2024 Q4 encryption venture capital review: which sectors are attracting new capital inflows?

Authors: Alex Thorn, Gabe Parker, Galaxy; Translated by: Wuzhu, Jinse Finance

Introduction

2024 is a remarkable year for the cryptocurrency market, with the launch of spot Bitcoin ETP in January and the election of the most crypto-friendly president and Congress in U.S. history in November. Overall, the liquidity cryptocurrency market saw an increase of $1.6 trillion in market value in 2024, with a year-on-year growth of 88%, reaching $3.4 trillion. Bitcoin alone accounted for an increase of $1 trillion in market value, nearing $2 trillion for the year. The cryptocurrency narrative in 2024 is driven on one hand by the rapid rise of Bitcoin (which accounted for 62% of total market gains) and on the other hand by memes and AI. For most of the year, memes were the hot cryptocurrency, with most on-chain activity occurring on Solana. In the second half of the year, tokens operated by AI agents became the focus in the realm of Bitcoin cryptocurrencies.

The cryptocurrency venture capital landscape for 2024 remains challenging. Major cryptocurrencies such as Bitcoin, meme coins, and AI tokens are not particularly suited for venture investments. Memecoins can be launched with just a few clicks, and both Memecoins and AI tokens exist almost entirely on-chain, leveraging the existing infrastructure primitives. Hot sectors from the last market cycle, such as DeFi, gaming, the metaverse, and NFTs, have either failed to attract market attention or have been built out with less capital required, making new startups more competitive. The infrastructure for the crypto market and gaming has largely been established and is now in a later stage, which may face competition from entrenched traditional financial service intermediaries as expectations change with the next government regarding U.S. regulation. There are indications that new meta currencies could become significant drivers of new capital inflows, but the range of these meta currencies varies from immature to very nascent: notable among them are stablecoins, tokenization, the integration of DeFi with TradFi, and the overlap between 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, with allocators less willing to take further risks on the risk curve. This phenomenon is squeezing the entire venture capital industry, but considering the risks, the crypto venture capital industry may be particularly affected. Meanwhile, large integrated venture capital firms still largely avoid this space, perhaps feeling cautious after the bankruptcy of several well-known venture capital firms in 2022.

Therefore, despite significant opportunities in the future, whether through the revival of existing primitives and narratives or the emergence of new primitives and narratives, crypto venture capital remains competitive yet 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. Generally speaking, venture capital is still well below the levels seen in previous market cycles.

However, the increasing institutionalization of Bitcoin and digital assets, the growth of stablecoins, and the new regulatory environment may ultimately herald 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 significant recovery 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 2024, venture capitalists invested $11.5 billion in cryptocurrency and blockchain-focused startups across 2,153 deals.
• Early-stage transactions received the most capital investment (60%), while later-stage transactions 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.
• Stablecoin companies raised the most funds, with Tether leading the charge by raising $600 million 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, the majority of 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 the number of transactions, the United States led with 36%, followed by Singapore (9%) and the United Kingdom (8%).
• In terms of financing, among the 20 new funds, investors' interest in venture capital funds focused on cryptocurrencies has decreased to $1 billion.
• In 2024, at least 10 cryptocurrency venture capital funds raised over $100 million.

Venture Capital

trading volume and investment capital

In the fourth quarter of 2024, venture capitalists invested $3.5 billion in cryptocurrency and blockchain-focused startups (a quarter-over-quarter increase of 46%), with a total of 416 transactions (a quarter-over-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 has been 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 weaker interest in crypto venture capital and broader venture capital, combined with the crypto market narrative favoring Bitcoin and ignoring many of the popular narratives from 2021, which partly explains 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 the large-scale financing from a few years ago. Starting from the third quarter, more and more capital flowed into 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 gauge 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 the fourth quarter of 2020 in the fourth quarter of 2023. However, as Bitcoin hit an all-time high, valuations and trading volumes began to rebound in the second quarter of 2024. In the second and third quarters of 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 venture capital space, although the rebound in cryptocurrency has been stronger. The median pre-money valuation for trades in the fourth quarter of 2024 was $24 million, with an average trade 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 the fourth quarter of 2024, accounting for 20.75%, totaling $771.3 million. The three largest deals in this category are Praxis, Azra Games, and Lens, which raised $525 million, $42.7 million, and $31 million, respectively. The dominance of DeFi in the total crypto venture capital is attributed to a $600 million deal between Tether and Cantor Fitzgerald, which holds a 5% stake in the company (the stablecoin issuer belongs to our premium DeFi category). Although this deal is not a traditional venture capital structured deal, we have included it in our dataset. Without the Tether deal, the DeFi category would rank 7th in investment amounts for the fourth quarter.

