Authors: Alex Thorn, Gabe Parker, Galaxy; Translated by: Wuzhu, Jinse Finance
Foreword
2024 is a glorious year for the cryptocurrency market, with the launch of the spot Bitcoin ETP in January and the election of the most cryptocurrency-supportive president and Congress in U.S. history in November. Overall, the liquid cryptocurrency market increased by $1.6 trillion in market value in 2024, with a year-on-year growth of 88%, reaching $3.4 trillion. Bitcoin alone saw an increase of $1 trillion in market value, close to $2 trillion for the whole year. The narrative of cryptocurrency in 2024 is driven on one hand by the rapid rise of Bitcoin (accounting for 62% of total market gains), and on the other hand by memes and AI. For most of the year, memes were the hottest cryptocurrencies, with most on-chain activity happening on Solana. In the second half of the year, tokens operated by AI agents became the focus in the realm of Bitcoin cryptocurrencies.
Cryptocurrency venture capital in 2024 remains challenging. These major Bitcoin, meme, and AI tokens are not particularly suitable for venture capital. Memecoins can be launched with just a few clicks of a button, and Memecoins and AI tokens exist almost entirely on-chain, utilizing existing infrastructure primitives. Hot sectors from the last market cycle, such as DeFi, gaming, metaverse, and NFTs, have either failed to attract market attention or have already been built, requiring less capital, making new ventures more competitive. Much of the crypto market infrastructure and gaming has already been built and is now in a late-stage phase. With anticipated changes in U.S. regulation under the next administration, these sectors may face competition from entrenched traditional financial service intermediaries. There are indications that new meta-currencies could become a significant driver of new capital inflows, but the range of these meta-currencies varies from immature to very nascent: notably, stablecoins, tokenization, the integration of DeFi and TradFi, and the overlap of crypto and artificial intelligence.
Macroeconomic and broader market forces continue to pose resistance. The high interest rate environment continues to put pressure on the venture capital industry, leading allocators to be less willing to take further risks on the risk curve. This phenomenon is squeezing the entire venture capital industry, but given its risks, the crypto venture capital sector may be particularly affected. Meanwhile, large integrated venture capital firms still mostly avoid this field, perhaps feeling cautious after several well-known venture capital firms went bankrupt in 2022.
Therefore, despite significant opportunities in the future, whether through the revival of existing narratives and originals or the emergence of new ones, crypto venture capital remains competitive and subdued compared to the frenzy of 2021 and 2022. Both trading and investment capital have increased, but the number of new funds has stagnated, and the capital allocated to venture capital funds has decreased, creating a particularly competitive environment favorable for founders in valuation negotiations. Broadly speaking, venture capital is still well below the levels of previous market cycles.
However, the increasing institutionalization of Bitcoin and digital assets, the growth of stablecoins, and the new regulatory environment may ultimately signal the possibility of some convergence between DeFi and TradFi, bringing new opportunities for innovation. We expect that venture capital activity and interest may see a meaningful resurgence in 2025.
Summary
- In the fourth quarter of 2024, venture capital investment in cryptocurrency startups reached $3.5 billion (a quarter-on-quarter increase of 46%), involving 416 transactions (a quarter-on-quarter decrease of 13%).
- In the year 2024, venture capitalists invested 11.5 billion dollars in startups focused on cryptocurrency and blockchain across 2,153 transactions.
- Early-stage trading received the most capital investment (60%), while later-stage trading accounted for 40% of the investment capital, a significant increase from 15% in the third quarter.
- In the second and third quarters, the median valuation of venture capital transactions increased, with the valuation growth rate of cryptocurrency-specific transactions outpacing the overall venture capital industry, but remained flat quarter-on-quarter in the fourth quarter.
- The stablecoin companies raised the most funds, with Tether leading the way by raising 600 million dollars from Cantor Fitzgerald, followed by infrastructure and Web3 startups. Web3, DeFi, and infrastructure companies accounted for the highest number of transactions.
- In the fourth quarter, most investments flowed to startups based in the United States (46%), while companies in Hong Kong accounted for 17% of all investment capital. In terms of transaction volume, the United States led with 36%, followed by Singapore (9%) and the United Kingdom (8%).
- In terms of financing, among the 20 new funds, investor interest in venture capital funds focused on cryptocurrency has decreased to 1 billion dollars.
- In 2024, at least 10 cryptocurrency venture capital funds raised over $100 million.
Venture Capital
transaction quantity and investment capital
In the fourth quarter of 2024, venture capitalists invested $3.5 billion in cryptocurrency and blockchain-focused startups (a quarter-on-quarter increase of 46%), with a total of 416 transactions (a quarter-on-quarter decrease of 13%).
