Pivot: Why is crypto market financing underperforming?

Author:Kit

Crypto compliance is showing weakness under the change of AI technology

The cryptocurrency market is undergoing the second four-year technology cycle transformation since the ICO wave in 2017, while the AI ​​industry has entered its 10th development cycle with its technological breakthrough from GPT-3 to LLM. According to the technological iteration laws of Moore's Law, the crypto industry faces cyclical tests in 2025 - the total financing amount plummeted from the peak of US$31 billion in 2021 to US$9.8 billion in 2024, a decrease of 68%. At the same time, the scale of financing in the AI ​​field exceeded US$110 billion in 2024, forming a distinct capital siphon effect.

Behind this structural change is the division of the technological maturity curve. Since the midsummer of DeFi in 2020, there has been no breakthrough technological narrative in the crypto industry, and AI continues to release productivity dividends through the evolution of Transformer architecture. The differentiation of financing scales of the two essentially reflects the capital's vote on the potential for technology application - when crypto projects are still repeating the traditional path of "coin issuance-exchange", AI has achieved a closed-loop business in the fields of medical care, manufacturing, education, etc.

AI monsoon is not over, crypto believers still need to work hard

Data from Q1 2025 show that when the crypto community is still addicted to the myth of AI MEMES, actively imitating the first chatbot in AI history, ELIZA, and becoming the decentralized ELIZA in the history of encryption. Institutional investment in the crypto field showed obvious differentiation: the proportion of financing for CEX and custodial projects shrank to 45% since the peak period after the midsummer of DeFi and the collapse of FTX, while AI, DeFi and infrastructure projects grew against the trend, accounting for 58% of the total financing in the current period.

At the same time, the financing scale of AI-related crypto projects has fluctuated dramatically. Although there was a single-quarter investment boom of US$2.3 billion in Q3 2024, the figure fell back to US$780 million by Q1 2025, a decrease of 66%. This reveals the inherent contradiction of the "AI+Blockchain" narrative: most projects currently only stay at the concept grafting level and fail to solve the core pain points such as AI model training and data rights confirmation. The scale of traditional AI first-level investment has entered its four-year technology cycle since the launch of GPT3. The total investment amount has increased to an average annual $800 billion+ from 2017 to 2020. In contrast, the growth of AI-related crypto financing has not increased to 1% compared with the above-mentioned traditional AI funds. How blockchain cleverly combines AI technology to ensure that crypto believers can share the pie from AI funds overflow is worth pondering, and the acceleration of total AI crypto financing also shows that native crypto funds are willing to increase their investment in finding this hen with no golden egg in a thousand. In short, the founders of crypto projects should think about how to combine AI and infrastructure solutions to solve the current rights confirmation and credibility problems that are difficult to solve by CeFi or traditional AI.

The dual dilemma of liquidity

The divergence between quantitative tightening policies and on-chain stablecoin issuance has exacerbated market distortion. In March 2025, the on-chain circulation volume of USDC exceeded a new high of US$98 billion, but crypto venture capital absorbed only US$4.6 billion during the same period. This liquidity damming lake phenomenon reveals a deeper contradiction -institutional funds tend to allocate BTC spot through compliance channels such as ETFs rather than supporting early innovation projects. In fact, the amount of financing for the primary market of cryptocurrencies fell from the peak of $31 billion in 2021 to the total financing amount of $9.8 billion in 2024, a 68% decline compared with the same period, while the number of financing fell from 1,880 financings in 2021 and 2022 to 1,544 financings in 2024, and the average financing amount dropped from 15.7M in 2022 to 6.4M in 2022, a 59% decline compared with the same period. The liquidity of crypto startups' capital investments in crypto startups is about to disappear due to the outbreak of programmable blockchain technology and the 2020 epidemic and quantitative easing.

Financing Dilemma: Founder Battle Royale Game

RootData data shows that the amount of financing for crypto financing has shrunk by about a significant reduction in the later stages of projects. The 2021 cycle dividend period leads to excessive valuation. The current founder project valuation has been drained in the A round or even the seed round, and the C round is no institutional willing to invest publicly from Q3 2023 to Q4 2024. Strategic financing remains stable, while M&A and OTC transactions show that institutional funds are more willing to reach an off-market bottom agreement in a market with low liquidity.

It is worth noting that the median financing of all rounds has risen steadily. In the case of a decline in the total financing amount, this shows that funds are more willing to reduce the investment frequency and increase the investment amount. Like the Battle Royale game, excellent capital reserves and bullets bet on founders projects with better fundamentals and cash flow. At a time of explosive growth in AI technology and encryption technology, the competition between early crypto founders and startup projects in the hands of investors has become increasingly fierce. Of the 2,681 projects that have received seed round financing since 2017, only 281 have entered the A round (promotion rate of 10.5%), and less than 30 projects have finally arrived in the C round. This "one in ten" survival game reflects the systematic flaws of early projects in the industry:

From valuation bubble to return to value:

• In the 2021 cycle, the median seed round financing amount reached US$4.7 million, while it fell back to US$400 in Q1 2025. As the total financing amount shrinks, its proportion continues to decline, indicating that investment institutions' interest in investment in crypto seed projects continues to decline.
• The median pre-seed round was $2 million in the same period, and rose to $2.91 million by Q1 2025. The total amount of pre-seed rounds of financing increased while the median financing increased, with higher risks but preferential prices and more crypto institutions.
• As the total amount of Series A financing shrinks, the amount of financing increased from US$10 million in the same period to US$14.5 million. This shows that crypto projects that obtain PMF and cash flow in the market have obtained more investment in funds, while projects that have not successfully made profits have failed to obtain more funds in the seed round

Token Economics Failure:

The B round project faces pressure to unlock liquidity, and the lack of secondary market acceptance capabilities has triggered a vicious cycle. According to RootData data, most projects unlock token funds without new liquidity injection will bring millions of selling pressure every time they unlock.