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 amount increased by 44.3% and 33.5%, respectively. The increase in the capital allocation as a percentage of total capital deployment is mainly attributed to a significant decline in capital allocation by crypto venture capital to Layer 1 and crypto AI startups, which dropped by 85% and 55%, respectively, since the third quarter of 2024.

If we break down the major categories in the above figure 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 transaction 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 top three 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 terms of 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 trading volume, Web3/NFT/DAO/Metaverse/gaming accounted for 22% of the transactions (92 transactions), 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 were infrastructure and trading/exchanges/investment/lending, with 77 and 43 transactions respectively in Q4 2024.

Projects and companies providing cryptocurrency infrastructure rank second in terms of transaction volume, accounting for 18.3% of the total transaction volume (77 transactions), with a month-on-month growth of 11 percentage points. Following cryptocurrency infrastructure are projects and companies that build trading/exchange/investment/loan products, ranking third in transaction volume, accounting for 10.2% of the total transaction volume (43 transactions). Notably, cryptocurrency companies that build wallet and payment/reward products saw the largest month-on-month increase 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 figure are 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 crypto companies related to gaming and Web3, which completed 37 and 31 transactions respectively in the fourth quarter of 2024, almost in the same order as in the third quarter of 2024.

Investment categorized by stages and types

By segmenting investment capital and trading volume by category and stage, it becomes clearer which types of companies are raising funds within each category. In the fourth quarter of 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 directed towards DeFi, trading/exchanges/investments/lending, and mining has gone to late-stage companies. Given the relative maturity of the latter compared to the former, this is to be expected.

Analyzing the distribution of investment capital across different stages in each category can reveal the relative maturity of various investment opportunities.

Similar to the crypto venture capital invested in the third quarter of 2024, a significant portion of the transactions completed in the fourth quarter of 2024 involved early-stage companies. The crypto venture capital transactions tracked in the fourth quarter of 2024 included 171 early-stage deals and 58 late-stage deals.

Check the share of transactions completed by stage in each category to gain insights into the various stages of each investable category.

Investment categorized by geographic location ###

In the fourth quarter of 2024, 36.7% of transactions involved companies based in the United States. This was followed by 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. As a result, the allocation of venture capital to startups based in Hong Kong has significantly increased to 17.4%. The UK stands at 6.8%, Canada at 6%, and Singapore at 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 venture funds remains challenging. The macro environment and turbulence in the crypto market in 2022 and 2023 have made some allocators reluctant to commit at the same levels as in early 2021 and 2022. By early 2024, investors generally believe that interest rates will significantly decline throughout 2024, although any rate cuts will not begin to materialize until the second half of the year. Since the third quarter of 2023, the total capital allocated to venture funds has continued to decline quarter-on-quarter, despite an increase in the number of new funds throughout 2024.

Calculated on an annual basis, 2024 is set to be the weakest year for cryptocurrency venture capital fundraising since 2020, with a total of 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 smaller fund sizes raised by venture capital firms, with the median and average fund sizes in 2024 reaching the lowest levels since 2017.

At least 10 cryptocurrency venture funds actively investing in cryptocurrency and blockchain startups have raised over $100 million for new funds in 2024.

Summary

• The sentiment is improving, and activity is increasing, although both are still well below previous highs. While the liquid crypto asset market has significantly recovered from the end of 2022 and the beginning of 2023, venture capital activity remains far below the previous bull markets. The bull markets of 2017 and 2021 showed a strong correlation between venture capital activity and the prices of liquid crypto assets, but over 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) in the spotlight, as well as marginal net new activity from meme coins, which are difficult to finance and have questionable longevity. Enthusiasm for projects at the intersection of artificial intelligence and cryptocurrencies is on the rise, 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 group made progress in the fourth quarter, primarily due to Cantor Fitzgerald's $600 million investment in Tether. Nevertheless, entrepreneurs are still seeking willing investors for 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 by U.S. allocators in spot Bitcoin ETPs suggest that some large investors (pensions, endowments, hedge funds, etc.) may be engaging with the industry through large liquidity instruments instead of 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, the demand for segments such as DeFi or Web3 may also flow towards ETPs instead of venture capital complexes.**
• Fund managers still face a challenging environment. Although the number of new funds in 2024 has seen a slight year-on-year increase, the total capital allocated to crypto venture capital funds is slightly lower than in 2023. The macroeconomic situation continues to pose challenges for allocators, but significant changes in the regulatory environment may rekindle allocators' interest in the sector.
• The United States continues to dominate the cryptocurrency startup ecosystem. Despite a regulatory environment that is very challenging and often hostile, companies and projects based in the U.S. still account for the majority of completed transactions and investment capital. The new presidential administration and Congress will be the most supportive of cryptocurrency in history, we expect the U.S. dominance to increase, especially if certain regulatory matters, such as the stablecoin framework and market structure legislation, are solidified as expected, which will allow traditional U.S. financial services companies to seriously consider entering the space.