Galaxy Digital says crypto venture capital sentiment continues to improve despite market lull

Crypto venture capital investment continued to rebound in Q2 despite a market lull, with founders and investors broadly reporting a more active fundraising environment than in prior quarters, according to Galaxy Digital.

“The crypto venture capital sentiment continues to improve, though levels remain significantly lower than 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 venture capitalists invested $3.19 billion into crypto and blockchain-focused companies in Q2, figures that align with The Block Pro’s funding dashboard , 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 medium pre-money valuation jumped to near all-time highs, up from $19 million to $37 million quarter-over-quarter, the analysts said.

“With generalist venture capitalists mostly still on the sidelines, crypto-focused venture capitalists find themselves in a more competitive environment, giving founders more leverage in negotiating terms,” they added. “This suggests that despite a lack of available investment capital compared to previous peaks, the resurgence of the crypto market over the past several quarters is leading to significant competition and a fear of missing out (FOMO) among investors.”

Valuation and deal size. Image: Galaxy Research.

In terms of deal count, total crypto venture deals rose 8% from 682 in Q1 to 739 in Q2, according to The Block Pro’s funding dashboard . This falls just short of the record 775 deals registered in Q2 2022.

Quarterly venture deals count by category. Image: The Block Pro .

“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,” the analysts projected.

Web3, Layer 1s, Bitcoin Layer 2s and early-stage deals lead the way

Web3 led the venture funding categories in Q2, attracting $495.5 million of investments, per The Block Pro’s funding data . This was driven by a $150 million raise for the web3 social media platform, Farcaster, Thorn and Parker said.

Layer 1s secured $371 million in funding during Q2, according to the analysts, dominated by Monad's $225 million and Berachain’s $100 million deals.

The so-called Bitcoin Layer 2s also witnessed considerable investment in Q2, with projects raising $94.6 million, up 174% quarter-over-quarter, according to Galaxy. “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,” Thorn and Parker said. “Our internal research suggests there are at least 65 projects identifying themselves as 'Bitcoin Layer 2s.'”

Overall, early-stage deals captured the majority of investment capital during the quarter, accounting for 78% of the total, while pre-seed deals represented 13%, per Galaxy’s data. “The continuing interest in early-stage deals bodes well for the long-term health of the broader cryptocurrency ecosystem. While some later-stage companies have struggled to raise capital, entrepreneurs are finding willing investors for new, innovative ideas,” the analysts said.

However, while the U.S. continued to dominate in terms of the number of deals made and capital invested, regulatory headwinds could force more companies abroad Thorn and Parker suggested. “Policymakers should be conscious of how their actions or inactions could impact the cryptocurrency and blockchain ecosystem if the U.S. is to remain the center of technological and financial innovation over the long-term.”

Correlation between bitcoin price and venture capital breaks

A multi-year correlation between bitcoin’s price and venture capital investments has broken down this year, as the latter struggled to keep pace, the analysts noted.

Bitcoin and the broader crypto market had a strong start to the year but struggled to regain momentum in Q2 after bitcoin hit its latest all-time high of $73,836 on March 14, subsequently trading in the $60,000 to $70,000 range.

The largest cryptocurrency by market cap is currently trading for $60,117, according to The Block’s bitcoin price page , up 43% year-to-date but down 12% in Q2. Meanwhile, the GMCI 30 index, representing a selection of the top 30 cryptocurrencies, has gained 30% year-to-date but fell 18% in Q2.

“Although BTC has significantly risen YTD, the capital invested has risen but remains far below the levels seen when BTC last traded above $60k in 2021-2022,” the analysts said, suggesting catalysts such as Bitcoin ETFs, pressures from crypto startup bankruptcies, regulatory challenges and macroeconomic headwinds contributed to the divergence.

However, “allocators may be preparing to return in earnest due to the resurgence of liquid crypto, potentially leading to increased venture capital activity in the latter half of the year,” they added.

Crypto venture capital and bitcoin price. Image: Galaxy Research.