As of 2024, venture capitalists have invested a total of $11.5 billion in cryptocurrency and blockchain startups through 2,153 transactions.
investment capital and Bitcoin price
In previous cycles, there was a years-long correlation between Bitcoin prices and capital invested in crypto startups, but this correlation has struggled to recover over the past year. Since January 2023, Bitcoin has surged significantly, while venture capital activity has struggled to keep pace. Allocators have shown weak interest in crypto venture capital and broader venture capital, coupled with the crypto market narrative favoring Bitcoin and neglecting many of the popular narratives from 2021, which can partially explain this disparity.
phased investment
In the fourth quarter of 2024, 60% of venture capital was invested in early-stage companies, while 40% went to late-stage companies. Venture capital firms raised new funds in 2024, and crypto-native funds may still benefit from large-scale financing from a few years ago. Starting in the third quarter, more and more capital flowed to late-stage companies, which partially explains Tether raising $600 million from Cantor Fitzgerald.
In terms of trading, the proportion of pre-seed transactions has slightly increased, remaining healthy compared to previous cycles. We track the proportion of pre-seed transactions to measure the robustness of entrepreneurial behavior.
Valuation and Trading Volume
In 2023, the valuations of venture capital-backed cryptocurrency companies saw a significant decline, reaching the lowest level since Q4 2020 in the fourth quarter of 2023. However, as Bitcoin hit an all-time high, valuations and trading volumes began to rebound in Q2 2024. In Q2 and Q3 2024, valuations reached their highest levels since 2022. The growth in cryptocurrency trading volumes and valuations in 2024 is consistent with similar growth across the entire venture capital sector, although the rebound in cryptocurrency was notably stronger. The median pre-money valuation for Q4 2024 transactions was $24 million, with an average transaction size of $4.5 million.
Investment Category
Companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised the largest share of crypto venture capital in Q4 2024, accounting for 20.75%, totaling $771.3 million. The three largest deals in this category were Praxis, Azra Games, and Lens, raising $525 million, $42.7 million, and $31 million respectively. The dominant share of DeFi in the total crypto venture capital is attributed to the $600 million deal between Tether and Cantor Fitzgerald, which holds a 5% stake in the company (the stablecoin issuer belongs to our senior DeFi category). Although this deal is not a traditional venture capital structured deal, we included it in our dataset. If we exclude Tether's deal, the DeFi category would rank 7th in investment amount in Q4.
In the fourth quarter of 2024, the share of crypto startups building Web3/NFT/DAO/Metaverse and infrastructure products in the total quarterly crypto venture capital reached a quarter-on-quarter increase of 44.3% and 33.5%, respectively. The increase in capital allocation as a percentage of total capital deployment is mainly attributed to a significant quarter-on-quarter decline in crypto venture capital allocation to Layer 1 and crypto AI startups, which have decreased by 85% and 55% respectively since the third quarter of 2024.
If we break down the major categories in the above chart into finer parts, crypto projects building stablecoins raised the largest share of crypto venture capital in Q4 2024 (17.5%), totaling $649 million across 9 tracked deals. However, Tether's $600 million deal accounted for most of the total capital invested in stablecoin companies in Q4 2024. Crypto startups developing infrastructure raised the second most venture capital in Q4 2024, with $592 million (16%) across 53 tracked deals. The three largest crypto infrastructure deals were Blockstream, Hengfeng Group, and Cassava Network, which raised $210 million, $100 million, and $90 million, respectively. Following crypto infrastructure, Web3 startups and exchanges ranked third and fourth in funds raised from crypto venture capital firms, totaling $587.6 million and $200 million, respectively. Notably, Praxis was the largest Web3 deal in Q4 2024 and the second largest overall, raising up to $525 million for building “internet-native cities.”
In terms of transaction volume, Web3/NFT/DAO/Metaverse/gaming accounts for 22% of transactions (92 in total), with 37 gaming transactions and 31 Web3 transactions being the driving factors. The largest gaming transaction in Q4 2024 was Azra Games, which raised $42.7 million in Series A funding. Following closely are infrastructure and trading/exchanges/investment/lending, with 77 and 43 transactions in Q4 2024, respectively.
Projects and companies providing crypto infrastructure rank second in transaction volume, accounting for 18.3% (77 transactions) of the total, with a month-on-month increase of 11 percentage points. Following crypto infrastructure are projects and companies building trading/exchange/investment/lending products, which rank third in transaction volume, accounting for 10.2% (43 transactions) of the total. Notably, crypto companies developing wallet and payment/reward products saw the largest month-on-month increases in transaction volume, at 111% and 78%, respectively. Although these month-on-month increases are significant in percentage terms, wallet and payment/reward startups accounted for only 22 and 13 transactions, respectively, in the fourth quarter of 2024.
The major categories in the above image are further subdivided into finer parts, with projects and companies building crypto infrastructure having the highest number of transactions across all industries (53 transactions). Following closely are gaming and Web3-related crypto companies, completing 37 and 31 transactions respectively in the fourth quarter of 2024, nearly mirroring the sequence from the third quarter of 2024.
Investment categorized by stages and types
By categorizing and segmenting investment capital and trading volume, it is possible to gain a clearer understanding of which types of companies are raising funds within each category. In Q4 2024, the vast majority of capital in Web3/DAO/NFT/Metaverse, Layer 2s, and Layer 1s flowed to early-stage companies and projects. In contrast, a significant portion of crypto venture capital funding for DeFi, trading/exchanges/investment/lending, and mining went to later-stage companies. This is to be expected considering the relative maturity of the latter compared to the former.
