Galaxy Digitals Q2 Cryptocurrency Venture Capital Report Significant YearOverYear Growth Yet Falls Short of Previous Bull Market

BiJieNet Report:
Authors: Alex Thorn and Gabe Parker, Galaxy Digital Research Analysts
Translation: Yangz, Techub News
Compared to the strong performance of Bitcoin and liquid cryptocurrencies in the first quarter, the market has cooled slightly in the second quarter, but still shows significant growth compared to the same period last year. The rebound trend of cryptocurrency venture capital seen in the first quarter seems to be continuing. The performance of industry founders and investors in the second quarter indicates a more active financing environment compared to the previous few quarters. However, as of July 1st, the data shows a slight decline in performance compared to the general market sentiment.
The number of venture capital transactions in the second quarter showed a slight decrease, from 603 in the first quarter to 577 in the second quarter, while investment capital increased from $2.5 billion in the first quarter to $3.2 billion in the second quarter. The median transaction size increased slightly from $3 million to $3.2 million, but the median pre-money valuation increased from $19 million to $37 million, reaching near-historic highs. These data indicate that although there is a shortage of available investment capital compared to previous peak periods, the recovery of the cryptocurrency market in the past few quarters has brought intense competition for investors and triggered their FOMO (fear of missing out).
Number of Transactions and Investment Capital
In the second quarter of 2024, venture capital invested $3.194 billion (a 28% increase from the previous quarter) in cryptocurrency and blockchain companies, involving 577 transactions (a 4% decrease from the previous quarter).
Investment Capital and Bitcoin Price
The long-standing correlation between Bitcoin price and investment capital in cryptocurrency startups has been broken. Since January 2023, Bitcoin has risen significantly, while venture capital activity has not kept up. Although Bitcoin has experienced a significant increase this year and investment capital has also increased, it is still far below the level when Bitcoin exceeded $60,000 in 2021-2022. Factors such as cryptocurrency native catalysts like Bitcoin ETF and emerging areas (such as re-staking, modularity, Bitcoin L2), as well as the pressure brought by bankruptcies and regulatory challenges for cryptocurrency startups, together with macroeconomic headwinds (interest rates), have led to this apparent divergence. Now, with the recovery of liquid cryptocurrencies, venture capitalists are preparing to return, and venture capital activity for the second half of this year is also expected to increase.
Venture Capital Stage Classification
In the second quarter of 2024, 78% of the funds were allocated to early-stage companies, and 20% were allocated to late-stage companies. Although early-stage venture capital funds focused on cryptocurrencies are very active and hold reserves from 2021 and 2022, large comprehensive venture capital firms seem to have exited the industry or significantly reduced their activities, making it more difficult for late-stage startups to raise funds.
In terms of the number of transactions, the share of Pre-Seed round transactions has slightly decreased but remains higher than the previous market cycle.
Valuation and Transaction Size
In 2023, the valuation of venture-backed cryptocurrency companies dropped significantly, reaching its lowest median pre-money valuation since the fourth quarter of 2020. However, in the first quarter of 2024, the valuation of venture-backed cryptocurrency companies started to rebound, reaching $37 million in the second quarter (a 94% increase from the previous quarter), the highest level since the fourth quarter of 2021. It should be noted that the delay in reporting and the lack of publicly available valuation data can lead to significant fluctuations in the above data. We strive to provide this information in a timely manner after the end of each quarter, so the data may be revised, but this peak is still a signal. In addition, the median transaction size increased slightly (+7%) to $3.2 million, which is roughly consistent with the past five quarters. The increase in valuation is due to improved market sentiment; although investment capital has not increased significantly, founders have seized the interest and competition of existing investor groups.
Investment Categories
In the second quarter of 2024, cryptocurrency companies and projects in the “Web3/NFT/DAO/Metaverse/Gaming” category raised a total of $758 million in cryptocurrency venture capital, accounting for the largest proportion (24%) among all categories. The two largest transactions in this category were Farcaster and Zentry, which raised $150 million and $140 million respectively.
Following closely behind are companies/projects related to infrastructure, trading, and L1, with investment amounts accounting for 15%, 12%, and 12% respectively. It is worth noting that due to the transactions of Monad and Berachain, with $225 million and $100 million respectively, the market share of L1 investment capital has increased more than sixfold. In addition, Bitcoin L2 raised $94.6 million in the second quarter of 2024, a 174% increase from the first quarter ($34.7 million).
