2024 Q4 Crypto Venture Capital Review Which tracks will attract new capital inflows?

Author: Alex Thorn, Gabe Parker, Galaxy; Compiler: Wu Baht, Golden Finance

Preface

2024 is shaping up to be a great year for the cryptocurrency market, with the launch of a spot Bitcoin ETP in January and the election of the most pro- cryptocurrency president and Congress in U.S. history in November. Overall, the liquid cryptocurrency market added $1.6 trillion in market capitalization in 2024, growing 88% year-over-year for the year to $3.4 trillion. Bitcoin alone added $1 trillion in market capitalization, approaching $2 trillion for the year. The cryptocurrency narrative of 2024 is driven by Bitcoin’s meteoric rise (accounting for 62% of total market gains) on the one hand, and memes and AI on the other. Meme is a popular cryptocurrency for much of the year, and most on-chain activity occurs on Solana. In the second half of the year, tokens operated by AI agents took center stage in the pre-Bitcoin cryptocurrency space.

Cryptocurrency venture capital in 2024 remains difficult. None of these major Bitcoin, memes, and AI agents are particularly suitable for venture capital. Memecoin can be launched with just a few clicks of a button, and Memecoin and AI proxy coins exist almost entirely on-chain, leveraging existing infrastructure primitives. Popular industries in the last market cycle, such as DeFi, gaming, the Metaverse and NFT, have either failed to attract market attention or are already established, requiring less capital, making new ventures more competitive. Crypto market infrastructure and gaming have largely been built and are now in advanced stages, and with anticipated changes in U.S. regulation under the next administration, these industries may face competition from entrenched traditional financial services intermediaries. There are signs that new meta-currencies may become important drivers of new capital inflows, but these range from immature to very nascent: the standouts are stablecoins, tokenization, DeFi integration with TradFi, and The overlap of crypto and artificial intelligence.

Macro and broader market forces also continue to provide headwinds. The high interest rate environment continues to put pressure on the venture capital industry, with allocators less willing to take risks further along the risk curve. This phenomenon has squeezed the venture capital industry as a whole, but the crypto venture capital industry may be particularly affected given its risks. Meanwhile, large integrated VC firms are still mostly avoiding the space, perhaps still feeling cautious after the bankruptcies of several high- profile VC firms in 2022.

So while there are significant opportunities ahead, whether through the resurgence of existing origins and narratives or the emergence of new origins and narratives, crypto venture capital remains competitive and subdued compared to the frenzy of 2021 and 2022. Both deal and investment capital have increased, but the number of new funds has stagnated and less capital has been allocated to venture capital funds, creating a particularly competitive environment that favors founders negotiating valuations. Broadly speaking, venture capital investment remains well below levels seen in previous market cycles.

But the increasing institutionalization of Bitcoin and digital assets, as well as the growth of stablecoins, and the new regulatory environment may ultimately herald the possibility of some convergence between DeFi and TradFi, and also bring new opportunities for innovation, we It is expected that 2025 may see a meaningful recovery in venture capital activity and interest.

summary

• In the fourth quarter of 2024, venture capital investment in cryptocurrency startups was US$3.5 billion (up 46% quarter-on-quarter), involving 416 transactions (down 13% quarter-on-quarter).

• Throughout 2024, venture capitalists invested $11.5 billion in cryptocurrency and blockchain-focused startups across 2,153 deals.

• Early-stage deals received the most capital investment (60%), while later-stage deals accounted for 40% of invested capital, a significant increase from 15% in the third quarter.

• Median valuations for venture capital deals rose in the second and third quarters, with valuations for cryptocurrency-specific deals growing faster than the venture capital industry as a whole, but were flat sequentially in the fourth quarter.

• Stablecoin companies raised the most funds, led by Tether's $600 million raised from Cantor Fitzgerald, followed by infrastructure and Web3 startups. Web3, DeFi and infrastructure companies accounted for the largest number of transactions.

• In the fourth quarter, most investment went to U.S.-based startups (46%), with Hong Kong companies accounting for 17% of all investment capital. In terms of transaction volume, the United States leads with 36%, followed by Singapore (9%) and the United Kingdom (8%).

• In terms of financing, investor interest in cryptocurrency-focused venture capital funds fell to $1 billion among 20 new funds.

• In 2024, at least 10 cryptocurrency venture capital funds raised more than $100 million.

venture capital

Transaction volume and investment capital

In the fourth quarter of 2024, venture capitalists invested $3.5 billion in cryptocurrency and blockchain-focused startups (up 46% quarter-on-quarter), totaling 416 deals (down 13% quarter-over-quarter).

As of 2024, venture capitalists have invested a total of $11.5 billion in cryptocurrency and blockchain startups through 2,153 deals.