Analyzing the distribution of investment capital at different stages within each category can reveal the relative maturity of various investment opportunities.
Similar to the cryptocurrency venture capital invested in the third quarter of 2024, a large portion of the transactions completed in the fourth quarter of 2024 involved early-stage companies. The cryptocurrency venture capital transactions tracked in the fourth quarter of 2024 include 171 early-stage transactions and 58 late-stage transactions.
Check the share of transactions completed by stage in each category to gain deeper insights into the various stages of each investable category.
investment categorized by geographical location
In the fourth quarter of 2024, 36.7% of trades involved companies based in the United States. Following closely are Singapore (9%), the United Kingdom (8.1%), Switzerland (5.5%), and the United Arab Emirates (3.6%).
The company headquartered in the United States absorbed 46.2% of all venture capital, a decrease of 17 percentage points compared to the previous period. Consequently, venture capital allocation for startups headquartered in Hong Kong significantly increased to 17.4%. The UK accounted for 6.8%, Canada for 6%, and Singapore for 5.4%.
Group Investment
Companies and projects established in 2019 occupy the largest share of capital, while those established in 2024 have the highest trading volume.
Venture Capital Financing
The financing of crypto risk funds remains challenging. The macro environment and turmoil in the crypto market during 2022 and 2023 have made some allocators reluctant to commit at the same levels as in early 2021 and 2022. At the beginning of 2024, investors generally believe that interest rates will drop significantly in 2024, although rate cuts will not begin to take effect until the second half of the year. Since the third quarter of 2023, the total capital allocated to risk funds has continued to decline quarter-on-quarter, although the number of new funds for the entire year of 2024 has increased.
Calculated on an annualized basis, 2024 is the weakest year for crypto venture capital fundraising since 2020, with 79 new funds raising $5.1 billion, far below the frenzy of 2021-2022.
Although the number of new funds has indeed increased slightly year-on-year, the decline in interest from allocators has also led to a smaller fund size raised by venture capital firms, with the median and average fund sizes for 2024 reaching the lowest levels since 2017.
At least 10 cryptocurrency venture funds that actively invest in cryptocurrency and blockchain startups raised over $100 million for new funds in 2024.
Summary
- Sentiment is improving, and activity is increasing, although both remain well below previous highs. While the market for liquid crypto assets has significantly recovered from the end of 2022 and the beginning of 2023, venture capital activity remains far below that of previous bull markets. The bull markets of 2017 and 2021 demonstrated a high correlation between venture capital activity and the prices of liquid crypto assets, but for the past two years, activity has been sluggish while cryptocurrencies have rebounded. The stagnation in venture capital is due to various factors, including the “barbell market” placing Bitcoin (and its new ETFs) at the center stage, as well as marginal net new activity from Meme coins, which are difficult to finance and have uncertain lifespans. Enthusiasm for projects at the intersection of artificial intelligence and cryptocurrency is rising, and anticipated regulatory changes may open doors for opportunities in stablecoins, DeFi, and tokenization.
- Early trading continues to lead the trend. Despite venture capital facing resistance, interest in early trading still indicates the long-term health of the broader cryptocurrency ecosystem. The late-stage trading community made progress in the fourth quarter, mainly due to Cantor Fitzgerald's $600 million investment in Tether. Nevertheless, entrepreneurs continue to seek investors willing to fund new innovative ideas. We believe that projects and companies building stablecoins, artificial intelligence, DeFi, tokenization, L2, and Bitcoin-related products will perform well in 2025.
- Spot ETPs may put pressure on funds and startups. Several high-profile investments in spot Bitcoin ETPs by U.S. allocators indicate that some large investors (pensions, endowments, hedge funds, etc.) may be engaging with the industry through large liquidity instruments rather than turning to early-stage venture capital. Interest in spot Ethereum ETPs has begun to rise, and if this trend continues, or even if new ETPs are launched covering other alternative Layer 1 blockchains, demand for niche markets like DeFi or Web3 may flow towards ETPs rather than the venture capital complex.**
- Fund managers still face a challenging environment. Although the number of new funds in 2024 has slightly increased compared to the previous year, the total capital allocated to crypto venture capital funds is slightly lower than in 2023. The macroeconomic environment continues to pose challenges for allocators, but significant changes in the regulatory landscape may reignite their interest in the sector.
- The US continues to dominate the cryptocurrency startup ecosystem. Despite a regulatory environment that is very challenging and often hostile, companies and projects based in the US still account for the majority of transactions completed and the majority of investment capital. The new presidential administration and Congress will be the most supportive of cryptocurrencies in history, and we expect the US's dominance to increase, especially if certain regulatory matters, such as the stablecoin framework and market structure legislation, are solidified as anticipated, allowing traditional US financial services companies to seriously consider entering the space.
