Venture investments in cryptocurrency startups in the second quarter exceeded $3 billion
Why venture capital is not keeping up with the growth of Bitcoin, where are venture capital companies investing and should we expect activity in the second half of 2024 in the crypto startup market
Venture capital investments in cryptocurrency startups in the second quarter of 2024 increased by 28% compared to the previous quarter, reaching $3.19 billion. According to Galaxy Digital, cited by Coindesk, crypto project founders and investors reported more active fundraising than in previous years. blocks.
“Crypto venture capital sentiment continues to improve, although levels remain significantly lower than the 2021-2022 bull market,” The Block quoted Galaxy Digital’s Alex Thorne and Gabe Parker as saying.
Not only is there an increase in deal volume compared to the first quarter, but also the average investment size has increased from $3 million to $3.2 million. And the average pre-investment valuation of a startup has jumped from $19 million to $37 million, analysts say.
According to Galaxy analysts, crypto companies are in a fairly favorable position due to increased interest in the industry. The highly competitive environment in the blockchain startup market allows their creators to claim large sums at the negotiation stage, having more leverage over venture capital companies.
“This suggests that despite the lack of available investment capital compared to previous peaks, the resurgence of the cryptocurrency market over the past few quarters is leading to significant competition and fear of missing out (FOMO) among investors,” Galaxy noted.
The number of transactions also increased: by 8%, from 682 in the first quarter to 739 in the second quarter. That's down slightly from the record 775 deals reported in the second quarter of 2022, according to The Block. Although there is other data published by Coindesk showing a decrease in the number of trades over the same period from 603 to 577.
Analysts quoted by The Block noted that if this rate of growth continues through the end of the year, 2024 could approach the record highs in capital invested and deal count seen in 2021 and 2022.
The report says the US continues to dominate in terms of deal count and capital invested. However, this may change. Thorne and Parker noted that regulatory hurdles could force more companies to move overseas. And if the United States wants to remain a hub for technological and financial innovation over the long term, policymakers should recognize how their actions or inactions could impact the cryptocurrency ecosystem.
What does venture capital invest in?
The largest venture deals over the past three months were led by the Monad blockchain ($225 million led by Paradigm), the social platform Farcaster ($150 million led by Paradigm), the Berachain blockchain ($100 million led by Brevan Howard Digital and Framework Ventures).
In the first quarter of 2024, venture capital was focused on re-staking protocols, solutions for interoperability between different ecosystem blockchains and decentralized exchanges (DEX) with derivatives support. The trends in the second quarter changed towards the Bitcoin ecosystem.
What is restaking in cryptocurrencies? How the EigenLayer service works
One of the startups of the new Bitcoin-based crypto trend was the BTC Babylon staking protocol, which raised $70 million led by Paradigm. Commenting on the unusual investment round, Bloomberg journalist Muyao Shen noted that if the concept that Babylon proposes takes root, Bitcoin staking could become as commonplace as staking other cryptocurrencies.
Bitcoin is designed based on the Proof-of-Work algorithm and cannot be used for staking, which is only implemented on Proof-of-Stake networks such as Ethereum or Solana. Staking involves receiving income in native coins for blocking a deposit.
Investments in the sector of second-level Bitcoin solutions, or so-called L2 networks, grew by 174% from the first quarter, to $94.6 million.
Investors are excited that the Bitcoin ecosystem will see more use cases for block space, attracting models like DeFi or NFTs, Galaxy's Thorne and Parker wrote.
Staking and more. Who benefits from DeFi projects on the Bitcoin network?
The analysts added that, according to their observations, there are at least 65 projects identifying themselves as second-tier solutions based on the main cryptocurrency.
Many experts consider Bitcoin not only as a tool for storing value. It is assumed that if Bitcoin can develop an ecosystem of applications based on smart contracts, this could have a positive impact on its price.
Galaxy experts also noted that most of the capital invested during the reporting quarter occurred in the early stages of fundraising, amounting to 78% of total investments. The report found that while late-stage companies have difficulty raising capital, this could be beneficial for the crypto market in the long run.
Investments and Bitcoin exchange rate
As in the first quarter, there is no relationship between the price of Bitcoin and the volume of investments in crypto startups. Previously, it was assumed that venture investments correlated with the price of the main cryptocurrency. For example, the lack of growth in the price of BTC could mean that funds will be cautious and selective when investing in the cryptocurrency space.
The Galaxy report confirms that the long-standing correlation between Bitcoin price and venture capital investment has broken down this year: “While BTC has risen significantly since the start of the year, invested capital remains well below the levels seen when BTC last traded above $60K in 2021-2022 years."
Galaxy suggested that catalysts such as Bitcoin ETFs, crypto startup bankruptcies, regulatory uncertainty and macroeconomic headwinds contributed to the divergence. However, analysts predict that further increases in the price of Bitcoin could lead to increased venture capital activity in the second half of the year.