Investment Capital and Bitcoin Price

In previous cycles, there was a multi-year correlation between Bitcoin prices and capital invested in crypto startups, but that correlation has struggled to recover over the last year. Bitcoin has surged since January 2023, while venture capital activity has struggled to keep pace. Allocators' weaker interest in crypto ventures and broad ventures, coupled with the crypto market narrative favoring Bitcoin and ignoring many of the hot narratives of 2021, could partially explain this disparity.

Invest in stages

In the fourth quarter of 2024, 60% of venture capital was invested in early- stage companies, while 40% was invested in later-stage companies. Venture capital firms raised new capital in 2024, while crypto-native funds may still be able to draw from large rounds from a few years ago. Starting in the third quarter, more and more capital has flowed to later-stage companies, which may partially explain Tether's $600 million raise from Cantor Fitzgerald.

On the deal side, the proportion of pre-seed deals has increased slightly and remains healthy compared to previous cycles. We track the proportion of pre- seed deals as a measure of the robustness of entrepreneurial behavior.

Valuation and deal size

Venture capital-backed cryptocurrency company valuations fell significantly in 2023, reaching their lowest levels since Q4 2020 in Q4 2023. However, valuations and deal sizes began to rebound in the second quarter of 2024 as Bitcoin hit all-time highs. In the second and third quarters of 2024, valuations reached their highest levels since 2022. Growth in cryptocurrency deal sizes and valuations in 2024 is in line with similar increases across the venture capital space, despite a stronger rebound in cryptocurrencies. The median pre-money valuation for deals in Q4 2024 was $24 million, with the average deal size being $4.5 million.

investment category

Companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category accounted for the largest share (20.75%) of crypto venture capital raised in Q4 2024, totaling $771.3 million. The three largest deals in this category were Praxis, Azra Games, and Lens, which raised $525 million, $42.7 million, and $31 million respectively. DeFi 's dominance as a share of total crypto venture capital investment is due to Tether's $600 million deal with Cantor Fitzgerald , which holds a 5% stake in the company (the stablecoin issuer falls into our Advanced DeFi category). Although this deal was not a traditional venture capital structured deal, we included it in our data set. If Tether transactions were removed, the DeFi category would rank seventh in terms of investment volume in the fourth quarter.

In the fourth quarter of 2024, the share of crypto startups building Web3/NFT/DAO/Metaverse and infrastructure products in total quarterly crypto venture capital increased by 44.3% and 33.5% sequentially respectively. The increase in capital allocation as a percentage of total capital deployed is primarily attributable to a sharp sequential decline in crypto venture capital allocations to Layer 1 and crypto AI startups, which are down 85% and 55% respectively since Q3 2024.

If we break down the broad categories in the chart above into more granular segments, crypto projects building stablecoins raised the largest share of crypto venture capital in Q4 2024 (17.5%), out of 9 tracked deals in total $649 million. However, Tether's $600 million deal represents the majority of total capital invested in stablecoin companies in the fourth quarter of 2024. Crypto startups developing infrastructure raised the second most venture capital capital in Q4 2024, at $592 million (16%) across 53 tracked deals. The three major crypto infrastructure transactions are Blockstream, Hengfeng Group and Cassava Network, which raised US$210 million, US$100 million and US$90 million respectively. After crypto infrastructure, Web3 startups and exchanges ranked third and fourth in terms of funding raised from crypto venture capital firms, totaling $587.6 million and $200 million respectively. Notably, Praxis was the largest Web3 deal and the second-largest deal in Q4 2024, raising a whopping $525 million to build "Internet-native cities."

In terms of the number of transactions, Web3/NFT/DAO/Metaverse/Games accounted for 22% of transactions (92 transactions), of which 37 game transactions and 31 Web3 transactions were the driving factors. The largest gaming deal in Q4 2024 was Azra Games, which raised $42.7 million in Series A funding. This was followed by Infrastructure and Trading/Exchange/Investment/Lending, with 77 and 43 transactions respectively in Q4 2024.

Projects and companies providing crypto infrastructure ranked second in the number of transactions, accounting for 18.3% of the total transaction volume (77 transactions), an increase of 11 percentage points month-on-month. Following crypto infrastructure, projects and companies building trading/exchange/investment/lending products ranked third in terms of number of transactions, accounting for 10.2% of the total (43 transactions). Notably, crypto companies building wallets and payment/reward products saw the largest month-on-month volume increases, at 111% and 78% respectively. While these quarter-over-quarter increases are significant in percentage terms, wallets and payments/rewards startups accounted for only 22 and 13 transactions respectively in Q4 2024.

Breaking down the broad categories in the chart above into more granular segments, projects and companies building crypto infrastructure had the highest number of deals (53) across all industries. They were followed by gaming and Web3-related crypto companies, which completed 37 and 31 transactions respectively in the fourth quarter of 2024, almost in the same order as in the third quarter of 2024.

