According to Galaxy Digital, cryptocurrency venture capital investment continued to recover in the second quarter despite the market downturn, with founders and investors reporting an overall more active funding environment compared to the previous quarter.
“Crypto venture capital sentiment continues to improve, but levels remain well below those seen during the 2021-2022 bull market,” Galaxy Digital research analysts Alex Thorn and Gabe Parker wrote in a Tuesday report shared with The Block.
Galaxy reported that venture capitalists invested $3.19 billion in cryptocurrency and blockchain-focused companies in Q2. The figure is consistent with The Block Pro’s funding dashboard, and is up slightly from $3.16 billion in Q1.
Quarterly Venture Funding by Category. Image: The Block Pro.
The median deal size also rose slightly, from $3 million to $3.2 million. However, the median pre-money valuation jumped to a near-record high of $19 million to $37 million in the quarter, analysts said.
“With mainstream VCs still largely on the sidelines, crypto-focused VCs are in a more competitive environment, offering founders more leverage in their negotiating terms,” they added. “This suggests that the resurgence of crypto markets over the past few quarters has created significant competition and FOMO (Fear of Missing Out) among investors, despite a lack of available investment capital compared to previous peaks.”
Valuation and deal size. Image: Galaxy Research.
According to The Block Pro’s funding dashboard, overall crypto venture deals increased by 8% in terms of deal count from 682 in Q1 to 739 in Q2. This is slightly below the record 775 deals recorded in Q2 2022.
Quarterly venture deals are calculated by category. Image: The Block Pro.
“If this pace continues through the end of the year, 2024 will see the third-highest investment capital and number of deals, following 2021 and 2022,” the analysts predicted.
Web3, Layer 1, Bitcoin Layer 2, and early-stage trading are leading the way.
Web3 led the venture funding category in Q2, raising $495.5 million, according to funding data from The Block Pro. That followed a $150 million round for its Web3 social media platform, Farcaster, Thorn and Parker said.
According to analysts, Layer 1 raised $371 million in Q2, led by Monad with $225 million and Berachain with $100 million.
According to Galaxy, so-called Bitcoin Layer 2s also saw significant investment in Q2, with projects raising $94.6 million, up 174% quarter-over-quarter. “Investor expectations remain high that more configurable blockchain space will emerge in the Bitcoin ecosystem, leading to a return of models like DeFi and NFTs to the Bitcoin ecosystem,” Thorn and Parker said. “Our internal research indicates that at least 65 projects are identifying themselves as ‘Bitcoin Layer 2’.”
According to Galaxy’s data, early-stage deals accounted for the majority of invested capital during the quarter, accounting for 78% of the total, while pre-seed deals accounted for 13%. “The continued interest in early-stage deals bodes well for the long-term health of the broader crypto ecosystem. While some later-stage companies are struggling to raise capital, entrepreneurs are finding people willing to invest in new and innovative ideas,” the analysts said.
But while the U.S. has the upper hand in terms of transaction volume and investment capital, regulatory headwinds could push more companies overseas, Thorn and Parker suggest. “Policymakers need to recognize how their actions or inactions could impact the cryptocurrency and blockchain ecosystem if the U.S. is to remain a hub for technological and financial innovation in the long term.”
Correlation between Bitcoin Price and Venture Capital Break
Analysts have noted that the years-long correlation between Bitcoin prices and venture capital investment has broken down this year, with venture capital investing struggling to keep up.
Bitcoin and the broader cryptocurrency markets had a strong start to the year, but struggled to regain momentum in the second quarter after Bitcoin hit its latest all-time high of $73,836 on March 14, trading in the $60,000 to $70,000 range.
The largest cryptocurrency by market cap is currently trading at $60,117, up 43% since the beginning of the year but down 12% in Q2, according to The Block’s Bitcoin price page. Meanwhile, the GMCI 30 Index, which selects the top 30 cryptocurrencies, is up 30% since the beginning of the year but down 18% in Q2.
“While BTC has risen significantly YTD, invested capital has increased but remains well below where BTC was last trading above $60,000 in 2021-2022,” the analysts wrote, suggesting catalysts such as Bitcoin ETFs, pressure from crypto startup bankruptcies, regulatory concerns, and macroeconomic headwinds have contributed to the divergence.
However, “allocators may be gearing up for a full-blown comeback due to the resurgence of liquid cryptocurrencies, which could potentially lead to increased venture capital activity in the second half of the year,” they added.
Crypto venture capital and bitcoin price. Image: Galaxy Research.
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