Technical iterative faults:

The 2021 financing bubble caused failures, projects concentrated in popular tracks in the previous cycle such as cross-chain bridges and NFT platforms, and failed to keep up with new trends such as ZK-Rollup, modular blockchain and AI. LP has not made positive profits in the fund structure and sought to survive, and the total amount of institutional activities (such as OTC and mergers and acquisitions) has been rising steadily.

Fundraising Dilemma: Cliff-like decline in scale

According to RootData data, the total amount of fundraising for crypto institutions plummeted from a peak of US$22 billion in 2022 to US$2 billion in 2024, a drop of as high as 91%. This shrinkage rate far exceeds the decline in financing scale of Nasdaq tech stocks during the same period (35%). The macro liquidity is insufficient, and the decline in the issuance of tokens and institutional IRR of cryptocurrencies in the "century-long" has led to a sharp decline in the interest of institutional LPs and independent investors in financing for crypto projects. This may indirectly reflect that the insufficient AI innovation in the crypto industry this cycle has not attracted the attention of incremental funds outside the industry.

Quarterly data confirms the decline: After Q2 2024 (BTC halving cycle) the amount of funds raised fell to US$420 million, which is comparable to the level before the rise of DeFi in 2020. This cycle's bull market did not bring incremental funds to crypto institutions' fundraising

Leading institutions encountered setbacks: A16Z suffered a Waterloo after successfully raising funds for three consecutive years from 2020 to 2022. Paradigm's new fund size in 2024 shrank by 72% from the historical high in 2021

After the crypto public financing market was cold, the trading volume of private equity rounds and OTC increased by 35% against the trend. The off-market financing completed through off-market Q4 2024 and Q1 2025 reached US$1.9 billion, with mergers and acquisitions and OTC accounting for 75% of the total amount in the current period. The prevalence of this "under-table trading" reflects institutional investors' anxiety about liquidity - through customized token unlocking terms and repurchase agreements, minimizing the impact of market volatility on investment portfolios as much as possible.

Crisis of breaking the issue when it goes online

This cycle of crypto communities is popular with the slogan "short tokens are launched", which indirectly reflects the negative reaction and rejection of independent crypto investors to institutional projects. According to the performance of the tokens and final financing of Binance's online crypto institutions and projects, under the "3+1" unlocking of universal YC rules, institutions face severe exit pressure:

a. You need to unlock the first phase to achieve 5-10 times the profit before you can download the entire cost in the first phase

b. Data shows that since Arbitrum in 2021, there are very few projects that institutions with lower financing rounds are expected to recover their costs without any hedging strategies.

c. Among the newly issued tokens in 2024, more than half of the projects' FDV is less than 5 times the last round of financing, which directly leads to:

• The first 10% unlocking of the institution must bear -50% actual book loss
• Subsequent unlocking triggers a series of selling pressure

This also indirectly confirms the hidden reason for the rise of institutional transactions above - the decline in returns to token portfolios. In short, the tokens launched by Binance are already like this, and institutions are even more miserable for tokens launched on T1 and T2 exchanges where liquidity is exhausted.

Crypto investment tends to be rational

The number of days and square variance data from seed round to Series A in crypto financing market based on RootData. We found that from 2017 to 2020, the average number of days for the next round of financing gradually increased, reaching a peak in Q4 2018 (1087.75 days). This reflects the slow pace of financing for early-stage projects in the crypto industry and low liquidity in capital. The variance was higher between 2017 and 2020, and the peak occurred in Q4 2017 (578.63 days), indicating that there is a high uncertainty in the project financing time. During the ICO and DeFi wave from 2017 to 2019, the crypto industry was in the exploration stage and the project quality was uneven. Some projects have extended financing cycles due to immature token economic model

After 2021, the next round of financing days will drop significantly, falling to 317.7 days in Q1 2023, and further shortened to 133 days in Q3 2024. This shows that as the market matures, the financing efficiency of high-quality projects has improved, and capital allocation has become more concentrated. Since 2021, the variance has gradually declined. This shows that the market has entered a stage of rational development and the financing cycles between projects are becoming more consistent. Since 2021, institutional investors have been more inclined to support top projects. The increase in funding concentration in seed and A rounds enables high-quality projects to complete the next round of financing faster. At the same time, capital has gradually abandoned projects that lack innovation and profitability, accelerating the survival of the fittest in the industry.

Summarize

The crypto industry is undergoing a transition from early chaos to rational development. Starting from 2021, both curves have shown a continuous downward trend. The decline in the next round of financing days and variance not only reflects the improvement of capital allocation efficiency, but also highlights the industry's preference for high-quality projects. In the next few years, projects that can quickly adapt to market demand, combine emerging technologies such as AI and realize a closed-loop business will become the focus of capital pursuit.

In short, the current market has higher requirements for profitability and product market fit (PMF). Founders need to quickly verify the business model in the seed round stage to shorten subsequent financing cycles. Institutional investors should pay attention to high-potential projects that can complete multiple rounds of financing in a short period of time. This type of project usually has a clear growth path and strong execution ability.

The author believes that the liquidity tightening commonly believed by the crypto community is not the main reason for the poor performance of the crypto financing market and even the crypto prices. 2024 is the first year of compliance in the crypto industry and is also a turning point for more mature institutions to enter the market properly. The founder of cryptocurrencies did not perfectly submit the answer sheet for AI and encryption technology closed loop to crypto native investors, which is the main reason why cryptocurrencies perform poorly in this round of AI and crypto interleaving technology cycle, or obtain liquidity spillover from the outbreak of AI applications.