respectively. The United Arab Emirates (UAE) and Switzerland rounded out the top 5.
Galaxy forecasts that VC investment could accelerate in Q4 2024 and Q1 2025, driven by lower interest rates and the potential for a more relaxed regulatory environment.
