Crypto venture capital funding declined 20% to $2.4 billion in the third quarter from the previous one, driven by a “barbell market” where Bitcoin and high-risk memecoins led, and mid-tier projects seeking funding were overlooked, Galaxy Digital said.
The funding drop was accompanied by a 17% decrease in deals, with 478 made during Q3, the crypto investment firm’s head of research Alex Thorn and research analyst Gabe Parker wrote in an Oct. 15 report.
Still, the $2.4 billion in Q3 funding was a 21.5% increase from the year-earlier quarter.
“The venture stagnation is due to several factors, including a ‘barbell market’ that has seen Bitcoin (and its new ETFs) in center stage and marginal net new activity coming from memecoins, which are difficult to fund and have questionable longevity,” the pair wrote.
Crypto venture capital funding amounts and deal count quarter-on-quarter since 2016. Source: Galaxy Digital
This has led to “minimal interest” from large allocators, keeping the crypto market mostly “tepid” in 2024, the report added.
A typical crypto barbell portfolio consists of investing in large market cap cryptocurrencies like Bitcoin (BTC) and Ether (ETH) alongside speculative tokens such as memecoins — neglecting mid-sized utility tokens and projects that often seek VC funding.
Galaxy’s report said high demand for spot Bitcoin exchange-traded funds from big investors like pension and hedge funds may have led them to neglect early-stage crypto VC investing.
Thorn and Parker added that the multi-year correlation between Bitcoin’s price and crypto VC funding has consequently “broken down.”
“Weak allocator interest in crypto venture, and venture broadly, combined with market narratives that favor Bitcoin and have left out many of the hot narratives from 2021 can partially explain the divergence.”
While spot Ether ETF demand has been “minimal” so far, increased adoption could drive VC interest even further away from crypto-native decentralized finance and Web3, Galaxy suggested.
Early-stage deals captured the most capital investment at 85% in Q3, with most of the total capital raised by crypto exchanges, crypto trading firms and companies behind layer 1 blockchains.
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Crypto firms that integrated artificial intelligence services gained a lot of ground, with a five-fold quarter-on-quarter increase in VC funding.
Share of crypto VC by company type in Q3 2024. Source: Galaxy Digital
Among the biggest contributors were Sentient, CeTi and Sahara AI, which raised $85 million, $60 million, and $43 million respectively, Galaxy noted.
United States-based crypto firms took in 56% of the VC funding from 43.5% of the 478 deals in Q3 — followed by Singapore and the United Kingdom at 8.7% and 6.8% respectively. The United Arab Emirates and Switzerland rounded out the top five.
Galaxy said VC funding may “accelerate” in Q4 and Q1 2025 with falling interest rates and the possibility of a more relaxed regulatory environment.
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