Crypto venture capital funding fell 20% to $2.4 billion over the third quarter, driven by a “barbell market” where Bitcoin and high-risk memecoins led, leaving mid-tier projects seeking funding overlooked, says Galaxy Digital.
The funding fall 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 explained in an Oct. 15 report.
The $2.4 billion in funding throughout Q3 is a 21.5% increase from the nearly $2 billion in venture capital that flowed into crypto in the third quarter of 2023.
“The venture stagnation is due to a number of 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.
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
$67,584 and Ether ETH$2,633.77 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 large investors like pension and hedge funds may have led those investors to turn their backs on 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 away from crypto-native decentralized finance and Web3 even further, 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.
Crypto firms that integrated artificial intelligence services also gained a lot of ground with a five-fold quarter-on-quarter increase in VC funding.
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 could “accelerate” in Q4 and Q1 2025 with falling interest rates and the possibility of a more relaxed regulatory environment.