Categorization of Transaction Numbers
In terms of transaction numbers, the “Web3/NFT/DAO/Metaverse/Gaming” category leads by a large margin with a 19% share, mainly due to the increase in decentralized social media and gaming-related transactions. Although the number of fundraising transactions related to re-staking cryptocurrency startups decreased in the second quarter of 2024, the infrastructure category ranked second with a 15% share.
Following closely behind are cryptocurrency companies/projects related to trading and DeFi, accounting for 11% and 9% respectively of the total number of transactions completed in the second quarter of 2024.
Venture Capital Stage and Category Distribution
By dividing investment capital and transaction numbers by stage and category, we can gain a clearer understanding of which types of companies are raising funds in each category. In the second quarter of 2024, the majority of funds in the Web3, L1, and infrastructure categories were invested in early-stage companies and projects, while venture capital in the trading category was more focused on late-stage companies.
By studying the capital share invested in each category at each stage, we can gain insight into the maturity of each investment category.
Similarly, the number of transactions also indicates a similar situation. A considerable portion of completed transactions in almost all categories involve early-stage companies and projects.
By studying the transaction share completed in each category at each stage, we can gain insight into the stages of each investable category.
Investment Distribution by Geographical Location
In terms of the number of investments, in the second quarter of 2024, over 40% of venture capital was invested in companies headquartered in the United States. The UK accounted for 10%, Singapore accounted for 8.7%, the UAE accounted for 3.13%, and Hong Kong accounted for 2.78%.
In terms of investment amount, companies headquartered in the United States attracted 53% of venture capital, a 23.5% increase compared to the previous quarter. The UK accounted for 12.78%, Singapore accounted for 4.6%, and the UAE accounted for 4.39%.
Investment Distribution by Group
The majority of venture capital in the second quarter of 2024 was invested in companies established between 2021 and 2023.
Summary
The sentiment of cryptocurrency venture capital continues to improve, but it is still significantly lower than the bull market of 2021-2022. With Bitcoin and Ethereum rising by about 50% this year, investment capital increased by 28% compared to the previous quarter, while the number of transactions remained relatively stable. If this growth rate continues until the end of the year, investment capital and transaction numbers in 2024 will be ranked third, second only to 2021 and 2022.
Investment in the Web3 and L1 categories is noteworthy. With the support of Farcaster ($150 million) and Zentry ($140 million), the Web3 category leads with a total financing amount of approximately $750 million. With the transactions of Monad ($225 million) and Berachain ($100 million), L1 ranks fourth with a score of $371 million.
The median valuation of cryptocurrency companies receiving venture capital has soared and reached its highest value since the peak of the previous bull market in the fourth quarter of 2021. Due to the adverse factors of the bear market in 2022 and macroeconomic conditions, most traditional venture capital firms are still in a wait-and-see state, while venture capital firms focusing on cryptocurrencies are facing increased competition, providing project founders with more negotiation chips. It should be noted that this median is based on available data as of July 1st, and as more second-quarter transaction information becomes available, the median may be updated and may be adjusted downwards.
Bitcoin L2 continues to attract a large amount of investment, with related companies and projects raising a total of $94.6 million, a 174% increase compared to the previous quarter. Investors’ enthusiasm for the Bitcoin ecosystem to see more composable block space and the return of patterns such as DeFi and NFT remains high. Our internal research shows that at least 65 projects claim to be “Bitcoin L2”.
Early-stage transactions dominated in the second quarter, attracting nearly 80% of investment capital, and Pre-Seed round transactions accounted for 13% of all transactions. Continued focus on early-stage transactions indicates the long-term healthy development of the wider cryptocurrency ecosystem. Although companies in the later stages are facing challenges in fundraising, entrepreneurs are seeking investors willing to invest in new innovative ideas.
The United States continues to dominate the cryptocurrency startup ecosystem. Although the United States maintains a clear advantage in terms of transactions and capital, unfavorable regulatory factors may force more companies to move to other countries and regions. If the United States wants to maintain its position as a long-term center for technological and financial innovation, policymakers need to be aware of how their actions or inactions will affect the cryptocurrency and blockchain ecosystem.