Investments by stage and category

Breaking down investment capital and deal volume by category and stage provides a clearer picture of what types of companies in each category are raising capital. In the fourth quarter of 2024, the vast majority of capital in Web3/DAO/NFT/Metaverse, Layer 2s, and Layer 1s has flowed to early-stage companies and projects. In contrast, a significant portion of crypto VC money invested in DeFi, trading/exchanges/investing/lending, and mining goes to later-stage companies. This is to be expected given the relative maturity of the latter relative to the former.

Analyzing the distribution of invested capital at different stages within each category can reveal the relative maturity of various investment opportunities.

As with crypto venture capital invested in Q3 2024, a large portion of deals completed in Q4 2024 involved early-stage companies. Crypto venture capital deals tracked in Q4 2024 included 171 early-stage deals and 58 later-stage deals.

Examining the share of deals completed by stage in each category provides insight into the various stages of each investable category.

Investments by Geography

In Q4 2024, 36.7% of transactions involved companies headquartered in the United States. This is followed by Singapore (9%), the United Kingdom (8.1%), Switzerland (5.5%) and the United Arab Emirates (3.6%).

Companies headquartered in the United States attracted 46.2% of all venture capital investment, down 17 percentage points from the previous quarter. As a result, venture capital capital allocation among Hong Kong-based startups increased significantly, reaching 17.4%. The UK is 6.8%, Canada is 6%, and Singapore is 5.4%.

Group investment

Companies and projects founded in 2019 accounted for the largest share of capital, while companies and projects founded in 2024 accounted for the largest number of deals.

venture capital financing

Financing for crypto venture funds remains challenging. The macro environment and crypto market volatility in 2022 and 2023 has made some allocators reluctant to make the same level of commitment to crypto venture investors as they did in 2021 and early 2022. At the beginning of 2024, investors generally believed that interest rates would fall significantly in 2024, although the rate cuts did not start to materialize until the second half of the year. Total capital allocated to venture funds has continued to decline sequentially since the third quarter of 2023, despite an increase in the number of new funds throughout 2024.

On an annualized basis, 2024 was the weakest year for crypto venture capital fundraising since 2020, with 79 new funds raising $5.1 billion, well below the frenzy of 2021-2022.

While the number of new funds did increase slightly year over year, declining allocator interest also led to VC firms raising smaller fund sizes, with median and average fund sizes in 2024 reaching their lowest levels since 2017.

At least 10 cryptocurrency venture funds actively investing in cryptocurrency and blockchain startups have raised more than $100 million in new funds in 2024.

Summarize

• Sentiment is improving and activity is increasing, although both remain well below previous highs. While liquid crypto asset markets have recovered significantly from late 2022 and early 2023, venture capital activity remains well below previous bull runs. The bull markets of 2017 and 2021 were characterized by high correlations between venture capital activity and liquid crypto asset prices, but over the past two years, activity has been subdued while cryptocurrencies have rebounded. The stasis in venture capital is due to a number of factors, including the "barbell market" that puts Bitcoin (and its new ETFs) center stage, and marginal net new activity from meme coins, which are difficult to fund and have questionable longevity. Enthusiasm for projects at the intersection of artificial intelligence and cryptocurrency is growing, and expected regulatory changes could open the door to stablecoin, DeFi, and tokenization opportunities.

• Early deals continue to lead the way. Despite the headwinds facing venture capital, interest in early-stage deals still bodes well for the long-term health of the broader cryptocurrency ecosystem. The late-stage trading community made progress in the fourth quarter, but that was largely due to Cantor Fitzgerald's $600 million investment in Tether. Nonetheless, entrepreneurs continue to find willing investors for new innovative ideas. We believe projects and companies building stablecoins, AI, DeFi, tokenization, L2 and Bitcoin-related products will do well in 2025.

• Spot ETPs may put pressure on funds and startups. Several high-profile investments in spot Bitcoin ETPs by U.S. allocators suggest that some large investors (pensions, endowments, hedge funds, etc.) may be gaining exposure to the industry through large liquidity vehicles rather than turning to early-stage venture capital. Interest in spot Ethereum ETPs has begun to increase, and if this continues, or even if new ETPs are launched covering other alternative layer 1 blockchains, demand for segments such as DeFi or Web3 may also flow to ETP, not a venture capital complex.

• Fund managers still face a tough environment. While the number of new funds increased slightly year-over-year in 2024, the total capital allocated to crypto venture funds was slightly lower than in 2023. Macroeconomics continue to create headwinds for allocators, but significant changes in the regulatory environment could revive allocator interest in the space.

• The United States continues to dominate the crypto startup ecosystem. Despite a tricky and often hostile regulatory regime, U.S.-based companies and projects still account for the majority of completed deals and the majority of capital invested. The new presidential administration and Congress will be the most pro-cryptocurrency in history, and we expect U.S. dominance to increase, especially if certain regulatory matters are solidified as expected, such as stablecoin frameworks and markets Structural legislation that would allow traditional U.S. financial services firms to seriously consider entering the space.